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The Most Basic Forex Trading Strategy
The Forex market is the most fluid a money market in the world. It is so fluid that it is also perhaps one of the most unpredictable. No one can ever guess the buying or selling power of a currency until the last second of trading period. However, using the basics of forex trading strategy, you can easily adapt to the changes of the forex market.
You don't need to a skilled trader to understand the basics of forex trading strategy. It is all about identifying which currency will be undervalued. Focusing the resources on that currency then earning profit in the end.
Bid and Ask Price
The Bid/Ask price ratio indicates the selling and buying power of the base currency, and also the buying and selling power of the counter currency, respectively.
A trader can calculate his profit or loss easily without the need for a formal forex trading education or the use of forex trading tools. A fundamental forex trading strategy used is all about realizing the currency that is undervalued, or that which has a chance to rise at the end of the trading period.
For example, the current bid/ask price for EUR/JPY is 1.4640/45. Interpreting this bid/ask ratio means that a trader can buy 1 euro for 1.4645 or he can sell his euro for 1.4640 US dollars. Based on analysis, the euro is undervalued against the yen and the trader has an opportunity for profit.
The trader buys 90,000 euros, each at 1.4645 US dollars that amounts to US $ 131,805. At 1 % margin, the initial margin deposit is US$ 1,318.05.
At a few hours before trading period closes, the euro gathers strength and the bid/ask price becomes 1.4690/95. To get the profit, the trader sells the 90,000 euros at the rate of 1.4690 US dollars each and his money becomes US$ 132,210.
The difference between the selling amount and the buying amount is the trader's profit which is at US$ 405.
This is the essence of all forex trading strategies such as forex scalping and fibonacci strategy. They are all focused on one thing – profit. If you understand this, you can devise your own strategy in forex trading yourself.
Of course, the above example is just the tip of the iceberg. What makes the forex market so unpredictable is that there are a multitude of factors that can affect each currency being traded.
Learning to trade in the forex market requires more than just a basic knowledge of forex trading strategy. It requires the study of political, economical and global factors that can shape the US dollar, which is currently the most traded currency in the forex market.