Forex Trading Strategies
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Most Forex traders use many different Forex strategies when trading currencies. that simplify key trading concepts so you can develop easy-to-execute strategies. This section additionally teaches you which forex strategies are profitable as well as which ones to potentially avoid. Furthermore, this educational material will enable you to learn how to protect your capital and manage them in your trading.
Trading Strategies Based on Forex Analysis
Each of the mentioned analysis methods is used in a certain way to identify the market trend and make reasonable predictions on future market behavior. If in technical analysis traders mainly deal with different charts and technical tools to reveal the past, present and future state of currency prices, in fundamental analysis the importance is given to the macroeconomic and political factors which can directly influence the foreign exchange market.
Quite a different approach to the market trend is provided by market sentiment, which is based on the attitude and opinions of traders. Below you can read about each analysis method in detail.
Forex Technical Analysis Strategies
Forex technical analysis is the study of market action primarily using charts for forecasting future price trends. Forex traders can develop strategies based on various technical analysis tools including market trend, volume, range, support and resistance levels, chart patterns and indicators, as well as conduct a Multiple Time Frame Analysis using different time frame charts.
Technical analysis strategy is a crucial method of evaluating assets based on the analysis and statistics of past market action, such as past prices and past volume. The main goal of technical analysts is not the measuring of asset’s underlying value, they attempt to use charts or other tools of technical analysis to determine patterns that will help to forecast future market activity. Their firm belief is that the future performance of markets can be indicated by the historical performance.
Forex Trend Trading Strategy
Trend represents one of the most essential concepts in technical analysis. All the technical analysis tools that an analyst uses have a single purpose: help to identify the market trend. The meaning of Forex trend is not so much different from its general meaning – it is nothing more than the direction in which the market moves.
But more precisely, foreign exchange market does not move in a straight line, it’s moves are characterized by a series of zigzags which resemble successive waves with clear peaks and troughs or highs and lows, as they are often called.
As we mentioned above, forex trend is comprised of a series of highs and lows, and depending on the movement of those peaks and troughs one can understand the trend’s type on the market.
Though most people think that foreign exchange market can be either upward or downward, there exist not two but three types of trends:
Traders and investors confront three types of decisions: go long, i.e. to buy, go short, i.e. to sell, or stay aside, i.e. to do nothing. During any type of trend, they should develop a specific strategy.
The buying strategy is preferable when the market goes up and conversely the selling strategy would be right when the market goes down. But when the market moves sideways the third option – to stay aside – will be the wisest decision.
Support and Resistance Trading Strategy
To completely understand the essence of support and resistance trading strategy you should firstly know what a horizontal level is. It is a price level indicating either a support or resistance in the market. The support and resistance in technical analysis are the terms for price lows and highs respectively.
The term support indicates the area on the chart where the buying interest is significantly strong and surpasses the selling pressure. It is usually marked by previous troughs. Resistance level, contrary to the support level, represents an area on the chart where selling interest overcomes buying pressure. It is usually marked by previous peaks.
To develop a support and resistance strategy you should be aware of how the trend is identified through these horizontal levels. Thus, for an uptrend to go on, each successive support level should be higher than the previous one, and each successive resistance level should be higher than the one preceding it.
In case this is not so, for instance, if the support level comes down to the previous trough, it may signify that the uptrend is coming to the end or at least it is turning into a sideways trend. It is likely that trend reversal from up to down will occur. The opposite situation takes place in a downtrend; the failure of each support level to move lower than the previous trough may again signal changes in the existing trend.
The concept behind support and resistance trading is still the same – buying a security when we expect it to increase in price and sell when expecting its price to go down. Thus, when the price falls to the support level, traders decide to buy creating demand and driving the price up. In the same way, when the price rises to a resistance level, traders decide to sell, creating a downward pressure and driving the price down.
Forex Range Trading Strategy
Range trading strategy, which is also called channel trading, is generally associated with the lack of market direction and it is used during the absence of a trend. Range trading identifies currency price movement in channels and the first task of this strategy is to find the range. This process can be carried out by connecting a series of highs and lows with a horizontal trendline. In other words, the trader should find the major support and resistance levels with the area in between known as “trading range”.
In range trading it’s quite easy to find the areas to take profit. You can buy at support and sell at resistance if the security hasn’t broken out of the channel. Otherwise, if the breakout direction is not favorable for your position, you may undergo huge losses.
Range trading works in a market with just enough volatility due to which the price goes on wiggling in the channel without breaking out of the range. In the case the level of support and resistance breaks you should exit range-based positions.
The most efficient way of managing this type of risk is the use of stop and limit orders as most traders do. They place stop limit orders when the currency price keeps dropping below the entry point and set the limit order to make profit when the security moves to the top of the range. In other words, while selling a range you should set limit orders down near the support level to take profit and while buying, you should place take profit orders at the previously defined resistance level.
Technical Indicators in Forex Trading Strategies
Technical indicators are calculations which are based on the price and volume of a security. They are used both to confirm the trend and the quality of chart patterns, and to help traders determine the buy and sell signals. The indicators can be applied separately to form buy and sell signals, as well as can be used together, in conjunction with chart patterns and price movement.
Technical analysis indicators can form buy and sell signals through crossovers and divergence. Crossovers are reflected when price moves through the moving average or when two different moving averages cross each other. Divergence happens when the price trend and the indicator trend move in opposite directions indicating that the direction of price trend is weakening.
They can be applied separately to form buy and sell signals, as well as can be used together, in conjunction with the market. However, not all of them are used widely by traders. The following indicators mentioned below are of utmost importance for analysts and at least one of them is used by each trader to develop his trading strategy:
- Moving Average
- Bollinger Bands
- Relative Strength Index (RSI)
- Stochastic Oscillator
- Moving Average Convergence/Divergence (MACD)
You can easily learn how to use each indicator and develop trading strategies by indicators.