Tuesday 16 October 2012

Trading Strategies – Forex

There are different types of trading strategies in Forex, in a way there are two divisions for devising strategies. In normal life strategies are used to gain advantages for example in chess or to make revision timetables so you can ace exams etc. Strategies in Forex are used to make investments profitable. These two divisions are key to making strategies and they are TA and FA (Technical analysis and Fundamental Analysis).  So you are probably asking what is TA and FA? They are crucial in Forex markets and any other markets.


Technical:

Quite a lot of traders use technical analysis and some traders that solely rely on technical analysis. In TA charts are used to determine the market outcome, technical analysts will use the charts to predict the price at the end of the day/month/year. They also use indicators to analyse the data more so they can see whether the market outcome they predicted will come true. In addition they will analyse the data for future entries in to the market and determine the currency of the pair. Below I will be talking about strategies for Forex, I will start off with the easiest strategies:

Moving averages

So here you can see below there is a downtrend in EUR/AUD. You can predict whether there will be a downtrend and entry should be done when the longer moving average dips below the shorter (fastest) moving average. Here I am using 50-day moving average and 200 moving day average and my time frame is 1 day. So the 1st arrow as you can see from the chart is where you would enter this is because when a shorter moving average crosses the longer moving average this signifies a down trend for the pair, as you can see later on a down trend appears, so the investment here would be going short . Beware of the market lag, as you may have noticed that the pair is already in a down trend, and then the longer moving average crosses the shorter moving average which signifies that there will be a uptrend, here you will notice a big lag in the market (2nd arrow) so the investment here would be going long.  You might be wondering why I have put a 3rd arrow,  the reason is that the shorter moving average may cut the longer moving average and may signify a downtrend.


Trend trading:

This is probably the most simplistic trading strategies used, you may have heard the song “Follow the Leader” that’s basically what you do, you trade the trend. When it’s an uptrend you should undertake investment in going long, and when it’s a downtrend you should undertake investment in going short. We can use our previous chart here EUR/AUD, I have drawn channel lines to signify a downtrend in blue.



RSI (Relative Strength Index)
This is a powerful indicator and not be underestimated in Forex markets, it is widely used in other markets as well.  So what’s the strategy here as you can see the currency has been over bought when the peak finishes on the overbought area this is an entry, undertake an investment going short. In addition you can see there is a drop in price for EUR/GBP so even if you miss it out on the day you can still jump in for the action. Basically when the RSI is above 70 then the currency is being overbought in the market



Next we move on to over-sold currencies signified by the graph below:


As you can see the area shaded in pink is the oversold region and there is a peak around 17th July here you would undertake an investment to go long. Using the same strategy buy at peak, here the oversold level is 30.
The disadvantages of RSI are that you need an exit plan, as it depends on when you want to exit.
I hope you enjoyed just some of the trading strategies. I hope I have given you an insight you on how to trade Forex using the strategies indicated above however these are basic strategies. 


However I am not finished, we still have FA, which is what causes a lot of volatility in the market, FA is the analysis of the impact of economic events on the market present and future. When a central bank decides to raise in real interest rates. Higher real interest rates mean a increase in price for the currency as more people will want to investment as they will get a higher rate of return (e.g. savings) and vice versa. News heavily affects the Forex rates. You can quite clearly see from this article:



If you think the results will be good then you can undertake an investment, if you think they are going to be rubbish short sell.

Don’t stick with just one side of the strategy division merge both of them. A wise friend of mine said: “Don’t trade purely on technical’s, trade on numbers as well.” By numbers he meant fundamentals, you will understand the power you have when you use both, as technical analysis is mainly based on human psychology.



Here are some great links for strategies: http://forex-strategies-revealed.com/basic

Please note this is my opinion and he/she (the reader of this post) should not place a trade with the information provided in this post as this may result in a loss for the individual. I will not be held responsible for the loss you make. The data presented may be inaccurate/incomplete and will be inaccurate due to the nature of financial markets 

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