Forex Trading Strategies
Forex trading is the trading of currencies of various countries. Currency is traded in pairs only and the goal is to goal to buy a nationís currency at a low price and then to sell it at a higher price. There are many forex trading strategies available for forex traders to use and in todayís article we discuss some of these strategies.
Technical analysis is one method used and it focuses on price patterns to indicate price action and market behavior. The theory is that prices move in trends so it you study the trends then you can make a profit trading using technical analysis tools. Technical analysis is popular for many reasons. For starters, as stated above, it predicts trends. It also gives traders the ability to study certain chart patterns that can reliably tell you what will happen in the markets. Also, it does not look at fundamental analysis factors such as the economy, annual earnings, and the like. Technical analysis believes that these fundamental factors are already accounted for in the price of forex, stock, etc. We discuss some forex trading strategies used below.
The moving average is a technical analysis indicator that is used by many forex traders today. This indicator tells you the price at any point in time over a defined set of intervals. There are different types of moving averages such as the simple moving average (SMA), the exponential moving average (EMA), and the weighted moving average (WMA). Moving averages give FX traders the currency price while calculating the average based on the selected time measure. They are often used in combination with other technical analysis indicators.
The Moving Average Convergence Divergence (MACD) in based on moving averages and plots the difference between certain exponential moving averages using a trigger line. The MACD is one of the more complex forex trading strategies but is worth learning because it is very useful.
Fibonacci is another form of technical analysis used when online forex trading. When learning about Fibonacci investors will learn about support and resistance levels. Traders use the Fibonacci Indicators as reference points to predict a retracement versus a reversal. Technical analysts use them to predict price targets and support and resistance targets. Fibonacci like the MACD is a complex concept to understand, but once understood can be very helpful when used with other technical indicators to trade forex.
Continue to learn about the different forex strategies available to investors. Most investors will learn two to three and combine them when trading forex. Just be sure that you donít try and use too many at once. That can hinder your trading. The best traders become experts in a only a few trading strategies instead of trying to learn a little bit about every strategy.
Market Direction: The bullish Jayhook pattern identifies extremely strong bullish sentiment. It can be used very effectively for correct timing for entering a trade and exiting a trade, then reentering. Investor sentiment works in a reoccurring pattern that allows for the identification of a strong price move based upon the Jayhook pattern. The same is true for identifying a strong bearish pattern. A bearish Jayhook pattern is presenting itself in the Dow chart as well as the NASDAQ chart. The same implications can be derived when identifying the strength of a bearish market trend. Utilizing the patterns makes trend analysis much easier to evaluate correctly. Knowing the simple parameters that are incorporated in the pattern allows for reasonably accurate projections where the trend may move.
One of the basic elements of a Jayhook pattern is that wave three will be approximately equivalent to wave one. This makes the projection of a downside target reasonably easy. The Dow is in the process of forming a bearish Jayhook pattern. If wave three should equal wave one, the next likely target is a test of the November lows. Will that be the exact target? Not necessarily, however it does create a viable target. This permits the candlestick investor to establish the positions in a portfolio with a fairly high degree of expectation. Today's close in the Dow was right the recent support level. Today's candle, not showing any reversal signal, and the stochastics still heading in a downward direction increases the probabilities of the markets heading lower. The NASDAQ closed slightly higher, but did not show any reversal signal.
Why is this type of analysis important? It keeps investors from maintaining profitable positions too long. Understanding all the elements that indicate which direction a trend is moving keeps a portfolio from being too heavily invested in the wrong direction. Early last week there were signs of a possible bullish rally. The hopefulness of many investors might have had them establishing long positions. That was the right thing to do last week. However, for many investors, that "hopefulness" continues in spite of the sell signals in the market. There is always a tendency to hold newly established positions too long. Instead of closing positions with a slight profit or a breakeven, many investors continued to hold positions that look good seven trading days ago. They do not want to acknowledge the signals revealing a difference in what they analyzed last week.
Part of investing correctly is understanding that some positions will be established but then immediately close back out because of a change of investor sentiment right at that time. There is nothing wrong with analyzing a trend as being bullish but the next day or two reassessing the original analysis. Trends will not always move as first indicated. The purpose of using candlestick signals is to have a much better understanding of what is occurring in a price trend. Profitable investing will involve holding positions for extensive period of time when a market trend is consistent and immediately closing out positions at other times when the market quickly changes direction.
The Dow and the NASDAQ show better probabilities of moving lower. That knowledge should be acted upon accordingly. Buying the short funds or short individual stocks has a higher probability of producing profits. There will be strong sectors in a downtrending market. However, trying to buck the trend may not be as lucrative as trading with the trend.
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