Forex Trading Strategies
Forex trading strategies refers to methods used by forex traders to
forecast price movement in the forex market. These methods or trading strategies
are grouped into two broad categories namely technical and fundamental analysis.
Technical analysis relies on the study of charts of historical prices so as to
forecast price movement while fundamental analysis relies on assessment of
economic data contained in news releases
to forecast price movement. The technical analyst presumes that all economic
factors influencing the forex market are captured on the chart and as such,
technical analysis alone will suffice, but this is not an absolute truism. Fundamental
analysis is relevant because it covers the economic factors that drive prices,
though it is not in itself sufficient for making market entry and exit decisions,
some level of technical analysis is still required to determine what is
happening now. Thus, professional traders combine both technical and
fundamental analysis when trading.
If, for instance, a technical analyst
identifies an uptrend reversal on a chart, it does not follow that price will go
all the way down within the price tunnel due to economic factors that the fundamental analyst
may be well aware of. Conversely, a fundamental analyst may be aware of an imminent uptrend
resulting from a news release, but this uptrend may not last for more than a few
minutes. So, entering the market based on news
releases or technical indicators alone can be
costly. However, technical analysis carries more weight because it tells the
trader what is happening now and not just what has happened.
Below
are three winning forex trading strategies based on three common technical
indicators - Bollinger bands, moving averages and MACD (moving average
convergence divergence).
Bollinger Bands Trading Zones
This forex trading strategy uses two Bollinger bands to map out trading
zones. Insert two Bollinger bands in your chart such that the first one uses 2
standard deviations from the 20-period simple moving average and the second one
uses 1 standard deviation from the 20-period simple moving average. BUY when
price lies in between the two lower Bollinger bands and SELL when price lies in
between the two upper Bollinger bands. This trading strategy will work perfectly
during ranging markets, but will make losses during Bollinger band breakouts
seen in trending markets or in a trend continuation scenario.
Weighted Moving Average Cross
This forex trading strategy uses two weighted moving averages to indicate buy and sell points on the price chart. Insert a 3-period weighted moving average to act as the fast line with blue colour, a 9-period weighted moving average to act as the slow line with red colour and a 26-period exponential moving average to act as a neutral line (filter) with white or black colour. BUY when the fast line crosses above the slow line and price is below the neutral line. SELL when the fast line crosses below the slow line and price is above the neutral line. This strategy is susceptible to whipsaw i.e. deceptive moving average crosses that do not amount to a trend reversal so, a suitable exit strategy is needed such as trailing stop. It may be safer to alter the strategy as follows: BUY when both the fast line and slow line cross above the neutral line and exit when the fast line crosses below the slow line, SELL when both the fast line and the slow line cross below the neutral line and exit when the fast line crosses above the slow line.
MACD Cross
This forex trading strategy uses the moving average convergence divergence (MACD pronounced mack dee) to indicate bearish and bullish market conditions. BUY when the signal line crosses below the MACD line and SELL when the signal line crosses above the MACD line. If using the MACD histogram as in MT4 platform, then BUY when the signal line breaks out of the histogram (breaks into the histogram if MACD>0) and SELL when the signal line breaks out of the histogram (breaks into the histogram if MACD<0). MACD Crosses usually signify the beginning of a new trend.
To learn more about technical indicators and how to use them, visit Incredible Charts.
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