Forex Trading Strategies And Trends In 2018
Forex market is one of the biggest in the world, with a daily turnover of more than $4 trillion. Forex trading is the art of buying and selling of currency pairs with a view of generating some profits on price changes.
To be a successful trader one must be conversant with economics that affects currency prices on a daily basis. In addition to economics, one must be conversant with various trading strategies, ideal for trading different market situations.
Below are some of the top forex strategies that successful traders deploy throughout the year to generate a fortune from the trillion dollar marketplace.
Trend Trading Strategy
Trend trading strategy is a highly profitable trading strategy deployed by millions of people around the world. When it comes to forex trading, it is best to trade with the trend as it significantly reduces the risk and increases chances of profitable trades.
With trend trading, it is important to use an indicator to determine the direction of a trend on a given currency pair. It is also important to stick to a given period depending on the trading strategy. For those analyzing long-term investments, long-term periods are ideal. For those in it for short-term investments, using indicators in shorter periods is important.
For long-term trend followers, the 200 days 100 day and 55-day moving average are ideal indicators. Trading platforms come with the provision that allows one to tweak the moving average depending on trading strategy. For long-term investments, using a 100-day moving average to determine the trend of a currency pair would be ideal.
In the chart above, it is clear that the EUR/USD pair started trending in an uptrend in May of 2006. The blue 20 simple moving average in this case crossed above the 55 simple moving average indicating an uptrend. The currency pair remained in an uptrend until July of 2008, when the blue moving average crossed below the red 55 moving average indicating a downtrend.
Whenever the Blue, 20 faster-moving average, crossed the slower, 55 Simple moving average then the currency pair was officially in an uptrend. In this case, traders entered long positions or Buy. Conversely, whenever the faster 20 Simple Moving average crossed, the slower 55 moving average on the downside, then traders entered sale positions given that the market had become bearish.
Moving averages in a trending market can also act as support positions or resistance level. In the chart below it is clear that whenever the price pulled back to the moving average, it struggled to breach the trend line to edge lower. In this case, traders entered buy positions whenever the price dropped to the trend line, which in this case is a 100-day moving average.
Currency pairs at times trade in a channel such that price movements are restricted in a given trading range. In this case, it is important to deploy a channel pattern trading strategy. With channel Pattern strategy, it involves identifying support and resistance level where a financial instrument remains restricted.
In the chart above, it is clear that whenever the price touched the upper part of the channel, it bounced back and started trading lower. In this case, traders could wait for a sell signal, in the form of a strong sell candle to enter a sell position.
In the same case, whenever the price touched the lower side of the channel, it bounced back and started climbing high. A trader, in this case, could wait for a strong bull candle to enter a buy position.
The Channel trading pattern is an ideal trading strategy whenever markets are trading sideways. In this case, one can make money whenever the price bounces off a support level. One also stands to make money whenever it starts dropping upon hitting a resistance level on the higher side of a channel.
Double Top/ Double Bottom Strategy
Double tops and double bottoms occur whenever there is exhaustion in the strength of a trend. For example, the price of an item might be trending in an uptrend. However, upon reaching some level it starts pulling down on short sellers resuming control. Eventually, after pulling lower, the price might once again start climbing high in such a way that it threatens to breakout past the previous high.
In the case of double top the price would struggle, rising above the previous high and once again starts retreating, i.e., edging lower. This is what is called double top as shown below.
With Double tops, you need to look out for a W-Shape pattern to enter sell positions as soon as the price starts trading lower on struggling to make a higher high after a bounce back.
Double Bottom occurs whenever the price of a security moves lower, and then bounces back as buyers resume control. However, short sellers resume control be it in the short term and try to push the price lower. However, on trying to push the price lower on the second trial, they might fail, and the price bounces back before it records a new lower low.
In the chart above it is clear that the second bottom is slightly higher than the first bottom. Traders deploy this strategy to enter a buy position at the ‘neckline as shown in the chart above.
Markets are always in consolidation, i.e. trading in a channel or trending. Whenever price is in one direction, then it is appropriate to use the trend trading strategy as described above. Conversely whenever a market is in consolidation, trading in a given channel, then deploying the channel pattern would be ideal. Before entering a position in a trending or consolidating the market, it is essential to wait for a signal candle to confirm who is in control and the direction the price is likely to move.