Trading Strategies for the FOREX Market
Traders approach the foreign currency exchange market, or Forex, in many different ways. This market provides you with an opportunity to make money from fluctuating exchange rates. The risks are high and most traders engage in short trades with large positions to leverage even the smallest fluctuations. How to decide when to enter a trade is highly personal, but some basic ideas can help you formulate your strategy.
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Trend-Following Strategy
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A popular and easy strategy that traders employ in the Forex market consists of identifying and then following an existing price trend in any currency. How you define a trend can widely vary, but a simple approach is to draw a "trend line" on the chart. If a currency is trending strongly, you can usually draw a straight line that connects all the low points in the trend. If it is a downtrend, this line will instead connect the highs. Most Forex charting software provides these simple drawing tools. If the chart does not provide a clear pattern for drawing such a line, then the currency is probably not trending. If it is trending, you simply enter in the direction of the trend as prices approach the line.
Candlestick Strategies
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Nearly all charting programs let you chart your instrument using "candlesticks," and indeed this is the default setting in most chart software. A candlestick is similar to a more conventional bar chart, but it highlights the opening and closing prices for the period of each bar. This creates unique shapes, and Forex traders often make predictions based on these patterns. There are dozens of popular candlestick strategies. A particularly effective and popular pattern, which is also easy to identify, is the "engulfing" pattern. This occurs when a candle forms that is the opposite color of the previous candle while also extending above and below the extremes of the previous candle. This pattern signals a significant turnaround in price action. Traders will often trade in the direction of the engulfing candle with the expectation that it leads further price action.
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Moving Average
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The moving average is a "technical indicator" that anyone can apply to a price chart. It calculates an average of historical prices for a given time frame. Each bar creates a new average, and these averages are connected to form a line. A positively sloped line indicates that average prices are rising. It is possible for prices to trade below their moving average, but if the average still slopes positively, this suggests an upward momentum. As prices cross back above such an average, some traders interpret this a "buy" signal. Moving average strategies are infinite and there is much room for variation and imagination with this indicator.
Warning
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Any trading strategy will always produce false signals. There is no strategy that will guarantee positive returns 100 percent of the time. For this reason, you must recognize that losses are common, and your trading strategy must also include a plan of when to exit a trade and accept a loss, rather than hold onto a trade indefinitely hoping for a turnaround. Always simulate with your new strategy before you trade real money until you are comfortable with how it works.
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