Proven Forex Trading Strategies
The foreign currency exchange (Forex) market provides an opportunity to make money from fluctuations in exchange rates. Trading currency in done in a similar fashion to trading stock. The strategies are innumerable, and every trader must determine her own style. But some strategies have demonstrated they work more often than not. It is important to understand than no Forex strategy is guaranteed to be successful. All strategies produce false signals and fail on occasion.
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Trend Lines
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A study of trends using trend lines is a common strategy in any financial market, including Forex. Trend lines are straight lines drawn on a chart that show the exact levels at which prices reverse to continue a trend. In an ascending trend, you draw the line through the low points in the trend. For the trend line to be valid, it should connect at least three consecutive lows. If three lows cannot connect with a straight line, a trend probably is not in place. Once drawn and extended into the future, the trend line shows where future prices may stop and reverse to head higher. Buying at or near the trend line may lead to profit. Most Forex charting programs let you draw these lines. If lines cannot be drawn, the lines usually are easy to imagine on the chart.
Engulfing Pattern
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Most Forex charts let you create "candlestick" charts. A candlestick is a development of an ordinary bar on a standard bar chart. The candlestick shows more clearly where prices opened and closed for each trading period, and this creates stand-out visual patterns. Many candlestick strategies exist, but one that is easy to identify is the "engulfing" pattern. When a candlestick extends above and below the prior candlestick and is also the opposite color, Forex traders often trade in the direction of this candlestick. If the candlestick is green, indicating a higher closing price than its opening price, prices tend to rise for a few bars after this pattern forms. Buying at these moments can lead to profit.
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Divergence Strategies
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Nearly all Forex programs let you add technical "indicators" to charts. These are additional chart elements and graphs that appear on or near the price chart itself. Many of these indicators offer access to "divergence" strategies. These compare the price action to the movement of the indicator. When they move in opposite directions, they are "diverging." One common indicator for this strategy is the Moving Average Convergence Divergence (MACD) tool. If a recent peak in the MACD is lower than the previous peak, but the Forex currency's most recent high is higher than its previous high, this is divergence. The MACD studies momentum and suggests that momentum declines even as prices rise. Many traders take this as caution for buying, and others will "short" the market to profit on a price decline. Divergence is a complicated field, but this simple pattern can help inform your trading decisions.
False Signals
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Any strategy eventually fails. A price trend, as determined by a trend line or another method, eventually ends and reverses to form a new trend. Divergence can occur for a long time before prices follow the direction of momentum. And candlestick patterns are never foolproof. The Forex trader opens herself to considerable risk as a result of the fast action and high volatility of this market. You should never trust any single strategy completely, and you should seek methods that combine multiple indicators into trading decisions.
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