Forex Trading Strategies – What You Should Know If You Are Into Forex Trading
If you have tested or do real trading for some times, you must realize that there are many forex trading strategies that can be applied. Every strategy has different pros and cons, need different circumstance and data, and will works well in certain currency pair.
Basically, forex trading strategies can be divided into two major:
1. Technical analysis
This strategy relies heavily on data, mainly charts from previous market movements to forecast the future direction of prices. There are various methods to read this data such as candlestick charting or Elliot wave, but basically they search for patterns in the chart for a given time and looking for relationships between various indicators such as price and volume. You need the right tool for this, learn about it at technical analysis software.
This strategy is preferred by most traders and they use it in daily basis to decide the best transaction available currently. Usually, each trader has their own way to interpret the data by using various variables and designed specifically for a particular market he is in. These difference in methods make them have different winning rates even though they can access the same data; the trader with a better method will get more profits.
2. Fundamental analysis
This strategy is executed by analyzing various economy factors like interest rate, production, payroll, management, and overall state of economy to make entry and exit decisions. For example: some news such as Non Farm Payroll or Wholesale Inventories can affect the market greatly. If you can analyze the market movement before the news out, you can secure your position and wait for the profit.
Some times, some people with high influence in economy state will gather for an important meeting. For example, a meeting about deciding a new interest rate or inflation will have great impact in the currency values. Usually it will be already too late to enter the market when the result has been announced, so you have to use the current data to analyze and guess the result before.
Not only short term trading, fundamental analysis can also be used as a long term forex trading strategies. This is rather complex, but basically you predict the future trends of the market based on how the new policy will affect the market in long run.
There are various ways to implement both strategies, for instance: Scalping.
Scalping
Scalping is about making small amount of profits from time to time where it will reach significant amount when combined. It requires the trader to spend most of his time watching his open positions, but it can be easier by using automated trading software. For instance: When a scalper notice a small movement in the market that has profit potential, he will takes this chances even if it only get him 5 pips in profit.
Scalping is not a method that can be used by any trader, it requires patience and no emotion involved. A scalper will execute his strategy with strict discipline even if he notice opportunity to get more; he will make an exit as planned, gain small profit, and move to the next order. For decisions base, a Scalper usually using technical analysis method, but sometimes fundamental method can be applied too. Scalping can be very tiring and hard for a human trader, but not for a robot; read about the best scalping robot at FAP Turbo Review.
If you are still unfamiliar with forex and looking for a suitable forex trading strategies then I suggest learning technical analysis first, it is the basic of almost all strategies. Another alternative: just go with a proven system, check it at best trading system.
The Forex Market: Bollinger Band indicator
What are Bollinger bands? It is a technical analysis indicator used in the financial markets such as Forex, which are used to determine market volatility and relative prices in a period of time determined by the trader.
This technique was developed by John Bollinger in the early 80’s. Bollinger was based on mathematical formulas commonly used by statisticians to determine the standard deviations of the data series and adapted for use in the Forex Market. Bollinger bands are used to determine over-bought and over-sold levels.
The use of Bollinger bands is more effective in ranging markets and it is suggested that it should be applied in periods of 20 days but it may also be used even in periods of 50 days.
Bollinger bands consist of three lines drawn in relation to price action. These three lines are:
• The middle or central band: it is as a rule; a simple moving average and provides information on market trends. From the middle band it is calculated upper and lower bands by one standard deviation.
• The upper band: is equal to a moving average of 20 periods and 2 standard deviations above the moving average.
• The bottom band: is equal to a moving average of 20 periods and 2 standard deviations below the moving average.
How to use Bollinger bands to invest in Forex?
You can use this indicator to determine market volatility and relative prices in the Forex Market. You must start tracing the 3 lines in the graphs, which provide you with the indications of when you should buy and sell.
In Markets without trends the strategy is to sell in higher bands and compared in the lower bands. The interval between the upper and lower band will provide you with information on the volatility of the market activity. This means that the higher the volatility in the market is, the higher the standard deviation will be and because of that the bands are a little broader. If on the contrary, it happens that there is less volatility in the market, the lower the standard deviation and thus the bands will be narrower.
On the other hand, if you notice that prices will break through the upper band, in the band that is contrary then we should expect a continuation of current trends.
Calculate the moving average (MA) using the following formula:
MA = (P1+ … + Pn)/n
Pn = Price at an interval n
n = Number of periods
• Subtract the moving average (MA) of each data point (p) used in calculating the moving average. This will give you a list of deviations (d) of the mean:
• Finally, you can calculate the three Bollinger Bands using the following formulas:
Superior Band = MA + 2σ
Media Band = MA
Lower Band = MA-2σ
It is not recommend using this indicator in volatile markets. But if you decide to use it, you should buy right on the break above the upper band and sell right on the break below the lower band. This is important if you, as a trader, notice that the bands shrink too fast (consolidation), it is likely to occur a violent break, a moment you can use to buy or sell.
Bollinger Bands provide you with 3 types of signals:
• Contractions (squeeze) means that there is less volatility in the market.
• Expansion (expansion) means that there is greater market volatility.
• 2.0 STDV close : Breakouts
What you should NEVER do?
• Never buy or sell without observing the candlestick patterns.
• Do not buy or sell if it has not detected a clear breakout of the market.
• Do not use this indicator in periods longer than 100 days.
• If prices touch the band alone, it does not mean that you should buy or sell. Never trade without a preliminary analysis.
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Remember that no investment is risk free and the Bollinger Band indicator in Forex will help you most effectively when it is used in conjunction with other tools.
If you would like to have information about Technical Analysis, Please Click Here: Forex Trading
