Foreign Exchange Market - Trading Strategies (Module 7)
On the last module, you've learned the three types of forex analysis (technical, fundamental, and sentiment). Moving on to module 7, you are to learn the fundamentals of forex trading strategies. With this, you are preparing yourself in conquering the forex market.
Forex trading strategies
Basically, a trading strategy is the technique you are to use in order to determine whether to sell or buy a certain currency pair on its right moment. It has a major connection between the three trading analysis we've discussed in the previous module.
A trading strategy often made of trading signals in which triggers the purchase or sell decision. You may encounter various strategies online, but it would be best to develop one on your own. Good tactics without a strategy of integration isn't a guaranteed success.
A forex trade strategy could either be automated or manual. At one hand, manual trade strategy involves you (the trader) in front of a computer looking for signals and evaluating whether to sell or buy.
On the other hand, an automated system is more of refining an algorithm that will find a signal and make trades on its own. The good thing with an automated system is it eliminates human sentiment, which likely results in improved performance.
Before discussing the actual forex trading strategies, it would be essential to learn the basics.
Support and Resistance
If the market moves up then pulls back, the highest point before a downward movement is a mark we call the resistance. On the contrary, if it moves up again, the lowest point reached before it went up is a mark we call the support.
Bullish and Bearish
Now, whether the trend is bullish or bearish, you could indicate the levels of support and resistance within your chart. It will be easier to identify the situation in the market with the use of a chart.
If the market is bullish, you are to purchase whenever you see a turn in the previous resistance becoming support. If the market is bearish, you are to sell whenever you see a turn in the previous support becoming resistance.
Support and resistance indicate a mark when to purchase and when to sell. It's a great strategy for most newbies who are having a hard time finding the right signal.
Trend line strategy is among the simplest and effective tool in forex trade. If indicated correctly, it could provide the most accurate strategy in the market.
Basically, an uptrend line is mostly within the bottom of a support area (valleys). You are to connect two or more low points. In a downtrend, the line is mostly within the top resistance areas (peaks). You are to connect two or more high points.
Whenever the trend line broke, it is an indication of a mainstream change. In short, the trend line is all about indicating two major highs or lows within the market chart and connect them.
Take note that there should be two(2) or more high/low when indicating a valid trend line. A steeper trend line means a lesser reliable and better chance of a breakout.
However, within the same horizontal resistance and support levels, the trend line is likely to become stronger. Never force a trend line and fit it in the market. If it doesn't fit, then it is not a valid trend line.
Moving on, we are about to discuss the fundamental strategies that are essential before you enter the forex trading market.
Beginners Forex Trading Strategies
Consider this like a training in your journey to become a wise and winner trader. There are various strategies in the market but start mastering the basics. On your way to success, you may modify and adjust these strategies and find which works best for you.
Let's start at the breakout strategy, an attempt to enter a trade as price moves beyond an indicated support or resistance areas. A breakout may occur horizontally or diagonally levels. That may depend on the price action pattern within the market chart.
An uptrend market with resistance within a horizontal level often indicates a bullish breakout from the initial resistance level.
It is somehow similar to a bullish breakout. However, this time, the market breaks towards the downside. Upon two failing attempts, the market breaks beyond the support. That indicates a bearish breakout coming from the initial support level.
It is important as breakouts mostly indicate an initial increase in volatility. As we wait for a break of a key level, volatility can be an advantage by entering the new trends as it starts.
Further Strategic Analysis
This strategy consists of four parts: support, resistance, breakout, and retest.
As you can see, there are two trend lines. One is the trend line support, while the other one is the trend line resistance. That formed a wedge.
A wedge is often a continuation pattern. That's the reason why you have to allow the market to show its movement before considering future price movements. Observe the sample chart below.
As the market begins to consolidate narrower, it often breaks wedge support and afterward retests the support level as new resistance. As a result, retest shows the perfect opportunity of entering short.
However, considering the idea of stop loss, to avoid further loss, you can place a stop loss below or above a breakout candle at its minimum. Looking at the previous sample chart, you need to place stop loss over the candle that broke through the support.
Remember that retests aren't the outcome all the time. There are times wherein price moves in a direction that may leave you behind. That's the reason why you need to use stop-loss orders and not to hold on to trade even at hopeful times.
Inside bar refers to a period on a chart forming inside a previous period. It is when a previous candle completely engulfs the inside bar. However, you should take note that we are looking at high to low; the entire range of the candle. That means you don't need to look further at the open or close of both bars.
Engulfing candle is the mother bar. That's the point where you are to focus on the mother's high and low.
This strategy works well on higher time frames. Mainly because this is when you don't want the noise gets on a lower time frame. In a daily chart, the noise is usually filtered out. That produces a cleaner price action patterns which are ideal on this strategy.
Time frame strategy works well on a daily timeframe or at a higher time frame. Inside bars aren't often present, meaning the important trade setup becomes more obvious and easier to see.
Meanwhile, looking at a 1-hour chart, you may see multiple inside bars in a single day. That's likely to become harder for you. Another way to identify an inside bar is when a strong trend occurs.
Looking at the image above, price action inside bar that occurred within a strong trend is evident. The sample above is an uptrend but as effective in a strong downtrend.
On the sample image above, inside bars within the consolidation are not obvious. That makes the trade harder as it doesn't give precise directional bias.
In short, with this strategy, looking for inside bars occurring on a daily time frame within a strong trending market would be a best practice. That is an effective strategy on both strong downtrend and strong uptrend.
Placing a stop loss
The best position for a stop loss is under the inside bar low. At this placement, you may receive the best rewards and the relatively safe place to hide a stop loss order.
One more thing to consider; the relative size of the inside bar is essential. It has a great impact on the entry and stop-loss placement.
You should always aim for a ratio of 1:2 risk to reward, at its minimum. Whenever your stop loss needs to be 50 pips afar, the profit target should be at least 100 pips.
At the sample chart above, you can see a valid inside bar setup. Within a daily chart at a strong downtrend, everything looks good.
On the sample chart above, the same setup is present. However, if the chart is at weeks past, the setup will be considered as invalid.
Obviously, previous support and resistance levels do play an essential part in this strategy. You may use these strategies to determine if the inside bar is worth to trade.
It's not just about the relative size of the inside the mother bar is necessary. The same way support and resistance levels are necessary. Both levels help traders know the previous price action, which may help you with your trades.
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