One of the keys to effective FX trading is to focus on simple techniques and strategies that can decipher price action trends and generate clear cut signals at the right times. Easier said than done? Perhaps so – however, by focusing on the simple trading tips discussed in this article, every new and aspiring FX trader will be able to better understand the art of distinguishing trends from ranges, and trade each on their merits.
Basic FX Trading Strategies That Work
FX Trading Styles In A Nutshell. In the most basic of senses, an FX currency pair can be doing one of two main things at any one point in time – trending or ranging. Once the FX trader identifies which of these two characteristics the market is displaying, they can better understand and trade price action.
Identifying FX Market Trends. When FX markets are trending the trader will be able to spot certain key traits exhibited by price action. For a start, a trend will tend to last anywhere from a few weeks to a year or more. Once a long term FX trend gets started, it can really take some stopping. Trends also offer the FX trader the highest possible rewards – price will travel longer and faster when riding on the crest of a trend. Trends aren’t that difficult to spot – look out for price action making consecutively higher highs (uptrend) or lower lows (downtrend).
There are many tools and methods available to identify and help a trader get on top of a market that has trending tendencies. Choose from a wide cache of trend indicators – the moving average is perhaps the most frequently used of these, but others that are frequently plotted on trader charts are the MACD and Average Directional Index among others.
A key skill for the trend trade to hone is the ability to plot accurate trendlines while a trend is taking place. Trendlines are especially useful for trend traders since they can help determine whether a trend is holding up – a break of a previously held trendline can be one of the earliest indications that a trend may be faltering. A little known trick to help pick out possible price trendline breaks before they happen is to plot trendlines on the Relative Strength Index (RSI) indicator. Often, a trendline break on the RSI precedes a trendline break on price itself!
Spotting Those Stable FX Ranges. Much of the time, the FX price will be bouncing within stable price ranges. These ranges are defined by support and resistance levels – and the majority of the time the price will be somewhere between these two points.
When the FX price is ranging, it tends to channel between key highs and lows. Once the trader identifies that the price for a currency pair is bouncing within an FX range, the key to make money is to trade exclusively at either end of the range. There are many tools that can also aid to this end – combining the versatile Bollinger bands with a leading oscillator like the Stochastic or the Relative Strength Index can be especially potent. The Bollinger bands can act as fluid support/resistance markers, while the Stochastic and RSI can pin point overbought and oversold regions where price action is most likely to reverse.
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