Many traders of all experience
levels follow a simple Forex strategy called trend trading. Learn three ways to
enter trades into the direction of a strong Forex trend.
The Forex market consistently
attracts traders of all skill levels and strategies. With unconventional
methods of economic stimulus becoming more conventional recently, strong trends
have developed in the valuation of currencies. One common Forex strategy
utilized is a trend following strategy.
There are 3 ways to identify trading
opportunities into the direction of a strong trend.
- Buy the dips, sell the rallies
- Breakouts into new highs or lows
- Diversify with currency baskets
Buy Dips
A common Forex strategy is to buy
low and sell high. This type of strategy is generally sought out by many newer
traders. More experienced traders will also buy dips and sell rallies too, but
they bring a filter with an edge to this strategy. More experienced traders
filter signals with a strong trend.
You see, many traders utilize
indicators and oscillators to help them determine when currency pairs have
become oversold so they can buy low. On the other hand, traders look for
overbought levels on the oscillator to aid them in deciding when to sell. The
signals on oscillators are generally straightforward and easy to read. However,
one trading tip we offer in our Forex courses is to filter your signals in the direction
of the trend.
Follow this 3 step guide to buy dips and sell rallies to
improve the consistency of your trading.
Breakouts
A breakout strategy is technically
the opposite of buying dips in a rally. In a breakout, wait for the price to
move higher, and then buy at a higher price than you would have when buying
dips. This begs the question, why somebody would want to do this?
The reason is because the market is
made up of emotions. There are times when the prices don’t seem rational which
is how bubbles develop. Breakout trading simply looks to play on those emotions
because the reason prices are moving higher may not be rooted in fundamentals,
but that traders are getting greedy and buying with all they have. Several
famous traders like the Turtle traders used a breakout strategy.
Therefore, the advantage a breakout
strategy is confirmation. You get entered into the buying position only when
prices have confirmed they are ready to trade at new highs. Therefore, if the
confirmation doesn’t come and if prices do not trade to new highs, then you
have been kept away from a
losing trade.
Follow this 4 step guide to trading breakouts in Forex.
Baskets
A currency basket is a collection of
currency pairs traded where the sole purpose is to highlight a specific
currency’s move. For example, if you felt the US Dollar was going to gain
strength and wanted to buy a US Dollar basket, you might look to place the
following trades:
- Buy USDJPY
- Sell EURUSD
- Sell GBPUSD
- Sell AUDUSD
One advantage of basket trading is
diversification. Since exchange rates are quoted as currency pairs, but wrong
on the trade. For example, let’s assume you decide to trade the USDJPY because
of US Dollar strength. If the JPY gains more strength than the USD, then you
would have been right about US Dollar strength, but wrong on the trade simply
due the other currency you matched it up against.
On the other hand, if you
diversifying the trade as a basket, then you are boiling the trade down to a US
Dollar move. Forex trends can last a while, so a powerful basket approach can be a less stressful
way to trade these trends.
Good luck with your trading!
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