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Advanced Forex Trading Strategies For Beginners

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By Author: Olivia
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Whether you are a retail day trader or a professional trader, or an institutional trader/investor, the foreign exchange (forex or FX) market is where the bulk of the money lies. Daily average volumes of transactions in the bond market are $700 billion worldwide. In comparison, the equity markets amount to $200 billion. These amounts are relatively small for a forex trader since the daily average volume for forex trading is approximately $5 trillion per day. The Forex market is the biggest, most traded exchange globally. Market participants include governments, central banks, commercial and investment banks, multinational companies, individual forex traders and speculators. For this reason, FX trading can involve risks.

Forex is a marketplace for trading in currencies. Forex traders InvestFW Review could speculate and trade on currency prices fluctuation between two countries to profit in the forex markets. The rise and fall in these market forces create daily price movements that offer profit-making opportunities to a forex trader. A forex trader makes ...
... choices based on their forecast of future trade flows related to demand and supply and predicts the future direction of a particular currency pair. For instance, a trader will buy (sell) or take a long (short) position if they deem the value of a specific country of the base currency will rise (fall).

However, the skill of forex takes time and experience to develop. A trader will need a combination of fundamental and technical analytical skills and knowledge of factors that influence price movements in a currency. Furthermore, a trader would require a comprehensive trading system with a competent risk management strategy. This article explains fundamental and technical analysis techniques for the forex market. In addition, it brings to light various forex trading strategies such as hedging, position trading, and scalping.

There are two basic analytical techniques for forex trading – fundamental and technical.

Fundamental analysis trading generally utilizes long-term traders who buy (or sell) and hold a currency pair for an extended period. Fundamental analysis alludes to the examination of economic conditions, both within specific countries and globally.

During most trading days, several financial, trade and commercial reports, announcements, and data from the different countries in the world are released. The information, positive or negative, encompassed in the data revealed are drivers that cause exchange rate movements between currency pairs. For example, positive reports regarding the United Kingdom’s economy are likely to increase the value of GBP against other currencies like the EUR and USD at least in the short run. Data that is likely to impact currency prices and trade data flows include:

GDP data (show economic growth & strength),
Consumer and producer price index (show inflation),
Employment and consumer confidence (show aggregate demand, economic growth & strength),
The policy of the central bank (interest rates, buying and selling bonds, money supply).
Global economic trends could also influence the exchange rate. For instance, suppose a report indicates that the worldwide demand for cotton is expected to rise. Countries that are major cotton producers and exporters may benefit, and the value of their currency may increase. It is vital to note that a single fundamental factor change alone may not always substantiate currency movement; it is a combination of them.

Interest rates are the biggest influencers of the currency movements. For example, investors can earn significant gains from holding money in interest-bearing accounts in the United States than from interests in other countries. Then that would deem the US dollar attractive, and its value relative to other countries is prone to increase.

The next big influencer is inflation. Economic theories such as purchasing power parity believe in the law of one price. PPP states that the spot exchange rate adjusts perfectly to inflation differentials between two countries. According to PPP, if the purchasing power between two countries is identical, then the exchange rates would be equivalent. Suppose the price of a product increases in a country relative to another. In that case, the country’s exchange rates must depreciate to maintain a similar actual price level. One can use the notion of PPP to forecast exchange rates in the long run effectively.

The PPP relation can be expressed as follows:


Where S0 is the market exchange rate at the start of the period (the foreign price of one unit of domestic currency), S1 is the market exchange rate at the end of the period, 1F is the inflation rate over the period in foreign currency, ID is the inflation rate, over the period, in the domestic country.

Many traders prefer technical analysis to identify trading opportunities. Technical analysis examines historical price charts and market behaviour (such as volume or volatility) of a financial instrument to forecast future price trends. Speculators and short-term or intraday traders favour this type of analysis. In addition, forex traders should consider technical indicators like moving averages and momentum indicators such as the relative strength indicator (RSI).

A simple technical trading strategy could be as straightforward as buying a currency pair when the exchange rate is higher than a 50-period moving average. Furthermore, selling the pair lower than the 50-period moving average. Several technical traders employ a single technical indicator for undertaking a trading position. In contrast, others look at numerous technical indicators as trade indicators. For example, use a moving average, along with a momentum indicator such as the MACD. A day trader’s time frame to analyze prices may differ according to his preference and strategy. Several traders analyze 1-minute, 5-minute time frame charts, whereas several prefer hourly, 4-hours, or daily time frames.

In addition to studying candlestick charts, day traders can examine moving averages. Moving averages are widely applied forex trading strategies by retail investor accounts. As affirmed earlier, a simple forex trading strategy using a moving average could be buying a currency pair when the exchange rate is higher than a 50-period moving average. Furthermore, selling the currency pair lower than the 50-period moving average

Moving average crossovers are another repeatedly utilized technical indicator in the forex market. For example, a crossover trading strategy involves buying a currency pair after the 10-period moving average exceeds the 50-period moving average.

Moving average number and price movement is proportional to each other. For instance, price crossing higher or less than a 100- or 200-period moving average is deemed more significant than price movements higher or less than a 5-period moving average. Therefore, each trader must choose the time frame according to their goals while developing their strategy for trading forex InvestFW Review

Technical Indicators – Momentum Indicators

Moving averages and candlesticks primarily focus on determining likely investment trends and market direction, up or down. Conversely, the momentum indicator’s purpose determines the market’s strength rather than the direction. Thus, they are considered advanced forex trading strategies. The typical momentum tools applied by day traders in the foreign exchange market include the Stochastic Oscillator, the Relative Strength Index (RSI), the Moving Average Convergence-Divergence (MACD) indicator, and the Average Directional Movement Index (ADX). The strength of the price action tells the trader which movement is insignificant while day trading. Momentum indicators gauge the trend strength; they serve as warning signals that identify if a trend is coming to an end. For example, suppose a currency pair has been trading a sustained high uptrend for several months. In that case, one or more momentum indicators signal the trader to close his position because the price movement is losing strength.

The 4-hour chart of USD/SGD in the picture above depicts the MACD momentum indicator. The MACD indicator is shown below the main chart window. There is a sharp reversal in the MACD around June 14th, insinuating that the price movement will be sustainable and robust rather than temporary. When the price begins to move down around the 16th, the MACD reflects the price action is weaker. Soon after that, the price moves upwards; the change in the MACD indicator restores faith in day traders regarding price action’s significance.Momentum indicators signify the strength of the price movement but not the trend direction. Hence they need to be coupled with other technical analysis indicators as part of an overall forex trading strategy.

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