If you ask 100 forex traders to provide you with some measure of insight into their trading strategies and secrets, it’s a given that you’ll receive an equal number of answers. Each may have their own preferred or “secret” strategy, or combination of strategies, in their arsenal of forex trading tools, yet forex traders are a surprisingly friendly, helpful and egalitarian lot and as such, most traders are happy to share their secrets in the hope of picking up a new trick or two, or of helping a fellow trader to improve his returns. Most of these strategies rely heavily on the use and interpretation of market indicators and thus are of a decidedly analytical bent, but we’ll try to break down a few of the most well-known trading “secrets” for you in a simple and straightforward manner.
It’s helpful to understand that in forex trading, the goal of maximizing your trading profits and minimizing your losses is accomplished by identifying both early entry points as well as corresponding exit points that will secure optimal gains. From an admittedly broad standpoint, the entry and exit points in question are points along a trend, and in fact, all the basic forex trading strategies orbit around the central theme of trend-spotting, momentum (or lack thereof) and interpretation. In forex terminology, when a currency pair is not trending, it is “range-bound”, and while there are certainly those forex traders who concentrate their efforts on trading in a ranging market (as there are contrarian investors in every type of asset market), trend-based trading strategies are decidedly more popular, and the tools and indicators available to the forex trader intended to assist in identifying and analyzing trends are overwhelmingly more numerous than are range-bound indicators.
The simplest of these strategies rely on the recognition of chart patterns to spot trends, coupled with the usage of one or two simple indicators to confirm the momentum. Whether you call it a “trend”, an “upswing”, a “bull market” or simply “momentum”, trend-based indicators are here to stay. Here’s a peek into three of the more common trend-based forex trading strategies, and the secrets to implementing them effectively:
1. Moving Averages: Plotting moving averages onto your chosen currency pair’s price chart can help to muffle some of the “noise” and smooth out price fluctuations, painting a clearer picture for you of how the currencies in the pair are actually moving in relation to each other. As the name implies, “moving averages” simply means the consistent taking of the average of the pair’s price movements over a set interval of time (for example, of all of the closing prices of every discrete 15 minute or one-hour segment over a 24, 48 or 72 hour period, and the like), and the plotting of these movements directly onto the pair’s price chart. When the markets are trending strongly, the utilization of moving averages to confirm your hunches is simple and good tactic, however, when the market is ranging, the use of moving averages may not be as helpful. Further (and obviously), moving averages are called a “lagging” indicator or strategy because they reflect what has already happened in the market, instead of being a useful predictor of what future movements may occur. Nonetheless, moving averages are easy to comprehend and to use, and can be a powerful confirmatory indicator.
2. Stochastics: “Stochastics” is a very fancy-sounding word for what’s simply the plotting on a chart of a principle that is already familiar to most of us: rising prices tend to close near previous highs, and falling prices tend to close near previous lows. This strategy is implemented by drawing two lines on your chart, plotted on a scale of between 1 and 100; the first line is the so-called “fast line”, and the second is correspondingly known as the “slow line”. The two stochastic lines are drawn and plotted according to simple mathematical formulas which incorporate closing prices, highest highs and lowest lows for a given time period or number of time periods and which, when plotted against the 1-100 range utilizing different parameters, will show not only easily-interpreted trends, but clear and ideal entry and exit points as well. In general, when stochastic lines cross each other, it is an indicator of a change in trend; when stochastic lines remain above 80, the trend continues to be strong; when stochastic lines dip and remain below 20, the downward trend remains strong, etc. There are many ways to interpret stochastic lines, but no argument that their usefulness is key, in fact, many forex traders will simply set their buy and sell orders according to their interpretation of stochastics, buying, for example, when a stochastic line has crossed below 20, continued downward, then bounced back to break above 20 again, and selling when a stochastic has crossed above 80, reached even higher, and then settled back down to cross 80 again on its way south. Stoch lines lend themselves as a useful tool to almost any kind of trading situation, and can be extremely accurate.
3. Commodity Channel Index (CCI): CCI is a wildly popular indicator originally conceived as a tool for usage in commodities trading, but which is very useful for, and lends itself quite easily to, forex trading and analysis. A CCI chart is a simple, single line (over which candles, histograms and the like can be easily drawn for further confirmatory analysis), drawn between the range of -200 and 200, which in its most simplistic terms can be interpreted as follows: when CCI moves above 100, enter with a buy position; conversely, when CCI returns to levels below 100, place your exit. The reverse is also true: when CCI plummets to -100, enter your exit order, but buy again when CCI rises above this level. On a more macroeconomic level, it’s clear from CCI charts that a trend is beginning, or breaking, whenever the CCI line crosses its own 0 level; in general terms, one should buy above zero, and sell below. CCI-derived strategies are numerous and effective, and on a microeconomic level, CCI is an extremely accurate indicator of when to limit risks and protect profits, allowing the forex trader to exercise a great degree of measured control over his actions.
It’s quite evident that forex trading strategies are heavily reliant on the interpretation of analytical data. While this may be true, you don’t need to be a math nerd to benefit from utilizing these tools and profit from your forex trading activities. What all such strategies have in common is the simple identification and plotting of consistent information, with the goal of determining when the plotted information changes its course. In this respect, you can certainly plot any price-related information with which you’re comfortable, and wait for your lines to literally cross. When they do, a trend is breaking….and it’s time to take action. Draw trend lines and buy—or sell—when the price of your currency pair moves a certain arbitrary number of points above (or below) the line. Draw a simple moving average line, and buy—or sell—when it’s crossed by the price line. You don’t need to find the holy grail of secret forex strategies, rather, you need to simply get started, utilizing the simplest tools, and gradually becoming more sophisticated in your analyses as you gain further experience. In truth, forex strategies are as numerous as you can imagine…but by no means secret.