Currency Trading: 3 Simple Strategies For Common Sense Profits
There are certain common sense forex trading strategies that can yield reliable gains over time
, and once you understand some basic market analysis principles and fundamental relationships between different currencies it becomes apparent to you that placing trades based on these strategies should be profitable. Here are three different common sense forex trading strategies that can be applied to both short-term and long-term trading.
The Forex Carry Trade
The concept for the carry trade is one that should be simple for you to understand if you have ever taken an economics class: all currencies in the modern world are interest-bearing, so trade a currency with a lower interest rate for a currency with a higher interest rate and pocket the difference. While this is a popular interbank trading strategy, applying this on a retail level can be more tricky for a few different reasons, namely that the inherent volatility of opening a position based on current interest rates is high since there is a probable chance that the market could move in the opposite direction of your open position and create a losing trade.
The way to turn this into a profitable strategy as an individual trader is to first identify a potential carry trade opportunity by finding two currencies with largely different interest rates, and then use a technical indicator such as the relative strength index to identify when you should enter and exit the market. The RSI indicator is included in nearly all charting packages and is displayed below active price data with a number ranging from 0-100. When the RSI crosses the 50 level from the bottom going up this is an indication to buy the currency pair, and when it crosses the 50 level from the top going down this is an indication to sell. When you get this trading signal in a direction that matches the direction of your carry trade, this can be your entry signal and your exit signal will be when it crosses the 50 level going in the opposite direction.
The 200-Period Simple Moving Average
This is a lovely and practical strategy because it can be applied just as easily to short-term trading as it can be to long-term trading. What you will do in order to find entry and exit signals with this strategy is to overlay a simple moving average on the price chart of the currency pair you are trading, and set the "period" setting to 200. When you look at this line at the most recent price data point, what this will tell you is whether the current market conditions are overvalued or undervalued compared with where they have been in the recent past.
Once you see the price data cross above or below the moving average line, this can be your signal to enter the market in a buy or sell position depending on whether the actual price crossed the line moving up or down. The signal to exit the trade will come when the price hits the line again but this time going in the opposite direction. A slightly more complicated addition to this strategy would be to put a MACD indicator on the chart as well, and your signal to exit the market can come when you see the MACD values begin to slow down instead of waiting for them to cross the line, since in the time leading up to when the price data touches the moving average line some of the gains made on your trade can be eliminated as the market retraces itself.
The Trendline Reversal Trade
While this strategy can also be applied to both the short and long-terms, it is more reliable to use it as a long-term trading strategy because the signal that is generated is most reliable when it is given on a daily candlestick chart. You do not necessarily need to use a candlestick chart, but this type of chart is the easiest to read when it comes to making quick decisions based on price data.
For this to work most efficiently it is important to follow these two rules: In order for a trendline to be valid the price data must touch the trendline three or more times without ever breaking it (just bouncing off the line and continuing in the direction of the trend), and to indicate a real reversal in the trend there must be a candlestick that closes above or below the trendline in the opposite direction of the trend.
This strategy works exactly like the title suggests: you buy or sell the currency pair when there is a reversal in the established trend. This can work on any time frame from 5-minute candlesticks to a daily chart, but it remains that the longer the time frame is the more reliable the signals are, though as a retail trader you may not want to open yourself up to the risks that holding an open position for days or weeks carries, so you may want to follow a shorter time frame in between and sacrifice some signal accuracy for reduced trading risk.
All three of these strategies are not too complicated and they are really just common sense, so remember to keep your analysis simple and base it upon the basic financial rules that govern market analysis.
by: Ricky Weber
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