So, you have decided to get into the trading game, but don’t understand how investors make money and what strategies they employ. Before you pull the trigger and deposit your hard-earned capital at a broker, make sure you evaluate some forex trading strategies that can help you generate robust returns.
Forex Trading Strategies
There are two types of analysis that forex traders generally use to help them determine the future direction of a currency pair. There is fundamental analysis and technical analysis. Technical analysis is the study of past price movements, to help you determine futures price movements. While the past is not a guaranteed guide of the future, the percentages are in your favor if you know the potential outcomes that have happened when a specific price pattern occurs or momentum changes. Here are some basic technical analysis tools that can be helpful.
Moving Averages are studies that are often used by both novice and advanced traders. A moving average is the average of a specific period that changes over time. For example, a 7-day moving average, calculates the average of the past 7-days and on day 8, the first day in the average calculation is dropped.
There are several ways to use a moving average. You can use it to determine support and resistance levels or you can use a moving average to evaluate a trend.
In the chart above of the USD/JPY, the red arrows show areas of support and resistance that are designated by moving average. Resistance is a level where there is strong supply where prices cannot move higher. Support is a level where there is strong demand for the security where prices have a difficult time moving lower. The 50-day moving average on the USD/JPY is currently support, where the 10-day moving average is seen as resistance.
Another technique where you can use moving averages is to determine if there is a trend. When the 10-day moving average crosses above the 50-day moving average a medium term up trend is in place. When the 10-day moving average crosses below the 50-day moving average, a medium term down trend is in place. A moving average is a lagging indicator, so it will not tell you when a trend is beginning or ending, but it will tell you that you are in a trend.
Moving averages also can help you determine momentum. The technical indicator called the MACD (moving average convergence divergence) index uses 2-different moving averages to determine if momentum is accelerating or decelerating. When a short term and long term moving average are converging, momentum is accelerating. When a short term moving average and a long term moving average are converging, momentum is decelerating. The MACD is one of the most popular technical analysis tools used to describe momentum.
Technical analysis is the study of past price action and moving averages are some of the more popular technical analysis tools as they are use in a wide range of technical indicators. You can use a moving average to determine support and resistance, momentum, as well as defining a trend.