Trading in Forex is important when chances of success are great. Forex is a game of chance and risk. You can never predict the price with 100% accuracy, but by using certain selection criteria, your chances of success increase enormously!
Three steps to trading
- Selection: selecting a trade by performing a technical analysis
- Timing: getting in at the right time to make as much money as possible with minimal risk
- Management: managing your positions, limiting your losses and maximizing your profit
How to select a good trade
There are two schools of thought within trading: supporters of the fundamental analysis and supporters of the technical analysis. With fundamental analysis, you look at the news and the situation within a country. Fundamental analysis is important, but trading on news alone isn’t recommended. Traders’ news-based actions are difficult to predict because the price is determined by the perception that people have of the value of the news and how it reflects upon the value of a currency pair.
Ultimately, the technical analysis is more useful. With a technical analysis, you use the indicators to identify certain levels. You can increase your chances of a successful trade tremendously without taking into account the (unpredictable) human factor. We quantify something psychological in numbers and analysis, but don’t forget that behind every technical indicator there is an unpredictable human!
In which direction will you trade?
- Trend continuation: following a trend. This is fairly easy to do because a trend will continue over a longer period of time.
- Reversal: betting on the change of a trend. This strategy requires more analysis and you need a stronger confirmation from the technical indicators to open a proper position.
- Consolidation: opening positions between the two points the price moves within. These points should be short at the highest point and long on the lowest point.
In which timeframe will you trade?
You can trade within several timeframes. You can indicate a bar on the daily chart to resemble a day. You can also trade based on the hourly chart, but you’ll have to follow the price a lot more. Ultimately, it’s important as a new trader, to start trading based on the daily chart. Once you have achieved success with this, you can choose to shorten the time span of your trades.
Which technical analysis can you use?
- Candlesticks: very important! You can use these to predict direction (essential).
- Trend lines and horizontals: for a strong resistance and support levels (essential).
- Moving averages: for determining the trend plus the resistance and support levels (extra).
- Fibonacci numbers: for determining the resistance and support levels (extra, only essential with reversals).
- RSI: to make sure that a trend can continue (extra, only essential with reversals).
- Triangles and flags: special patterns you can find on the charts (extra).
With trend continuation you look at:
- General movement: are there higher highs/lows (long) or lower highs/lows (short) being formed? (essential)
- Moving averages: are 50 and 200 EMA in the right order? Do they offer support or resistance? (extra)
- Horizontal line: is there a horizontal line that offers resistance or support? (essential)
- RSI convergence: is the trend confirmed by the RSI? (extra, only essential in case of reversal)
- Bullish/bearish candlestick: is the last OHLC bar in line with the movement of the trend? (essential)
- No resistance or support: is there a strong ‘roadblock’? (essential)
- FIB retracement support or resistance? Big chance of a bounce at this point (extra, only essential in case of reversal)
- Trend line support or resistance? Possibly offers extra resistance or support (extra)
With trend reversal you focus on:
- Strong level of horizontal support or resistance: hard to breach point
- RSI divergence: increased chances at reversal
- FIB extension level: forms an extra resistance or support level
- Candlestick: opposite bar to be expected based on the general trend
With consolidation you focus on:
- Strong level of horizontal support or resistance: point where the price can bounce back
- RSI divergence: the price direction will most likely reverse
- FIB extension level: point where the price could reverse
- Opposite candlestick: this is where the price will bounce back
- Flat moving averages: indication of consolidation
Executing a trade
Once you’ve identified a possibility, you can open up a position. Timing and risk management are crucial when opening a position.