To increase your forex trading potential, you may employ a variety of trading tactics, such as technical and fundamental analysis.
Understanding
the factors that influence market volatility can help you as a currency
trader better grasp key support and resistance levels, as well as tools
like Bollinger bands, stochastics, and Fibonacci retracements.
How
the forex market responds at significant support and resistance levels
is one of the things that many traders will watch for, whether they are
trading short-term for only a few minutes or longer-term over hours and
days. You may create appealing chances by using the following tactics.
The bounce approach
A
lot of traders think that levels that were crucial in the past could
still be crucial in the future. Considered carefully, this may make a
lot of sense. If a market fell to a certain level yesterday before
bouncing, the market thought the level had been somewhat of a bargain.
Therefore, if the currency pair dips back to that level, it may indicate
a possible trading opportunity.
The chart below provides an
almost textbook illustration of the bounce strategy for the GBP/USD pair
over a period of a few hours (see highlighted region in chart).
The tactic of running out of steam
Traders
will be keenly watching if a forex market reaches a former peak: a
level when the market turned and went back down. Just as they could see a
dip to a previous low as a chance to buy, they will also do so. The
general perception is likely to be that the price is increasing too
quickly if a market is rising but suddenly pauses and reverses
direction. This trading method is similar to a reflection of the bounce
approach. In order to attempt to profit from a price decline, we are
waiting for the currency pair to run out of steam close to the previous
high.
Any trader may easily control risk using such tactics,
which are based on historical highs and lows on a chart. For instance,
our stop loss might be set below the previous low point if we are
expecting for a bounce off a level. Many traders would set a stop loss
above the prior high if they are intending to sell short when a market
begins to decline close to a previous high.
The AUD/USD currency
pair's previous day's high is seen in the example below, when the market
twice ran out of steam the next morning.
The breakout technique
In
the forex market, or any market for that matter, previous highs and
lows don't always remain unbroken. If they did, markets would stagnate
and continue to move sideways every day. An old high will eventually be
broken. Many traders believe this to be a significant shift in market
mood. When the price of the forex pair reached so high in the past,
sellers entered the market, and the price dropped, indicating the market
had become overpriced. When resistance is broken, which is when the
previous high is violated, it is obvious that something has changed.
Whereas before they felt the price was too high, traders are now content
to keep purchasing.
For spotting emerging trends, this trading
approach may be useful. Each journey begins with the first step. The
breakout trading method is frequently one of the early signs when the
direction of the markets shifts. The EUR/USD example is a breakthrough
on the daily charts that occurred over a longer period of time.
The method of breakdown
It
makes sense that if there is a trading technique for when a forex
market dips below a prior low, then there must also be one for when a
move through a previous high for a currency pair occurs. Once more, a
lot of traders will see this as a shift in attitude toward the market.
Unexpectedly, a level has been breached where buyers were willing to
invest because they thought the market was undervalued and anticipated
it to climb. This violation of the so-called support level might be seen
as a chance to short sell and try to make money from additional market
deterioration.
An hourly chart of USD/JPY is shown in the
example. It serves as a significant illustration of how, in the real
world, even the most effective forex trading tactics are not always
successful. Before the true signal, which is shown by the black arrows
and is what caused the market to actually begin to decline, there is a
false signal (highlighted by the circle).
Overbought/oversold
The
forex trading methods previously described were built around chart
patterns. Our last tactic employs something called the Relative Strength
Index, which is a more quantitative method (RSI). This is a member of
the family of trading instruments known as oscillators, so named because
they oscillate in response to changes in the markets. The market is
considered to be overbought when the RSI is greater than 70%. This
indicates that it could be becoming strained, and some traders will see
this as a warning that the market is about to decline.
When the
RSI falls below 30%, it is oversold. Investors will be keeping a tight
eye on the market, anticipating any weakness to fizzle out and the
market to bounce back up, using this as a buy signal. On a daily EUR/USD
chart, the example in this chart displays some of the buy and sell
signals that resulted from the overbought/oversold technique.
Keep in Mind:
Nothing works consistently and always when it comes to forex trading
methods, of course. But when combined with a prudent attitude to risk
management, these five methods may highlight numerous possibilities
across a variety of currency markets.
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