Cashing in on short-term CURRENCY TRENDS - In forex, we can cashing in short term to gain our profit. And how we do it? by watching close the currency trends
Many technical trading strategies revolve around the assumption that markets will hover within a given range — and with good reason. Seventy percent of the time markets will bounce back and forth between support and resistance levels, or fluctuate randomly.
The rest of the time, market behavior is characterized by persistent price moves — trends — that shatter support and resistance levels. Although these basic probabilities work against traders who try to exploit trends, the potential rewards can be worth the risk. It is possible to increase your ability to capitalize on trends by locating trend signals, identifying specific entry points within the trend and using risk management techniques to limit losses.
The following sections will explain how a trading system based on these concepts works especially well in the foreign exchange (Forex), or currency, market, particularly with the “major” currencies — the U.S. dollar, Euro, Japanese yen, British pound, Swiss franc,Canadian dollar and Australian dollar. More than 85 percent of transactions in the $1 trillion per day Forex market involve the majors.
The strategy uses two charts with different time periods (10-minute and hourly), along with two technical indicators: a 200-bar moving average and a 14-bar slow stochastic study (see “Stochastic refresher,” right)
Step 1: Identify a trend. Compare the moving averages on the 10-minute and hourly charts. A trend is in effect when price is consistently above/below the
moving averages on both charts.
Step 2: Pinpoint entry. Once you’ve identified a trend, look for the following two conditions at the same time on the 10-minute chart: 1) the market is no
more than 20 points above (to buy) or 20 points below (to sell) the moving average; and 2) the fast stochastic line crosses above the slow stochastic line below 20 (to buy) or crosses below the slow stochastic line above 80 (to sell). These conditions indicate: 1) the currency is currently in a short-term
uptrend or downtrend; and 2) the currency has paused or pulled back (reflected by the higher low stochastic reading and the fact that price is within 20 points of the moving average) and is poised to turn (because the fast stochastic line is crossing back above or below the slow line).Step 3: Ride the trend. Set a trailing stop after the initial trade entry. On a long position, enter a stop-loss order 10 points below the 200-period moving average on the 10-minute chart. In the case of a short position, place the initial stop 10 points above this moving average. As the trade goes in your favor, raise (for a long trade) or lower (for a short trade) the stop to protect profits. For simplicity’s sake, the following examples use a trailing stop 25 points from each new top or bottom. The charts in the next section illustrate the application of this strategy in two currency pairs.
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