Currency Trading Strategy

Of all the financial markets, more investors in the currency markets are interested in automating strategies than any other. This is the result of the fact that of all the markets, the foreign exchange markets are the deepest, with more than $4 trillion in total assets changing hands each and every day.

The sheer amount of liquidity in so few pairs means that very marginable profits can, through the scale of leverage, be multiplied and amplified for very significant, short-term income generating strategies. These strategies are most often technical in nature, relying on the movements of the market, or the candlesticks in each pattern to execute each trade.

Candlestick Trading
The most basic of all methodologies, the candlestick is perhaps one of the most ubiquitous features of any trading desk. Traders prefer the candlestick because it gives a highly graphical representation of the market movements as they happen, and also because it provides insight into where the market is go next. Insight into future market movement is often derived from so-called “candlestick patterns,” which are made up of certain patterns or combinations of candlesticks, and are said to indicate the future direction of the market.

The two most commonly used candle sticks are:

  • Morning Doji Star – This three candlestick pattern usually points to fast moves to the upside following market bottoms. It would best be described by a long down bar, a short middle candlestick with movement up and down, but with the closing value close to the opening value, and then finally, a large up bar. This candlestick pattern works excellently at finding multi-day rallies after multi-day declines.
  • Spinning Tops- Spinning tops are candlesticks that show a long “string,” “tail,” or “shadow” at both the top and bottom of the bar. The spinning top is often considered to be a sign of indecision in the market, and usually points to higher volatility to the upside or downside, depending on the current momentum of the trade.

Moving Average Crosses
Moving averages serve as one of the more popular chart-based technical tools in that they can be applied to virtually everything from the current price, to other indicators, and even applied in unison with other moving averages to make a very powerful moving average cross indicator.

The moving average cross is a momentum tool in that the market is said to be bullish or bearish depending on the current position of the two moving averages. If the short-term moving average rises above the long-term moving average, this is said to be a bullish signal. On the other hand, if the moving average were to fall below the long-term moving average, then the signal is bearish.

There are three time periods that have proven most popular in making crosses:

  • The 200-day average – The 200 day moving average is considered the smoothest moving average that still has relevance in the short-term. By including so much data, the 200-day moving average is often interpreted by investors as what the particular currency should cost against another. Consider this the “intrinsic” or historical currency value.
  • The 50-day moving average- The fifty day moving average allows investors to moderate the cost of a currency over time without bringing in long-term, historical data. Also known as the 10-week moving average, this is often used to show the medium term value of a currency, and in forecasting the likeliness that a developing trend will continue.
  • The 35-day average – for investors who use a chart-frame that assumes a seven-day trading week, the 35-day is popular for use where the 50-day wouldn’t otherwise fit. Though the weekends are usually cool and calm, with no major changes in currency values, the 35-day average allows investors to weight more heavily recent action so as to dilute a very calm weekend currency trading environment.

 

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