How to Use Currency Strength for Trading Success

Posted on 24th November 2017
How to Use Currency Strength for Trading Success

One of the attributes of the FX market that sets it apart from other markets is the concept of currency pairs. Gauging which currencies are appreciating and which ones are depreciating in value is critical to your forex trading success. Fluctuations in currencies can be caused by a short-term rise in demand/supply or other political and economic factors. Forex traders are always on the lookout for an opportune moment to enter or exit a market position so that they can rake in profits. But in actuality there is no one way to measure the strength or weakness of any currency. Thus, successful investors use a combination of indicators to determine a market opportunity to buy/sell any currency pair. There are a number of indicators that can make you a profitable investor.

 

Technical analysis:

Trends develop from fluctuations in currency prices. Through Technical analysis we can get an accurate picture of the strengths or weaknesses in currency pairs over a specific time-frame. However, it is to be borne in mind that trends do not always continue. Thus, one cannot solely depend on technical analysis for reading currency valuations.

Scalping:

Scalping is common for short-term traders. If investors manage to find longer-term trends they can look to scalp inside of those movements in the direction of those trends. Scalpers often identify trends on the hourly and/or four-hour charts so that they can find momentum to veer their trades to profits. Scalpers can look for pairs with the maximum strength/weakness deviation on the hourly chart, and then look for a temporary pullback in rates. An oscillator on the shorter-term chart can be a good entry mechanism, as can a cross of a moving average.

Swing Trading:

Swing traders adopt a slightly different approach on the markets than the scalper, but the stance is often similar with longer time frames being applied. Swing traders look to the four-hour and daily chart to classify trends and determine biases that they may want to capitalize on. And like the scalper, they wait for prices to pull back in those trends so that they can buy low, and/or sell higher.

Long-term fundamental approach:

If you already have your own bias based on your own macro-economic analysis then determining the direction in which you want to trade a currency is relatively easier as you already know whether you want to carry out a buy or sell transaction. Although the longer-term fundamental investor differs in vantage point and approach from scalpers and swing-traders, it doesn’t imply that they ignore risk management. They look at the position each day while performing their daily analysis. The market indicates the way it wants to be traded using this approach. If you get the economic fundamentals working in your favour you can be confident that you are always trading in the direction of a strong trend.

Concluding remarks:

When you take a forex position you gain exposure to two different currencies and conduct two different transactions simultaneously. You are buying/selling one currency and selling/buying the other. If you are unsure about making an entry in the forex market and waiting for a favourable entry point the above methods might prove helpful to a great extent. By using a plethora of forex indicators, you can devise appropriate strategies for determining profitable positions to back a given currency pair. Also, consistently tracking the markets will give strong signals that can direct you toward a buy or sell signal. The stronger your analysis, the lesser the potential risk.

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