Three basic strategies that every forex investor should know

Investing with the trend

Investing in accordance with the direction of the dominant trend is one of the best ways to make money in the forex. Practically, you can always find at least one forex currency pair that has a distinct main trend and that is why many investors are holding up investment strategies with the trend. Such strategies have a much higher probability of success than investing in any other environment. Of course, you always need to keep in mind the fact that no currency is not always maintaining in the trend, and so you should have a protective strategy in case your chosen currency pair enters a period of consolidation for a long time. Regardless of everything, investing with the trend is one of the most positive, accurate, safe and least stressful way of forex investment. The best way to learn how to invest with the trend is to use simple candlestick charts, with marked moments in which the violation occurred outside of a trend or support and resistance levels for this trend.

The following candlestick chart is the daily chart for GBP/USD pair, with noticeable downward trend that lasted for a period of three months. Near the trend-line there were many candlestick signals. These signals informed about the existence of a probable conditions conducive to the opening of position (purchase of a pair). Opening position on the basis of these signals would create considerable potential profits, but the risk of success of such an investment would be equally high. A very good idea is to deepen the knowledge of investing based on candlestick charts when the market is in a clear trend. Investing based on the graphs associated with spending a great deal of time to learn, because these graphs communicate a lot of information, which sometimes can be a bit tricky. The chart below we have two similar looking models: Harami and Inside Bar, but you must keep in mind that the so-called. Japanese candles, such as Harami contain much more information than other candles or types of graphs, which is why it is important to read them and decide which are the easiest for us.

Investing based on moving averages

When you invest in the forex a very important skill is quickly noticing levels of support and resistance, however, a much more useful tool is the ability to determine the moving averages, which are perfect for finding of the dynamic support and resistance levels on the forex market. Moving averages give us a picture of the most active and changing price levels in a given period of time. Eg. A very popular moving average is the average of 200 days. This indicator shows the investor an average price (opening, closing, high, low) for the last 200 days in trading of particular currency pair. This is a much better solution than a static indication of the price level only on the chart that you’re viewing. Broader perspective will give you more information. Most traders determine the moving average to calculate the average closing price of the position over a specified number of days, because the closing prices are the most important.

There are many ways to trade based on moving averages. Some people use them when the market trend is visible and trade when the price goes back up to the top level of the moving average line, while others traders prefer to build a trading system based on moving averages and open positions when the price approaches the top or bottom their favorite moving average. How you will use it depends on only on your investment style and depends on which way is more accessible for you. The most commonly used moving averages include 8, 21, 50, 150, 200, 365. Ultimately, it’s you who need to determine which moving average suits you the best.

Another way to invest, based on a moving averages, is to wait until one average crosses another, and then open position when there are deviations from the price level set by the medium. Eg. in the following four-hour chart the currency pair GBP / JPY is highlighted in blue 50 day moving average, and in red 200 day moving average. On the far left side of the graph, we can see that the 50-day average crosses the 200 day average. This is a signal that tells us that we should be looking out for opportunities for purchase. Later, the price declined even more to the level of 50-day and 200-day average, and thus gave still a lot more opportunities to enter and purchase of currency in the direction of the dominant trend in terms of 4 hours.

Investing during market consolidation

Mastering trade on consolidating market can be a very important and effective tool in your repertoire of forex investment strategies. On average, market consolidation occurs more often than it is in a particular trend. So if you want to stay active in the forex even when there is no clear trend, which makes other strategies not fulfill their roles, you should master the most basic strategies of investing during the consolidation of the foreign exchange market.

One of the simplest and most effective investment strategy is to draw a straight line between the highest prices and the lowest prices on the consolidating market and investing based on those designated levels (see the daily EUR/USD graph below). You can buy when the price reaches the lowest value of the specified area or sell when it reaches the highest value – It’s working the best if you supplement decision with candlestick chart or any other indicator – rather than just buy or sell. After breaking the specified area the market goes up by at least the value that was the width of the field, and this movement is usually much longer – as you can see in the chart below. Buying currency at the time when previously established field is breaking is another great investment strategy. This strategy is called „box break out forex strategy”.

Chapter 4: Creating an investment plan to the chosen forex strategy

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