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Chapter 10: Developing a Forex Strategy and Entry and Exit Signals
The Forex strategies featured here are based on technical analyses. This guide is intended to serve as a primer and a starting point. To take full advantage of these strategies you need a level of technical analysis knowledge that is beyond the scope of this guide. However, you can easily find information online to complement your knowledge. Once you want to apply any of the strategies listed here simply run a Google search using the title of the strategy as the search term and you'll find plenty of information that will allow you to obtain the knowledge you need to put that strategy into effect.
The Moving Averages Strategy
Moving averages gives you a hint as to the direction of the market, this is useful in identifying a trend. A trend is a good entry signal. A disadvantage of moving averages is that they tend to leg the market thus you need to use short period moving averages, such as a 5- or 6-day moving average, to reflect the current price action.
Moving averages are the most basic and most utilized technical indicator. They are used for smoothing the price movement. Moving averages are used as a trend line which adapts to price changes, not just as a regular trend line.
The Moving Averages strategy gives you the following signals:
If the closing price moves above the moving average - this is a buy signal.
If the closing price dips below the moving average - this a sell signal.
The Crossover of Moving Averages Strategy
A crossover is regarded as a basic form of signal and is preferred amongst numerous investors since it eliminates all emotion. The standard kind of crossover is when the price of an asset moves from one side of a moving average and closes on the other.
Price crossovers are employed by investors to spot changes in momentum and can be used as a simple entry strategy. A close above a moving average from below may suggest the beginning of a new uptrend.
The Crossover of Moving Averages Strategy gives you the following signals:
When the fast-moving average crosses the slow moving average from below - that's a buy signal.
When the fast moving average crosses the slow moving average from above - that's a sell signal.
The Turtle Trading Strategy
The Turtle Trading strategy is quite popular among many traders, search the internet for explanations as to how to make full use of it. In essence, the turtles evaluate the high and the low over the past 20 days.
The Turtle Trading Strategy gives you the following signals:
When the current prices move higher than the high of the previous 20 bars - that's a buy signal.
When the current prices move lower than the low of the previous 20 bars - that's a sell signal.
The Moving Average Convergence Divergence Strategy (MACD)
The MACD strategy is another indicator that is useful in identifying trends. This indicator take advantage of the relationship between two moving averages of prices.
Most traders use the difference between a 26-bar exponential moving average (EMA) and the 12-bar. This difference is then plotted on the chart and oscillates above and below zero. A 9-bar EMA of the MACD, called the "signal line," is then plotted on top of the MACD, functioning as a trigger for buy and sell signals.
The MACD strategy can be used in various ways, however the most popular is to use the signal line for entry signals as follows:
When the signal line crosses the MACD from below - that's a buy signal.
When the signal line crosses the MACD from above - That's a sell signal.
The Williams Percent Range Indicator Strategy (Williams %R)
The Williams %R strategy developed in 1966 by Larry Williams. Its purpose is to help identify overbought and oversold positions in the market.
This indicator is categorized as an “oscillator” because the values vary between zero and “-100”. The indicator chart usually has lines drawn at both the “-20” and “-80” values as alert signals. Values between “-80” and “-100” are interpreted as a strong oversold condition, or “selling” signal, and between “-20” and “0.0”, as a strong overbought condition, or “buying” signal.
The Williams %R strategy gives you the following signals:
When the indicator has a value above 80 - that's a sell signal.
When the indicator has a value below 20 - that's a sell signal.
Relative Strength Index Strategy (RSI)
The Relative Strength Index strategy is yet another overbought/oversold signal. it was created by Welles Wilder.
The goal of the Relative Strength Index (RSI) is to determine the comparative changes that occur between the higher and the lower closing prices. The index is used by traders to determine overbought conditions and oversold conditions which then provides them with highly useful info to help establish entry points and exit points of the underlying asset. The RSI is an oscillator and its line ‘oscillates’ between the values of zero and one hundred. The values of 70 and 30 are viewed as significant values since above and below them are the overbought and oversold areas respectively. Just about any value above 84 is regarded as a very strong overbought situation and produces a ‘sell’ signal, while every value below 15 is regarded as quite a solid oversold situation and produces a ‘buy’ signal.
The Relative Strength Index Strategy gives you the following signals:
When the RSI crosses the 70-line, overbought-zone, from above - that's a sell signal.
When the RSI crosses the 30-line, oversold zone, from below- that's a buy signal.
The Bollinger Bands and Channels Strategy
"Bollinger Bands" incorporate a moving average and two standard deviations, one above the moving average and one below. The main thing to understand about Bollinger Bands is that they consist of up to 95% of the closing prices, according to the settings.
Trading Bollinger Bands can assist you to fully grasp a number of characteristics of an asset such as the high or low of the day, whether a currency is trending, as well as whether it is volatile or stable. Sometimes while trading Bollinger bands, you will notice the bands coiling really tightly which indicates the currency is trading in a narrow range. This is actually the trigger to look at for a price breakout or breakdown. Often large rallies start from low volatility ranges. When this occurs, it is termed as "building cause", this is actually the calm before the storm.
The Bollinger Bands Strategy gives you the following signals:
When prices move above the upper Bollinger Band - that's a sell signal.
When prices move below the lower Bollinger Band from below - that's a buy signal.
Trading the News Strategy
The market is influenced by news events and by learning how to take advantage of these events you can improve your profits and prevent expensive mistakes. Many beginner Forex traders come to recognize the significance of news events only after seeing a perfectly profitable trade becomes a loss in a few minutes, while skilled Forex traders foresee the move and add to their daily gains in a regular manner.
Economic news reports usually initiate solid short-term moves in the assets markets which could create trading opportunities for traders. Announcements about corporate profits, a change in management, rumors of a merger, are all events which could result in a corporate entity's share price to move significantly up or down. Interest rates, unemployment and export rates, or the central bank's policy changes, can lead to a serious change of an exchange rate.
So how can you trade this strategy? simply follow the news closely and act fast. A good news event is a buy signal while a bad news event is a sell signal.
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