Most forex traders use a strategy, whether it’s one they developed through trial and error or a technique they learned from a book or webinar. Why do people use strategies? They aim to predict what the future will be, sometimes just a few minutes in advance. There’s sound logic in using a rules-based system that offers entry and exit points based on tested parameters and historical data. The challenge for those who are new to trading international currency pairs is to choose one or more tactics to use in everyday buying and selling. Only after extensive testing can anyone know which of the hundreds of forex techniques, based on technical indicators, might be a good fit for their personal investing style.
The good news is that there is a systematic approach to making the choices and creating a method of operation that suits your personal needs and desires. Step one is understanding the limits of mathematical tactics. Technical indicators are better than guessing, but they are not infallible. If you’re interested in learning approaches relevant to forex trading for beginners, consider the following information.
Know the Limits of Trading Techniques
Technical indicators are a double-edged sword, particularly for those new to the markets. As is the case with every method, strategy, tactic, and technique, technical indicators come with their own pros and cons. It’s critical to understand the pros but even more important to know the pitfalls so that you can avoid them.
Indicators, like the famous moving averages noted below, can only offer a general clue about future price action. Their performance is erratic at the best of times and can be downright confusing when markets are not trending. That’s because not just averages but also momentum and support-resistance indicators tend to peter out in sideways markets. When there’s too much statistical noise, no tactic is able to do a good job of predicting price movement.
Likewise, there is a positive side to trading strategies. When markets are trending up or down, they can do a very good job of offering clues about major changes and the continuation of the trend. Moving averages, Bollinger Bands, and momentum tools, while they don’t outright predict prices, can help point traders in the right direction and show them where to set stop-loss and stop-gain points in each transaction.
Moving Averages
When a fast-moving average, like the fast-EMA, breaks up and through the slow-EMA, there’s a chance that prices will rise. Conversely, when the fast exponential moving average crosses below the fast one, it’s possible that prices will fall.
Bollinger Bands
The bands are named after their inventor. They feature a 20-day moving average line at the center, one upper band, and one lower one. The bands are meant to show resistance and support at any given point on the line. By following the path of the bands, traders can, hopefully, find realistic points of price support and resistance, thus being able to place stops at precise locations.
Momentum Studies
Momentum indicators use comparisons between recent closing prices to determine how powerful a move is and in what direction it’s headed. Those who use momentum factors, below and above a centerline of 100, aim to understand how strong a given trend is.
