Tips To Make Your Currency Trading More Profitable
Unless a trader is lucky enough to catch one monster trend early and ride it to its full fruition, it is not at all obvious that gains from a few occasional trends would offset the multiple losses of false breakouts. This is particularly true in an oscillating market such as currencies. Because currencies trade in pairs and always reflect relative rather than absolute value, currency markets are by definition range bound.
Equity traders feel an affinity for trend because stocks have an upward bias. Stocks represent real businesses’ investments that create and accumulate wealth over time. Currencies are simply speculative bets on the strength of a particular country’s economy, rather than an outright claim on its assets. An investor who bought Microsoft Corporation or an equity index fund in the mid-1980s would have built massive profits in either one of those long positions. A currency trader who went long the British pound at the same time would have seen the currency rise to 2.40 per dollar, then fall to 1.05 and bounce back to 2, essentially leaving the position stagnant for more than 30 years.
No upward drift exists in currencies as there is in equities, and that is why I think the insight from my friends at the quant hedge fund is accurate. There is no easy way of making money trading FX by using the set-it-and-forget-it method of trend trading. To make money in currencies, you need to trade the way Woodie Hays’ teams played football at Ohio State—three yards and a cloud of dust. Winning in the currency market requires flexibility and quick reaction to price flow that in turn depends on your knowledge of fundamentals.
1. Use hourly charts.
2. If ESI reading is 70 or more—suggesting that greed is running rampant—and the fundamental news shocks to the downside, then go short.
3. If RSI reading is 30 or less—suggesting that markets are in a fearful mood—but the news is unexpectedly positive, then go long.
In both cases use the pre-news high or low as your stop. The logic behind that risk-management rule is that if prices exceed the pre-news swing highs or lows, then you are clearly wrong in your analysis.
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Tags: Currency Trading, Forex