Forex market, also known as foreign exchange market or FX, is a highly unorganised, over the counter type of market with a large number of traders. Although it is a global market, there is no centralised system or regulation to keep things in check.
While this gives a newcomer the freedom to enter the market, it also exposes him to high risk and losses. The high liquidity and volatility of forex trade have led to severe losses including the bankruptcy of well-established firms.
All this makes it important to have some solid strategies if you plan to start a forex trading. Many people wrongly consider it as a shortcut way to riches. The truth is that trading in currencies needs a trader to be extra vigilant and diligent.
It is not advisable to proceed blindly as speculation might only lead to more problems. No matter what currency you deal in, it is important to understand its working before you take any big steps.
Here are some strategies for those who wish to trade in USD.
Who are USD traders?
USD traders are those who speculate on the strength of the US dollars, in comparison to its major partners.
In Forex trade, the relationship between the US Dollar (USD) and the Euro is counted as one of the most liquid forex pairs. A tight spread and broader price movement of the currencies provide the trader with a continuous flow of profitable opportunities for those engaging in forex trading.
Although there are several ways to trade the USD/ EUR pair, three simple strategies can make your forex trading performance consistent and effective. You need not be an expert or experienced trader to use these strategies. Even a novice can make use of these strategies to his advantage. I
f you are new to forex trade, you can participate in USD trading by resorting to small position sizes to minimise your risks and by using these strategies. Alternatively, veteran traders can use the strategies to increase the position sizes to get the best out of their forex trading account.
Key points to consider
- Britain’s exit from the EU, along with the general economic instability in the PIIGS countries, has made the euro a popular choice of forex traders aiming for profit from increased volatility
- There are numerous ways to trade the USD - versus the Euro and other strong currency pairs such as USD/GBP
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Strategies for trading USD
With the following strategies, you can make forex trading less complicated and low risk.
One of the first strategies is to identify potential trend formation. This is done through price breakouts. At times, markets vary between various ranges of support and resistance. This is known in forex trading as consolidation.
When the market moves beyond the limits of consolidation, it creates a breakout – it can be high or low. A breakout occurs before a trend sets in. So, in essence, breakouts can be considered as potential signals of a new, emerging trend. However, the fact that not every breakout results in new trends make things a bit complicated for the forex trader.
Hence, it is necessary to back up strategies with strong risk management techniques. That way, you can minimise your losses if things don’t go your way. Bear in mind that a new high is indicative of a possible upward trend and a new low is suggestive of the start of a downward trend.
Similarly, a lot depends on the period of the breakout. Generally, it is considered a buy signal when the price breaks out beyond the 20-day high. Likewise, a price breakout below a 20-day low is a sell signal. However, this is not fool proof in itself and hence you have to use a stop-loss strategy. The simple way to do it is to close your position after a certain number of days have passed. Since this is a long-term strategy, it will work out in your favour in the long term.
Moving Average Crossover
The second Forex strategy is to use a simple moving average or SMA.
SMA is a trailing indicator that uses older price data and moves slower than the current market price. The longer the period of SMA average, the slower it moves.
Forex traders often use a combination of longer SMA and shorter SMA. For instance, you can set a 25-day moving average as your shorter SMA, and a 200-day moving average as your longer SMA.
A change in trend is indicated when the shorter, faster SMA crosses the longer one. And, when the short SMA moves beyond the longer SMA, it indicates that newer prices are greater than older ones. This is suggestive of a bullish trend, which in turn is our cue to buy. Conversely, when the short SMA moves beneath the longer SMA it indicates a bearish trend, which means we sell.
Moving averages are regularly to validate overall trends. So, you can combine the two strategies by using the positive aspect of the SMA to make your breakout signals more effective. This combined strategy will help you discard signals that don’t fit into the overall trend indicated by your moving averages. For instance, if your breakout suggests buying, check if the short SMA is above the long SMA. If it is indeed so, you can go ahead and place the trade. If not, it makes sense to wait before you trade.
The third strategy, an essential one is a type of trade that is commonly used by professionals. The underlying principle of the carry trade is to derive profit from the difference in yield between a currency pair.
So, if you buy a currency pair where the base currency has a high-interest rate as compared to the quote currency, then your forex trade account will receive funds from the positive swap rate. The yield amount has a correlation to the currency commanded and hence the leverage is a help. However, there is always the risk of ending up on the wrong side of a move. Hence, it is important to choose your currency pair carefully. If you get it wrong, the leverage will lead to massive losses.
If you are into forex trading, irrespective of your experience in USD trading, you can use the above strategies to take advantage of repeating price action. You can apply these strategies along with real-time tracking of the forex pair you trade-in.
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