Intraday Trading Strategies -Forex Price Action
Understanding the dynamics of Forex price action is essential when trading Forex Intraday. There is a great variety of methods and tools available for traders seeking to interpret the daily price action. These tools include candlesticks, chart patterns, harmonic patters, the Elliott waves, etc.
What is Forex Price Action?
Price Action in Forex trading reflects the flow of executed orders within a specific time frame. You may evaluate Price Action via empirical methods but the most reliable way is the use of technical analysis. What really distinguishes trading using Price Action compared to other intraday strategies is the use of naked charts with candlesticks and without any indicators or oscillators.
Price Action and Candlesticks
A candle is formed by a closing an opening price and two wicks. The two wicks reflect high and low prices within the selected time frame (for example 1 minute chart). The body of its candle is determined by the distance between the closing and opening prices and therefore a candle may be bullish or bearish. Price action should be interpreted according to the current trading conditions of each Forex market. Let’s distinguish between the two main types of Forex Markets.
Fundamental Forex Strategies & Key Fundamental Data
The fundamental Forex strategy involves opening positions in the Foreign Exchange market based on hard data and fundamental analysis. In general, the fundamental analysis aims to anticipate future market conditions based on the analysis of key economic indicators and hard macroeconomic data.
The importance of Fundamental Analysis
Fundamentals are often ignored by many Forex investors, and that is a serious mistake, especially as concerns swing and position traders. No matter if you are willing to apply a fundamental strategy, or not, understanding deeply the current macroeconomic landscape is very helpful in anticipating the formation of strong price trends. A fundamentalist is always aware of the basic macroeconomic conditions in the market and can predict when the macroeconomic cycle is likely to shift. The macroeconomic cycle plays a tremendous role in the future decisions of Central Banks regarding the level of interest rates. The level of interest rates is at the core of any Forex pair valuation.
Examples of Common Fundamental Forex Strategies
Here are some common fundamental strategies:
(1) Macroeconomic Conditions Strategy
As all currencies trade in pairs, there is always an economy that is in better shape than another. This fundamental strategy involves reading carefully the macroeconomic cycle of two economies and making an educated decision by going long on the economy that will likely perform better than the other, in the near future.
(2) Interest Rate Cycle Strategy
As mentioned above, the level of interest rates is the most important component of any Forex pair valuation. The interest rate cycle involves two distinct phases: (i) lower rates to stimulate the economy and consumption (ii) higher interest rates to deal with inflation. These two phases create a never-ending macro-cycle that plays a key role in the Foreign Exchange market.
Swing trading is a short to a medium-term trading strategy that aims to profit from strong price changes or else price 'swings'.
Major Characteristics of Swing-Trading
Swing traders use fundamental analysis to spot trading opportunities and technical analysis to analyzing patterns and confirm price trends.
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It involves periods from a few days to several months
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Swing trading minimizes intraday cost (spreads and commissions are practically irrelevant)
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As positions remain active overnight, the swap rates become very important
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Swing trading exposes traders to weekend risk (potential gaps may not activate stop-loss orders)
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High trading-leverage is not an option for swing trading
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Only high Reward/Risk trades are compatible with swing trading strategies
Carry Trade Investing Strategy
Carry trade is a very popular Forex investing strategy that involves borrowing or selling a Forex currency with a low interest rate, and a t the same time buying a Forex currency with a higher interest rate.
Introduction to Carry Trade
In general, carry trade means borrowing in a low-interest rate Forex currency and investing in a higher interest rate currency. The profit mechanism is simple, you are paying a low interest (borrowed currency) while you are collecting a higher interest rate (purchased currency). Hence, the profit is the product of the interest rate differential.
At a glance:
□ Carry trade means selling low-yield assets to buy high-yield assets
□ Typical carry trade funding currencies are the Swiss franc (CHF), and the Japanese yen (JPY)
□ Two common pairs for carry trading are AUD/JPY and AUD/CHF
□ Profiting from the interest rate differential
□ The risk includes the general exchange rate risk (market risk)
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