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 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 price, 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.
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)
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 analyze 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
Intraday Forex Strategies -Create your own Forex Trading Strategy
Implementing a trading strategy that is suitable to your risk profile is absolutely necessary when trading Forex Currencies. The Foreign Exchange market is characterized by high volatility and uncertainty. Therefore, only the existence of a trading plan and a money management (MM) system with specific rules can lead you to long-term success. There are hundreds or even thousands of different trading strategies that cover all trading styles (intraday, automated, swing, position, and long-term trading). The selected trading strategy must be 100% compatible with your risk profile and general personality.
Trading Intraday -Basic Requirements
Trading intraday is very risky and not suitable for all Forex Traders. To evolve as a successful intraday Forex trader, you need to have a very specific trading plan, a money management system, and discipline to implement both. A set of logical rules covering all market conditions can help you when you are trading in tiny timeframes.
Never be emotional with your trades. Emotional trading is a disaster when trading intraday.
The Importance of ECN/STP Brokers
Trading with a competitive Forex Broker is also very important. ECN/STP Forex brokers are the best choice for intraday traders as they offer low-cost trading and fast execution with minimal slippage. Here are some important features that you should demand when choosing an ECN/STP Forex Broker:
i) Tight spreads and low commissions on the pairs that you will trade most
ii) Optionally, offering a trading rebate plan that may prove helpful in minimizing your trading cost
iii) Fast execution without any price manipulation (true ECN)
iv) Fully allowing scalping
On the contrary, Dealing-Desk brokers (market makers) can’t offer the above features. This is happening as Dealing-Desks create markets within markets and that means high trading slippage, delays in order execution, and high price manipulation.
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, soon.
(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.
What is a Forex Trading Strategy?
A Forex trading strategy is a method of trading Foreign Exchange currencies based on a predefined set of rules and techniques. A Forex trading strategy includes several components:
- a detailed trading plan that contains objectives, taxes, and time horizon
- trading setups that include the conditions of entering/exiting the market
- money management (MM) that includes trade sizes, rules to limit risk exposure, and conditions to achieve portfolio diversification
