How to trade forex successfully
When it comes to Forex trading it is important to trade only when the success rate is high. Recall that Forex is a game of chances and risks: although you can never predict with absolute certainty where the price is going, if you use certain criteria you can significantly increase the chances of success!
Three steps to trading successfully
- Selection: selecting a trade by applying technical analysis
- Timing: open a position at the right time to make larger profits with relatively small risk
- Management: managing your open positions, limiting your losses, and maximizing your profits
How to select a good trade
There are basically two movements of traders: adherents of fundamental analysis and supporters of technical analysis. Fundamental analysis looks at the news and the economic situation within a country. Although fundamental analysis is important, I would not recommend to trade only on news. It is difficult to predict what influence a news item has on the price because the perception of traders is what ultimately determines the value of the stock, currency, or commodity.
Tip: Use the Forex Factory calendar to see major economic events.
In the end technical analysis is a lot more useful. Technical analysis uses a variety of indicators to determine certain price levels or recognize certain patterns. This allows you to increase the success rate without taking into account the (unpredictable) human factor. Actually we quantify something psychological into numbers and analysis. However, recall that the factor behind these technical indicators is the unpredictable human!
What movements should you trade?
- Trend continuation: to follow a trend. This is fairly easy because a trend often continues for a longer period.
- Reversal: anticipate on a change of trend. This strategy requires more analysis and you need a stronger confirmation from the technical indicators in order to take a reasonable position.
- Consolidation: opening positions at those points between which the price moves: short at the highest point and long at the lowest point.
What timeframe should you trade?
You can trade on different time frames. If you use the day chart, each bar resembles one day. It is also possible to trade on other timeframes, such as the 5-minute chart, the 15-minute chart or the hour chart. However, the shorter the timeframe, the more intensely you will have to follow the market. I would recommend beginners to start with the day chart: once you understand things and get the hang of it, you can switch to shorter timeframes.
What technical analysis could you use?
• Candlesticks: very important! Useful to help predict the next move. (essential)
• Trend lines and horizontals: indicate strong resistance and support levels. (essential)
• Moving averages: to determine the trend and resistance and support levels. (extra)
• Fibonacci numbers: to determine resistance and support levels (extra, only essential for reversals)
• RSI: to check whether the trend will maintain (extra, only essential for reversals)
• Flags and triangles: special patterns you can recognize on charts. (extra)
In a trend continuation you watch…
• General movements: are higher highs / lows (long) or lower highs / lows (short) formed? (essential)
• Moving averages: 50 & 200 EMA in the correct order? Do they form a support / resistance? (extra)
• Horizontal line: is there a horizontal forming a resistance or support level? (essential)
• RSI convergence: is the trend confirmed by the RSI? (additional, essential for a reversal)
• Bullish / Bearish candlestick: is the last OHLC bar in line with the general trend movement? (essential)
• No obstructive resistance / support levels: are there hindering resistance or support levels? (essential)
• FIB retracement support / resistance?: large possibility of a bounce at this point. (extra, essential for reversals)
• Trend line support / resistance?: creates a potential additional resistance or support level. (extra)
Tip: In case of a trend continuation you do not need all the indicators, 3-4 is enough, the essential factors however must always be present.
In a trend reversal you watch…
• Strong horizontal support / resistance level: price will likely bounce from this point
• RSI divergence: increases the chance of a reversal
• FIB extension level: additional resistance / support level
• Candlestick: opposite bar than might be expected based on the general trend?
In a consolidation you watch …
• High level of horizontal support / resistance: point where the price might bounce
• RSI divergence: the direction will probably reverse again
• FIB extension level: price might bounce from here
• Opposing candlestick: price will probably bounce back
• Flat moving averages: indication of a consolidation
Tip: In a trend reversal and consolidation you will need all indicators to open a position