Forex Strength Trading – Unique Tools for a Unique Approach
If you’re a trader, I’m sure you’re familiar with fundamental trading, technical trading, trend trading, candlestick trading, swing trading and all the other varieties of trading styles that riddle the markets these days. Each one professes to be “the way,” but in reality, none of them really are.
The only constant I’ve found in trading any of the markets I trade, especially forex, is that strength is the only factor that drives prices especially in the short term. And since I am a short term trader, this is the only time frame I’m interested in. Strength is a direct indicator of supply vs. demand, and is therefore more of a fundamental indicator than a technical indicator.
However, for some bewildering reason, short term traders have chosen technical analysis as their method of choice. You’ve probably noticed that every charting website or charting software package includes a long list of technical indicators free of charge. I believe that the reason they’re free is because you get what you pay for. These indicators are really good for nothing other than predicting the past.
So, what is strength and how do you determine what’s strong and what’s weak in the forex market at any given time? You may think that the Relative Strength Index (RSI) is a technical indicator that reflects strength. It’s really not though.
By definition, the RSI is an indicator that tells us if a currency pair is overbought or oversold. However, just because a currency pair is oversold doesn’t mean that the price of that pair is going to move up in the near future. Conversely, just because a currency pair is overbought does not mean its price will move downward in the near future.
The price of the currency pair may behave in this manner, but there is no fundamental reason for this to occur and is therefore not a dependable tool to use in making sound, profitable trading decisions. The reason that the price of a currency pair will move (in every instance) is when there is an imbalance in strength between the 2 individual currencies in the pair.
For instance, if the EUR and the USD are both strong with respect to all the other currencies they trade in pairs with, but there is no imbalance of strength between the EUR and the USD, the price of the EUR/USD pair will not tend to move regardless of the RSI reading at the time, and regardless of how overbought or oversold the pair may be.
So, essentially, the most important piece of information needed to successfully trade a currency pair is how strong each individual currency is compared to the other currencies it trades in pairs with. This information will allow us to match a strong currency with a weak currency, and thus select the best currency pair to trade at the time we are trading. There is no free conventional technical indicator I know of that delivers this information.
There is, however, a very unique tool that does deliver this information clearly, on one screen, and in real time. It’s a currency meter that utilizes a real-time data feed to measure the buying and selling activity of each major currency tick-by-tick. A calculation is made using this input and the strength of each currency is displayed graphically on a chart where higher values on the vertical axis indicate strong buying activity for an individual currency, and lower values on the axis indicate strong selling activity.
At one glance, it is easy to match a strong currency with a weak currency using this tool. By looking for a trade in the currency pair identified by this method, you now have an extremely high probability of capturing a near term, predictable price move for a profitable trade. Another benefit of using this tool is that the real-time data feed that it requires is free.
Since I started using this currency meter and making trades based on the imbalance of strength between 2 currencies, both my winning percentage and trading profits have skyrocketed. Trading without this tool is like driving blindfolded and I can no longer trade confidently without it.
If you’d like more information about this unique tool that will enable you to use this approach to trading the forex market, please visit my website to see it in action and to see the results of my trading as well as some sample trades I've made using this tool and this method.
Moving Average Envelopes are percentage-based envelopes set above and below a moving average. The moving average, which forms the base for this indicator, can be a simple or exponential moving average. Each envelope is then set the same percentage above or below the moving average. This creates parallel bands that follow price action. With a moving average as the base, Moving Average Envelopes can be used as a trend following indicator. Beyond simply trend-following, though, the envelopes can also be used to identify overbought and oversold levels when the trend is relatively flat.Moving Average Envelopes Conclusions and forex signalsMoving Average Envelopes are mostly used as a trend following indicator, but can also be used to identify overbought and oversold conditions. After a consolidation period, a strong envelope break can forex signal the start of an extended trend. Once an uptrend is identified, chartists can turn to momentum indicators and other techniques to identify oversold readers and pullbacks within that trend. Overbought conditions and bounces can be used as selling forex trading signals opportunities within a bigger downtrend. In the absence of a strong trend, the Moving Average Envelopes can be used like the Percent Price Oscillator. Moves above the upper envelope signal overbought readings, while moves below the lower envelope signal oversold readings. It is also important to incorporate other aspects of technical analysis to confirm the overbought and oversold reading. Resistance and bearish reversal patterns can be used to corroborate overbought readings. Support and bullish reversal patterns can be used to affirm oversold conditions and buy forex trading signals.
First and foremost a trader should determine the direction that the market has been taking the pair over time…the longer term trend. Once that is determined, the trader can then look for entry signals in the direction of that trend as that will be the direction that offers the greater likelihood of success.As we look at our 4 hour chart of the EURJPY below, we can see that the pair is in an uptrend (has a bullish bias) as price is trading above the 200 Simple Moving Average and, at the time of this chart, the EUR was stronger than the JPY. So, if the pair is in an uptrend (bullish bias), we would want to look for candlesticks and candlestick patterns that demonstrate a potential for a bullish reversal. That would be a reversal by price action back in the direction of the trend.On the chart above we would be looking at the Hammer Candlesticks, Doji, Bullish Engulfing pattern and the Morning Star pattern for that bullish reversal signal. When we see these candlesticks and patterns forming at the end of a retracement, a support level, this is a “tip” the price action may very well reverse back in the direction of the overall trend. Again, nothing in trading is a certainty but these patterns can provide us with a trading edge, the tip that we are looking for.What if the pair is in a downtrend?On the chart above I have also included some of the patterns that we would look for that would indicate that price action may be reversing to the downside after a reversal (pullback) to a level of resistance. Those patterns would be the Shooting Star, Bearish Engulfing, Doji, Evening Star and the Spinning Top.While in most cases on this chart price action did reverse to the downside after these patterns showed up on the chart, the higher probability trade will still exist in the direction of the trend.While it is not necessary to discard your indicator of choice in favor of candlestick patterns, using these patterns in conjunction with your indicator, be it MACD, Stochastics, RSI, etc., can provide an additional tip when it comes to looking for a pair to reverse its direction.
Everyone keeps asking “What is a Forex practice account?” Most people in the know will answer that it is an added functionality in a forex trading/trial account. And that it allows you to practice trading without the actual risk of losing money. Then comes the other questions... This article will address some of the more common follow up questions to the definition of a forex practice account (demo account).Where do I buy a practice account?You don’t buy one, you rent it out. This is because a practice account comes hand in hand with a forex account/platform. The former is accessible via membership, usually with a monthly fee. Now that’s cleared up, you have two options. Either sign up with a broker that provides a free platform or sign up with a forex platform.Can I get a practice account for free?Yes you can. This can be had using two methods. The first is to sign up for a trial account. The disadvantage is trial accounts only last for about 30 to 90 days. This means your free practice account will last just as long. Of course, there is the alternative of going around signing up for demo accounts each platform at a time. But this will be very inconvenient, and after a few years, you will have exhausted your options. This is because they identify your URL and sometimes, even the CPU’s serial number. This means you either sign up or buy a new CPU.The second method is not actually for free, but technically it is. This is because you sign up with a broker. This broker will charge you a fee. However, in exchange for the fee, you get the services of the same plus a forex platform. Of course you get more by way of service but you also pay more in terms of actual dollars shelled out.Are all practice accounts the same?Essentially, they are. This is because the purpose remains the same. However, the functionality as well as the interface are different. Also, the access to historical data is different, depending on the provider. And in most cases, practice accounts are tweaked in order to function just like a particular platform. Therefore, in reality each practice account is different in feel and in its efficacy.What is the best practice account?The answer depends on your needs as the broker and the forex account the same is tied up with. For example, if you are looking for an autopilot type of account and you are a team player, then you may want to consider Currensee. If you are more off a technical analysis kind of trader, then Multicharts is your primary consideration. If you are an FXPro kind of trader, then cTrader is a good choice; provided of course that you take into consideration the generation of platform it is working with. For example, practice accounts with third generation platforms are almost always better.How do I maximize the use of a forex practice account?This advice will not come as a surprise to you. You only need to do three things. The first is to read the manual. The second is to practice regularly. The third is to analyze what you did right and wrong, then repeat.