As far as successful foreign exchange trading goes, picking out optimum trade entry points is simply crucial. Knowing when to enter and exit the market at just the right time will quite often be the difference between a profit and a loss. Different market conditions will require the trader to adopt a suitably appropriate market entry strategy, and there are a wide variety of these available – we’ll examine a couple of these approaches here.
Foreign Exchange Trade Entry Tips For Ranges And Trends
1. For Trend Entry, Combine Trend & Momentum Foreign Exchange Indicators To Establish Strength. Looking to get into a trend early to secure the maximum available pips? Try combining a moving average indicator with a momentum one. Here’s how:
- Plot a slow and fast moving average together on the forex chart. When the fast moving average cuts up above the slow, it’s a surefire sign that a new uptrend may be on the cusp of forming. When the fast moving average cuts down below the slow it’s a signal that a new downtrend might be about to form.
- To get a feel of the trend strength check the Average Directional Index (ADX) – when the ADX rises above 20, the trend is strong (and a level of 40 or more indicates truly exceptional trend strength).
- Beware overbought and oversold extremes on the foreign exchange chart – when a foreign exchange currency pair is either overbought or oversold, at some point there is likely to be a reversal. Either the stochastic or the relative strength index can reveal this information prior to trade entry.
- Look for retracements in the trend for good entry points. One of the very best times to enter a trend is on the back of a price retracement. Foreign exchange price trends will never zoom up or down in a straight inclined line. Rather, even the strongest of trends will stutter and run out of momentum for brief periods before resuming. When the price does retrace in this way, it can be an ideal time to get into the main trend at a better price. Indicators such as the Fibonacci and Elliot Waves can be useful to predict where a price retracement may travel to.
2. For Ranges, Combine Oscillators With Bollinger Bands While Paying Attention To Support & Resistance. What about trade entry when price action is ranging? This requires a different approach altogether than when trying to enter a position when price action is trending. Before discussing indicators, the key to understanding price ranges is to plot accurate support and resistance levels. When a range holds, these key levels represent turning points in price action. When range trading, we ideally want to buy at support and sell at resistance. The key indicator here will be a momentum indicator such as Stochastic or Relative Strength Index. Both of these will tell us regions of overbought and oversold price. A very simple strategy is to wait till price hits the support level and starts to turn upwards, while the Stochastic also turns up from an oversold level (ie moves upwards from a level of 20 or so). The reverse holds for going short – wait till the price is at a resistance stronghold and starts to turn downwards – the Stochastic in this instance should be at an overbought level, and turning downwards from a level of 80. Adding the Bollinger Bands to this foreign exchange entry strategy can further help provide dynamic support and resistance levels for better trading potency.