There are many different kinds of Forex trading systems, but underlying each of them is a set of rules. The rules differ to some degree from system to system, but in essence, they are all variations of the same system. Reduced to its simplest, the system is called momentum trading.
Momentum Trading
If you take a look at any given Forex or stock market chart, you’ll notice that it’s a series of ups and downs. You’ll also notice that rarely does the currency or equity oscillate up and down statically. There’s always some larger overall rising or falling trend. This larger trend is the Forex equivalent of Newton’s First Law of Motion: objects that are in motion tend to stay in motion unless acted upon by some external force.
Similarly, in the Forex the equivalent rule is that a rising currency value may and probably will have many small ups and downs but generally within a larger, more consistently rising value that continues until some market event or external political or economic event brings the trend to a halt. A winning trade has a certain momentum that doesn’t guarantee but suggests that the next move will be in the same direction.
Determining how to profit from this observation is the subject of many books, speeches, software implementations, and seminars. Some of these strategies are available for a significant fee, but underlying them all are some well-known market facts available without cost.
Advanced Trading Strategies Versus Winning Trading Strategies
Some traders employ systems that require observation and trading adjustments every few seconds to every few microseconds (most of these are computerized and have computational requirements well beyond even the most powerful personal computer). Others employ trading systems that encourage trading on 5- to 15-minute charts or daily charts. Novice traders who try to implement these systems often don’t fare well, first because in general these shorter-term systems require more experience and trading skill, but also because when trading on a short-term chart, the trader may inadvertently be trading against the larger, more significant overall trend — the kind of trend that weekly charts are more likely to reveal.
Trading against the trend, needless to say, can be a recipe for disaster.
Weekly Forex Trading Systems
Systems based on weekly charting are a less labor-intensive way of participating in the Forex market. Assuming you have a good basic understanding of the Forex market and various risk reduction strategies, you’ll want to begin to develop your weekly trading system by looking at some charts. These are mostly generic charts, widely available online from brokerages and trading house without cost. A detailed discussion of each of these indicators is beyond the scope of this article, but each of the following indicators is linked to an article describing them in greater detail.
Here, you’ll learn the basic idea underlying each chart or indicator.
Moving Average: This is the simplest and most popular of all trend indicators. Moving average charts plot the rise or fall of the currency value within a given time frame. When a currency value rises or falls above or below the given average within that frame, this signals a buy or a sell.
Stochastic: This differs from a moving averages chart in that it doesn’t look primarily at the quantity of the rise or fall, but rather its velocity. How fast is this occurring? If the rate of rise is increasing, this suggests the currency has an underlying strength that will likely continue, at least until something happens that stops it. If the currency rise is losing momentum, this may indicate it’s time to sell.
Relative Strength charts assess the rise or fall of a currency in relation to other currencies. Although a particular currency may be rising in value in relation to its currency pair, how does it compare with the rise of other currencies? A rise weaker than other rises may indicate weakness and could be a sell signal even though the currency may be above its moving average.
Bollinger Bands (a registered trademark of its inventor, John Bollinger) are another charting indicator. A Bollinger Bands chart is related to a Moving Averages chart but uses a more complicated charting process that incorporates standard deviation in its calculation. Not all traders will be interested in the complexities of this chart, which is not that far removed from a Moving Average chart, but if you are interested in statistics, mastering Bollinger Bands charting could be an additional, valuable assessment tool.
Using Momentum Charts
One way to begin using these charts is with the simplest, the moving average. If the currency rises above a moving average for a given time period, this is a buy signal, although a rather primitive one. If the currency rises above the moving averages of two charts of the same currency but with different time periods, this is a stronger buy signal. Using a Stochastic chart, you can determine if the rate of rise is increasing or falling. Using a Relative Strength chart, you can compare its rise with the rise of other currencies.
A comparison with the moving averages of another related currency–the Euro vs. the Pound, for example–can provide additional insight into the relative strength of your selected currency, the US dollar.
It’s not often that all momentum indicators point in the same direction; sometimes you’ll need to wait until in aggregate they’re more favorable. The main thing to remember is to trade small and be patient. If you normally trade forex mini lots, use micro lots instead, because weekly charting is easy to manage, but the price differences can be significantly greater than when trading with charts over shorter time periods.
As with trading generally, use stops, set targets and stick to your trading plan.
