“economic Indicators And Forex Profit: Understanding The Australian Landscape” – Many Forex traders spend their time looking for the perfect moment to enter the market or the telltale sign that screams “buy” or “sell”. And while the search can be fascinating, the result is always the same. The truth is that there is no one way to trade the Forex markets. As a result, traders must learn that there are a number of indicators that can help determine the best time to buy or sell a cross forex.

It is possible to make money using a countertrend trading approach. However, for most traders, the easier approach is to recognize the direction of the main trend and try to profit by trading in the direction of the trend. This is where trending tools come into play.

“economic Indicators And Forex Profit: Understanding The Australian Landscape”

Many people try to use them as a separate trading system, and while that is possible, the real purpose of a trend tracker is to suggest whether you should be looking to enter a long or short position. So let’s look at one of the simplest methods of trend following — the moving average transition.

Foreign Exchange Market

A simple moving average represents the average closing price over a number of days. To elaborate, let’s look at two simple examples – one long-term, the other short-term.

The chart below shows the 50-day/200-day moving average crossover for the EUR/JPY cross. The theory here is that the trend is favorable when the 50-day moving average (yellow) is above the 200-day moving average (blue) and unfavorable when the 50-day moving average is below the 200-day. As the chart shows, this combination does a good job of identifying the main trend in the market – at least most of the time. However, no matter which moving average combination you choose to use, there will be breakouts.

The chart below shows a different combination – a 10-day/30-day crossover. The advantage of this combination is that it will react faster to changes in price trends than the previous pair. The downside is that it will also be more susceptible to shocks compared to the long-term 50-day/200-day crossover.

Many investors will declare a particular combination to be the best, but the reality is that there is no “best” moving average combination. Ultimately, Forex traders will benefit most from deciding which combination (or combinations) best suits their time frames. From there, the trend—as shown by these indicators—should be used to tell traders whether they should trade long or short; one should not rely on timing inputs and outputs.

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We now have a trend tracker that can tell us if the main trend of a given currency pair is up or down. But how reliable is that indicator? As mentioned earlier, trend-following tools are prone to being broken. So it would be nice to have a way to judge whether the current trend-following indicator is correct or not.

For this we will use the trend confirmation tool. Much like a trend follower, a trend confirmation tool may or may not be intended to generate specific buy and sell signals. Instead, we look to see if the trend follower and the trend confirmer agree.

Essentially, if both the trend follower and trend confirmation tool are bullish, then the trader can more confidently consider going long on the currency pair in question. Likewise, if both are bearish, the trader can focus on finding an opportunity to sell the pair in the short term.

One of the most popular and useful trend confirmation tools is known as the Moving Average Convergence Divergence (MACD). This indicator first measures the difference between two exponentially smoothed moving averages. This difference is then smoothed and compared to its own moving average.

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When the current smoothed average is above its own moving average, then the histogram at the bottom of the chart is positive and the uptrend is confirmed. On the other hand, when the current smoothed average is below its moving average, then the histogram at the bottom of the image below is negative and a downtrend is confirmed.

Basically, when the combination of the moving average that follows a bearish trend (the short-term average is below the long-term average) and the MACD histogram is negative, then we have a confirmed downtrend. When both are positive, then we have a confirmed uptrend.

At the bottom of the chart below, we see another trend confirmation tool that could be considered in addition to (or instead of) the MACD. It is the rate of change (ROC) indicator. As shown in the chart below, the orange line measures today’s closing price divided by the closing price 28 trading days ago.

Readings above 1.00 indicate that the price is higher today than 28 days ago and vice versa. The blue line represents the 28-day moving average of daily ROC readings. Here, if the red line is above the blue line, then the ROC confirms an uptrend. If the red line is below the blue line, then we have a confirmed downtrend.

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Note below that the sharp price declines experienced by the Euro/Yen cross from mid-January to mid-February, from late April to May and during the second half of August were each followed by:

After deciding to follow the direction of the main trend, the trader must decide whether he is more comfortable jumping in as soon as a clear trend is established or after a pullback occurs. In other words, if the trend is determined to be bullish, the choice becomes whether to buy strength or buy weakness.

If you decide to enter as quickly as possible, you can consider entering a trade as soon as an uptrend or downtrend is confirmed. Alternatively, you could wait for a pullback within the larger overall primary trend in the hope that this offers a lower risk opportunity. For this, the trader will rely on the overbought/oversold indicator.

There are many indicators that can fit this bill. However, one that is useful from a trading standpoint is the three-day relative strength index, or three-day RSI for short. This indicator calculates the cumulative sum of up and down days during a window period and calculates a value that can range from zero to 100. If all price movement is to the upside, the indicator will approach 100; if all price action is to the downside, then the indicator will approach zero. A reading of 50 is considered neutral.

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The chart below shows the 3-day RSI for the EUR/JPY cross. In general, a trader looking to enter a pullback would consider going long if the 50-day moving average is above the 200-day and the 3-day RSI falls below a certain trigger level, such as 20, which would indicate an oversold position. .

Conversely, a trader might consider entering a short position if the 50-day is below the 200-day and the 3-day RSI rises above a certain level, such as 80, which would indicate an overbought position. Different traders may prefer to use different trigger levels.

The last type of indicator a forex trader needs is something to help determine when to take profit on a winning trade. There are many choices available here as well. In fact, the 3-day RSI can also fit into this category. In other words, a trader holding a long position might consider taking some profits if the 3-day RSI rises to a high of 80 or higher.

Conversely, a trader holding a short position might consider taking some profits if the 3-day RSI falls to a low level, such as 20 or below.

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Another useful tool for taking profits is a popular indicator known as Bollinger Bands. This tool takes the standard deviation of price data changes over a period of time, then adds and subtracts it from the average closing price over the same time frame, to create trading “bands”. While many traders try to use Bollinger Bands to time trade entries, they can be even more useful as a profit making tool.

The chart below shows the Euro/Yen cross with 20-day Bollinger Bands overlaying the daily price data. A trader holding a long position might consider taking some profit if the price reaches the upper range, and a trader holding a short position might consider taking a profit if the price reaches the lower range.

The final profit taking tool would be the trailing stop. A trailing stop is usually used as a method to give a trade the potential to release profits while trying to avoid losing any accumulated profits. There are many ways to reach a trailing stop. The chart below illustrates just one of these ways.

The trade shown below assumes that a short trade was entered in the EUR/YEN FX market on January 1, 2010. Each day, the average true range of the last three trading days is multiplied by five and used to calculate a trailing stop price that can only move sideways or lower (for a short trade), or sideways or higher (for a long trade).

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If you hesitate to enter the Forex market and wait for an obvious entry point, you may find yourself on the sidelines for a long time. By learning various forex indicators,

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