- “long-term Investing In Forex: Sustainable Profit Strategies For Australians”
- What Are The Pros And Cons Of Forex Trading?
- Biggest Reasons You Lose With Forex
“long-term Investing In Forex: Sustainable Profit Strategies For Australians” – A trend is a tendency for prices to move in a certain direction over a period of time. Trends can be long term, short term, upward, downward and even sideways. Success with forex market investing is tied to the investor’s ability to identify trends and position themselves for profitable entry and exit points. This article examines the stages of a currency trend and how they affect investors.
For the most part, an economy that is strong will also have a strong currency. Economic strength attracts investment and investment creates demand for a currency. The demand for gold as an alternative to fiat currencies has led to a currency demand in the gold producing countries such as Australia, South Africa and Canada.
“long-term Investing In Forex: Sustainable Profit Strategies For Australians”
Note how the economic factors, in this case, a demand for gold and the higher interest rates in Australia around 2009 to 2012, created a demand for the Australian currency. This type of demand will continue until the exchange rate becomes too high and adversely affects Australian exports.
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In addition, factors in other economies should be taken into account as no single currency can act in isolation from the rest of the world’s economies.
The weekly AUD/USD chart below shows the recent uptrend in the Australian dollar against the US dollar exchange rate at that time. While the price (exchange rate) oscillated back and forth in a regression channel, producing some short-term trades in the opposite direction, the prevailing uptrend remained intact.
In the chart below, the Canadian dollar has strengthened against the US dollar over the period 2009 to 2011. Canada is also a commodity producing country, with a lot of natural resources. In the case of the Australian dollar chart, there is an upward-sloping growth path as the demand for Australian dollars increases. As the Australian currency is the base currency and the US dollar is the quote currency, the chart shows a strong bullish and strengthening Australian dollar.
On the other hand, in the case of the Canadian dollar against the US dollar, the US dollar is the base currency while the Canadian dollar is the quote currency. Thus, the chart shows the US dollar trending downward as it weakened against the Canadian dollar.
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The conventional wisdom among traders is that “the trend is your friend.” While this is sound advice, we add a cautionary phrase: “The trend is your friend … until it ends.”
Of course, the difficult questions to answer are whether there is a trend at all or just a sideways trading range and where and when a trend starts and where and when it ends.
We first look at the question of where a trend might start and, once it has started, where to get in on the action. To answer these questions, we need technical analysis. To make our analysis as simple as possible, we create a chart that uses a weekly time frame and uses only two indicators.
The first indicator is a simple 20-period moving average calculated on the closing prices. But to add a cushion, we also add another 20-period simple moving average, but this time calculated on the price highs. Then we add another 20-period simple moving average calculated on the lowest prices. The result is a moving average channel that reflects a dynamic price equilibrium.
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We use this channel to determine when prices are trending up and when prices are trending down. We assume that if prices break below the channel, there is a potential downtrend, and if they break above the channel, there is a potential uptrend.
Also notice that when a market is trending in either direction, there is a tendency for prices to move away from the channel and return to the channel as volatility increases and decreases respectively. With volatility, prices always tend to revert to the mean over a period. This reversion to the mean provides either buying or selling opportunities depending on the direction of the trend.
In addition to the moving averages, we also add an RSI set to a two-period, instead of the usual 14-period, with the plot guides set to 90 and 10 instead of the usual 70 and 30.
The diagram shows some interesting possibilities. Whenever the RSI reaches an extreme at the 90 plot guide, it presents a selling opportunity while the trend is down and prices are below the channel. Every time the RSI reaches the 90 plot guide, the price has also moved back into the channel, providing a new opportunity to sell in the direction of the trend.
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Conversely, when the trend is up, prices return to the channel while the RSI reaches the 10-plot guide providing new buying opportunities.
Trading in the above way means trading only in the direction of the trend each time it corrects, providing a new opportunity to participate.
Many traders will look to reverse the trade. A turning point is always where a trend begins or ends. To find these potential turning points, we look for price patterns (such as double or triple tops or bottoms), Fibonacci levels or trend lines. A reversal often occurs at a 127.2 or a 161.8 Fibonacci extension. Therefore, it is also useful to plot the Fibonacci lines on the weekly charts and then see the results on the daily chart when prices approach one of the Fib levels.
Some trends are stronger than others. In fact, some trends become so exuberant that prices form a j-shaped or parabolic curve.
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On the next chart we see an example of an irrational parabolic price curve for the World Silver Index. It is irrational as traders push silver prices upwards, as the entire commodity complex benefits from strong fund flows into futures and ETFs without equal and natural demand for the underlying product. This is a case of “musical chairs”. When the music stops, the exit door narrows and late arriving traders suffer.
The “spinning” candlestick on the weekly silver chart should be a strong warning sign to traders that the trend may be ending.
In the case of the Canadian and Australian dollars (the first two charts above), the curve shape follows a more normal upward slope than the silver price. Traders should always be aware of the curve shape as parabolic curves indicate a “bubble” mentality developing in the market.
A reader familiar with the Elliot Wave will observe that trending markets move in a five-step impulse wave followed by a three-step ABC correction. Many investors prefer to count pivots, and they look for between 7 and 11 advancing pivots, especially noting the pivot count when the price reaches a strong resistance level.
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It is impossible to predict the future, but we can calculate the potential success of a trade by stacking various factors in an attempt to tilt the odds in our favor. Since all speculation is based on odds, not certainty, we should be aware of risks and use methods to manage risk.
When making a trade, it is important to always place stops to limit losses in case the trade does not go as expected. Large market makers know where all the stops are and can under certain circumstances (especially in times of low liquidity) reach the stops. Thus, an investor’s stops should be in a place where there is enough room to prevent them from being withdrawn prematurely.
To best manage a stop policy in trending markets, use “volatility stops”. The well-known Parabolic SAR indicator can also be used to follow the market and take profits when the stop is reached. In the chart below, the 50-period three ATR trailing volatility stops track prices and provides exit points if the trend suddenly reverses.
It is best to trade with the trend but be aware of when a trend is exhausted and a correction or reversal is in order. By observing and listening to market sentiment, following news releases, and using technical analysis to help time entries and exits, you should be able to develop your own personal rule-based system that is both profitable and easy to execute.
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The offers shown in this table are from partnerships that receive compensation. This compensation can affect how and where listings are displayed. does not include all available offers on the market. Is long-term trading more profitable than short-term trading? This is a subject for debate, and there is no clear answer. But let’s see the discussion – long trades vs short trades.
By definition, the long position is when a trader buys a currency at one price and aims to sell it later at a higher price. A short position in is when a trader sells currency at one price and aims to buy it later at a lower price. Thus, long position – buy currency pair and short position sell.
Short term trading or long term trading? Both short-term and long-term trading have advantages and disadvantages. Usually, the long-term trading has a better profit ratio and profitability, but short-term trading has a more significant compounding effect.
Have you been wondering about short term trading or long term trading? As for , it’s a good idea to concentrate on long-term growth. It is important to realize that you will not get rich in a short time with the market.
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