Trading Forex usually requires understanding technical analysis for currency pair price. Numerous technical indicators exist that can be used for technical analysis. In the forex trading strategy presented here we apply 2 primary indicators and one more sign that is used as confirmation for the price trend.
The 2 indicators that are applied to the strategy are pivot point analysis and stochastic sign. The confirmation sign is the relative strength index (RSI). Let us see first an overview of these signs and find out then how are they applied with each other in the trading strategy to make decision on whether to buy or sell.
The pivot point analysis involves determining support and resistance level. The support level is understood to be a level the currency pair can’t go below it for a large period of time. Similarly, the resistance level is synonymous with a level the currency pair can’t go above it for a large interval. The pivot point analysis specifies many levels at various strengths. The higher support or resistance levels the strongest level which means it is more likely that the currency price reverse direction at the level. This is actually the 1st sign in our forex trading strategy.
The stochastic is an sign that determines the degree of increase or decrease for a given period. The higher the value, the more the currency price raises over the period. The lower the value, the less the price is going. If the price is continuously rising within the specified period, the stochastic will be high for a large period and this is called overbought. To reverse is true and will result in oversold condition. If this indicator is more than 80 % for large period, we say this is overbought condition. Also when it is under 20% it is oversold condition. This is the second sign that will be applied in our forex trading strategy.
The RSI is like the stochastic but uses various calculations. You can use it to determine the overbought and oversold conditions. It’s also used to find out the price trend. When it is more than 50 % the price is going high and the reverse is true. This can be a confirmation indicator in our forex currency trading strategy.
The forex trading strategy given uses the pivot point analysis and the stochastic as the primary indicators. The trader must first take a look at the stochastic indicator. Whether it is high for reasonable length of time (especially over 80%) then it is overbought condition. Likewise, if the stochastic is low for long time(less than 20 %), then it is oversold condition. The trader must expect to have a reverse in the price when those two conditions are seen.
Once overbought or oversold circumstances are seen on the price curve, the trader can see the pivot level at which the price reaches. The greater the level the price reaches, a lot more likely that the price will reverse. For example, if the price is overbought and we see that the price reaches the R3 level or a higher resistance level, then a very strong chance that the price at certain point will reverse. The price also at this condition will change very strong which will make numerous pips.
The the trade entry point at this forex strategy can be based upon the RSI. Once the price is overbought or oversold and reached the highest pivot level (or break out that level) the RSI can be checked to find out when to enter a trade. When it is above 50 %, the price is going high. If it lower than 50 %, the price is going low.
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