With all of the complexity in forex trading, there is a very simple way to describe success. Almost everything boils down to choosing the right currency pair, entering the market at the right time, and knowing when to exit. Now the hard part. How do you know when to enter and exit? In this article we will focus only on one side of the equation, finding a list of conditions you should look for before dipping in – AKA entry signals.
Perfect conditions for the entry
One excellent way to look for forex entry signals is with crossover in moving averages. Here’s the concept: if you use the moving average for the long-term and another average for the short-term, you have a nice basis for comparison. If the short-term average crosses the long-term from below, you can reasonably say that an upward trend is coming. Of course, a downward trend only works in reverse-the short-term average crosses from above.
However, to confirm the trend, you should look at another indicator. The average directional index (ADX) or moving average convergence/divergence (MACD) is a statistical way of measuring whether a trend is significant. Look for a number somewhere around 30-40. Similarly, you can also look at momentum indicators such as the TRIX indicator, relative strength, or smoothed rate of change.
Another way to establish trends is with Fibonacci analysis. Trace daily pivot points, drawing a horizontal trend line. You should also see if you can find points of resistance or support. And yet another indicator is exponential moving average. Use 200 EMA and see if the trend line intersects with this indicator at any point.
This brings us to the next step-timing. If you use price candles or a retracement method, you should also make this part of your decision. In other words, once you are convinced of a trend, wait for a short term retracement to begin-usually 3-4 candles. Buy on the bottom of one of these short trends so that you can profit from the larger trend.
There are several other possibilities for entry signals. One is something you should be doing anyway-watching news shocks. If you have any reason to expect a major adjustment and the market hasn’t yet reflected it, this is an obvious reason for entry. Cable (EUR/USD) during the Greece crisis is a good illustration for this idea. If you use a carry strategy, an additional signal is any change in interest rates. If the change puts you in a better position for trading, this is an obvious reason to enter the market.
There is a final entry signal that too many traders rely on-automated software signals. Many platforms now include such information built in. It is fine to ask a computer to help you with some of these statistical and analytical decisions. But it is not wise to rely on these systems completely or without understanding of the underlying mechanisms. Take the time to learn how your system works and confirm the trade before putting money on the line. Some brokers offer forex signals for free in their VIP accounts, compare forex brokers carefully if you are interested in this.
All of this points to the final and most important consideration when trading based on entry signals: always look for overlapping reasons to make a buy. In other words, the best situation is always when a number of these indicators come together to point to a strong trend. One or even two of them might be wrong. When you see several conditions fulfilled at once, it’s time to trade with confidence. Of course, the job is never done until you also discern exit signals.
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