Short Term Forex Trading Tips

Today, we will discuss three basic technical analysis tools for forex trading and three specific strategies for short-term forex trading to include: a long wick bounce, a trendline third touch and a Fibonacci/trendline/wick convergence. Technical analysis is a method of evaluating currencies by relying on the assumption that past price action well help predict future price movement. We use it because it works in currency trading. It allows us to be able to quickly analyze many different currency pairs to get a good idea of the mood of the forex traders who are in that particular market. Since most of these traders use technical analysis, we assume that they will react the same to certain setups which can be identified and used to trade. What are we going to use to find forex trading opportunities? Trendlines - which is connecting at least two highs or lows Fibonacci - which is a tool used to measure the retracements in trending moves Candles wicks and the price extremes they represent Risk:Reward ratio which is an important money management tool Trend lines may be the most important technical tool we can use. To draw a trend line we connect two highs or two lows. It is then the 3rd test of this line, that these previous lows or highs create, that offers the trading opportunity. If the trend is up, then we should look to buy on a move back to that trendline as it should offer good support. We should then place our protective stop below that support level. If the trend is down, then we should look to sell on a move up to that trendline as it should offer good resistance. We should then place our protective stop above that resistance level. By entering into the market close to the trendline and placing our protective stop on the other side of the trendline, we can limit our risk and maximize our risk:reward ratio. What is important is that trendlines measuring two bottoms are used to measure support in an uptrend and trendlines measuring two tops are used to measure resistance in a downtrend. The more times a trendline is tested, the more likely the next test will fail. We need two points, either tops or bottoms, to first identify the trendline. This means that the third point will actually be the first test of the trendline. This third point represents the best use of the using a trendline to find a trading opportunity and should give us a specific price point to enter. The long wick on a candle is an indication that the market is not comfortable enough at that extreme price level to remain there very long. That wick extreme usually represents a key price level which can be used as an entry point and give you a favorable risk:reward ratio. These large wicks can be seen at extreme tops and bottoms because they represent a point where the traders came in aggressively to change the momentum of the market, which resulted in follow though buying or selling by other traders seeing the same thing. These formations also offer good entry points with favorable risk:reward ratios. Fibonacci levels are used to identify the depth of a retracement in a trending move. As the forex market moves against the trend, these mathematically generated price levels can quite often offer support or resistance where the market moves to before changing directions and continuing on with the prevailing trend. Once again specific support and resistance levels offer excellent entry levels and good places to place your protective stop to maintain an favorable risk:reward ratio. In an example when the forex market pulls back off of a high in the uptrend to between 50 and 61.8% of the trending move. This offered good support to give buyers an opportunity to jump back in on the buy side and as the market started to move up once again. In Forex Trading we can also use many technical tools to confirm our actions and increase our chance of success. One such approach is to use a trendline, candle wick and Fibonacci levels to identify a trading opportunity. This particular approach starts with identifying the trend line, calculating the Fibonacci levels and then look for the long wicks as the market tests these different levels of support or resistance. Finally a selling opportunity as the market rallied up to the trendline and Fibonacci level which offered good resistance and an opportunity to sell. We referred to an favorable risk:reward ratio in a solid forex trading opportunity. This means looking for at least three pips of profit for every pip risked in a trade. If we are risking 100 pips, we should look for at least 300 pips of profit. This money management strategy is key to long-term success and can result in a trader being consistently profitable even when losing more than half of their trades. You can try the forex trading strategies above for free at FXCM by signing up for a free 30 day demo account. Article Source: http://EzineArticles.com/5224644