Foreign Exchange Rates Long Term Trading Strategies

Foreign Exchange Rates

Anyone contemplating trading foreign exchange rates needs to make a basic decision about how they are going to trade as soon as possible. There are 2 kinds of trading and, to a large degree, they are mutually exclusive. On the one hand, you can “day trade”. This involves using highly leveraged (i. e., 100:1 or more) positions, moving in and out of the market in very short amounts of time. To be successful in day trading, you can only think about the next hour of your life. On the other hand, you have trend-trading, involving relatively long periods of time (.e g., a week or a month) and relatively low leverage (i. e., 30:1 or less), where the emphasis is on getting in on the ground floor of the next trend. To be successful in trend-trading, you almost have to forget about today and worry about 3 months from now.
For long-term traders, “Keltner Channels” may be superior to “Bollinger Bands®”. For signal confirmation, “Stochastic RSI” is highly thought of.

Why Use Long-Term, Instead Of Short Term Strategies, To Trade Foreign Exchange Rates?

Generally speaking, longer-term trading strategies produce superior returns (this is why you rarely see hedge fund managers day trading). They’re also easier and since a lower leverage ratio (i. e., 30:1 or less) is used, the chances of getting knocked out of a trade by a price spike aren’t that high. For instance, at the end of 2012, the Japanese government embarked on a new set of economic policies. It didn’t take long to see that one of the effects of this change was going to be a weakened ¥en. Since the USD/JPY is a positive interest rate carry trade, “almost everyone” piled into long USD/JPY trades and didn’t get out until the summer of 2013. The profits were immense.

Popular Long-Term Strategies For Trading Foreign Exchange Rates

By far the most heavily used long-term trading strategy is one that deploys Bollinger Bands® or “Donchian Channels” or Keltner Channels, with 1 or 2 oscillators to pin point when to successfully get in and out of a trend. Bollinger Bands® are the most popular, but Donchian Channels are better for seeing a new trend developing. Keltner Channels, however, may represent the unsung heroes of trend trading. Because they use an “Average True Range” (“ATR”) indicator plus an exponential moving average, they produce a smoother “pricing envelope” which is also more sensitive to volatility changes. As a trade signal confirmation, Stochastic RSI works well with all 3 Bands or Channels, although some traders prefer to use a “CCI” (“Commodity Channel Index”).

How To Successfully Apply Long-Term Strategies Trading Foreign Exchange Rates

If you believe in trial by fire, try this long-term strategy (on a “demo”, first). Open up a daily, USD/JPY chart and place a Keltner Channel on it, overlayered with a “Linear Regression” indicator, positioning an “Awesome Oscillator” (“AO”) plus an “SMI Ergodic Indicator” (“SMII”) at the chart bottom. Notice how there are time periods when the currency pair’s price almost pops out of both the Channel and the Linear Regression band. That’s your signal to bust a move. If both the AO and the SMII confirm the breakout, then either “buy low” or “sell high” and wait for the trend to play out. Since this is a long-term strategy, maintain low leverage ratios (i. e., 30:1 or less).

 

 

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