Wednesday, 1 November 2017

Top 10 Forex Entry Signals - Part 1 and 2

An Educational Article. 

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 making an entry.

Part 1- 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.

Part 2- The exit

In Part 1, we pointed out that one might regard Forex as being somewhat simple: you just need to know which pair to trade, when to get in, and when to get out. (An exception to this is with carry trading, where you also need to pay attention to a few other factors). Of course, all of the challenge is in those three little decisions. Here we discuss some of the major signals for knowing when to exit a trade.
For starters, the basic set of tools is almost identical to the entry signals. With entry, you look for a trend and jump in just before it starts. With exits, you simply look for the end of a trend or the beginning of a new one, and jump out before it's too late.
The big difference is that you are not usually looking for a new trend. By the time you can identify that a new trend has begun and is measurably significant, it's already too late-you're losing money. Instead, you should exit the market as soon as it is clear that the trend you bought on has ended.

So you could start with crossovers in the moving average. If you used that to identify an uptrend, now you're looking for a reversal with crossover from above. But hopefully you won't get that far. Instead, you should watch the percentage of change in the short term moving average. If the short term average remains unchanged over a period of time, the trend has probably ended.

Of course, this means that the average directional index (ADX) or moving average convergence/divergence (MACD) both become more significant for you. Look for stabilization or stagnation in these indicators as a signal for the end of a trend. Some of the most helpful forex exit signals are the momentum indicators such as TRIX, smoothed rate of change, or relative strength.

It is also easy to draw a trend line based on Fibonacci pivot points. When prices begin to fall below the original trend line and you see a new pattern of pivot points, the trend has ended. Look for resistance or support that offers any type of pattern. You can also rely on exponential moving average (200 EMA). The problem here is that it is often hard to know if you are dealing with a new trend or just with retracement. This is where price candles can be helpful in some cases. Since the end of a trend is often more analytically complex than the beginning, knowing your analysis well is very important.

News shocks are generally a bad way to make exit decisions, since your response will be too late, anyway. However, if you do have reason to suspect an event and you are more accurate than the market, this might be useful. Generally, your stop loss order will kick in before you can.

And this is where the most important exit signal comes in. You should always have stop-losses in place for every trade you make. Quite simply, you've found an exit signal when your stop-loss kicks in and ends the trade for you!

This also relates to the biggest value in automated systems: rely on your software to free you from a position before you lose too much. You can set this up in complex ways to help you even with profitable trades. If more traders relied on their own analysis to get them into the market and software as one of several signals to get them out, they would significantly improve their profits.

Reference: Forextrader

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