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Tuesday, October 9, 2012

Forex investment strategy

Today I want to write a short post on how to invest in Forex. Foreign exchange market has been mostly place for short term speculation. However, if you learn how to pick up Forex pairs and buy them on the bottom and sell them at the top (and reverse there by going short) you will not have to concentrate on jumping in and out of the market on a daily basis, but sit through bigger market moves and enjoy bigger profits with smaller efforts. I do day trading, but I have said it a number of times that I am more of a swing trader, pattern trader and a trend trader. I do not like micro analysis as much as I like macro technical analysis. I do both daily, but I prefer seeing the big picture to seeing micro picture. 

If you want to make extra money and are ready to trade Forex, futures, indexes and stocks I recommend Etoro. 

It is advantageous from both psychological perspective (does put so much stress and trying to figure entry and exit points on a daily basis) and from time perspective (you can take a few hours during a weekend and form the big picture as opposed to sitting hours trying to find good  day trades). The good news is that you do not have to know much about fundamentals of the game. Surely, you will need a bit, but you will not have to do interpretation of the fundamentals but simply follow the market and let the market interpret any fundamental data for you. You just have to be aware of those key fundamental points that make Forex market tick. Well, I should say that you will mostly have to be aware of one thing: interest rate policy. Central bank policies drive currency markets from fundamental point of view and other fundamental data has to be interpreted from the perspective of how it influences interest rate decisions in the future. 

Quite often major reversals happen around these kinds of decisions. Of course, not always! We do have continuations of trends if meeting of central banks’ policy makers do not change their statements. If a situation is not clear (let’s say with both EU and Great Britain central banks) a particular pair will stay in a well defined range till advantage (or disadvantage) from one side starts appearing. The pair then goes out of its’ range and one has possibility to keep his position for a longer period of time. 

From a technical point of view you have to see some accumulation (demand) or distribution (supply) and some reversal patterns before you actually take a position in an upcoming swing (or trend). I talked on these two aspects in my two previous posts: Best forex trading system and trading supply and demand. You want to see institutional buyers coming in before you start buying and institutional sellers to come in before you start selling. Combination of the two serves as the best means of longer term profitable Forex investment.
We can look at eur/aud pair to see how this works. From the 7th of June it was in a downtrend. Any rise in price was met with hard selling and prices continued falling. Then somewhere around 22nd of July serious buyers started coming in. However, selling momentum was very strong and early bulls were overcome by inert bears. Prices continued falling till the 2nd of August when the bottom was hit. That’s where bulls became really aggressive. On the 7th of August central bank of Australia issued their interest rate decision. There was a sell off initially, but bulls again stepped in and price reversed its’ course. 

Before I jump into any trade I want to see either accumulation or distribution already taking place. Accumulation before I start buying and distribution before I start selling. And do believe trading and even investing should be done this way. If you think that you can buy or sell any security just because you feel bullish or bearish and are ready to wait any time for the security to confirm your expectations you can destroy your account very fast. If you trade using leverage that is definitely going to happen sooner rather than later. You can trade this way only if you are 100 percent right all of the time. But nobody is right one hundred percent all the time. 

Therefore, I consider it is best to wait and see when big buyers start coming in after price has been falling for some time and only then start trading from the long side. The same is true about going short. I know that Warren Buffet, Jim Rogers and George Soros can trade and invest differently, but do not forget that Warren Buffet buys good companies (not just some shares) and he can sleep well even if the price of the shares falls dramatically, because he gets nice cash flows those companies generate. You cannot afford that, because you do not own those companies. 

I know that Jim Rogers and George Soros do take losses from time to time too. Why should you freeze your capital by buying when no buyers are in sight? Start buying when momentum kicks in. If we talk about stocks you should also wait for earnings report and if you trade currencies you will find good opportunities to enter trades around central bank decision releases. 

This is what happened with eur/aud pair. The pair reversed at support after seeing a lot of buyers coming in and after the bank announced its’ rate decision. 

If you want to make extra money and are ready to trade Forex, futures, indexes and stocks I recommend Etoro. 

When you see price start jumping after a prolonged move upwards or downwards do not be surprised. Bull and bear powers even up. When you see this get ready. Mark support and resistance levels which should be places where strong momentum starts kicking in. When the area is hit enter your trade. Then, if you are right and the market goes in the direction open more trades. When you start seeing momentum drop start gradually closing your trades. Then wait for a reversal and do the same.   

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Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.