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Part of becoming a good investor in forex is learning to understand that the markets evolve and changes with time. As it does, your trading strategies should also evolve and adjust. You will need to make a little tweak here and a little tweak there sometimes in your trading strategies. There will be periods of low returns or losses. But once you have made the changes and adjusted your trading strategies, you will start making profits again.
Don’t get stuck with only one currency pair and one trading strategy. Start looking at macroeconomic events and how different currency pairs react to them. Now, lets discuss a trading strategy that depends on following oil prices in the markets. There are many sources of oil. Some currency pairs react more strongly than other when oil prices change. Fortunately for you, oil prices trend for extended periods. Wall Street hawks watch oil prices closely. Rising oil prices tend to have a major impact on the US as well as the global economy. Right now oil prices have stablized around $60-80 due to the global recesssion and the reduced demand of oil in the global economy. It is being predicted that oil prices are going to skyrocket to the level of $200 in the next 2-3 years when the global economy comes out of the recession and the consumer demand picks up. So watch out. This forex trading strategy may help you when the oil prices start rising!
When oil prices rise, they continue to rise for several months. Almost in the same fashion, when oil prices start declining, they tend to continue declining for several months. In 2008, we saw oil prices on the rise for several months before a sudden collapse. Oil prices than stabilized around $55 for many months. Some of the currencies that react strongly to oil price changes are British Pound (GBP) and the Canadian Dollar (CAD). Lets focus on USD/CAD currency pair in our example. United States is the major importer of Canadian oil.
The value of CAD increases with increase in oil prices in relationship to US Dollar (USD). Increase in oil prices means that the pair USD/CAD should start trending downward. This is a good example of a trend trading strategy. If you watch CNBC daily, then you should watch for times when the oil prices are rising and the exchange rate USD/CAD is decreasing.
Similarly, on CNBC watch for times when oil prices are declining and the exchange rate USD/CAD is increasing. Use CCI (Commodity Channel Index) to trigger your trade. Watch for the 14 period CCI to cross above 100 and then cross back below 100. This tells you that the buyers have made a temporary upward push on the currency pair USD/CAD but was not able to turn the trend around. Enter the trade. Set a limit order of 300 pips and a stop loss order of 75 pips. Go short on USD and long on CAD. This setup gives you a risk to reward ratio of 1:4. This risk to reward is very good and it allows you to be wrong a few times but without ruining your chances of being profitable. 300 pips mean $3000 profit and 75 pips means $750 loss if the trade goes against what you anticipated. Usually such a trade will continue for a month. Prolonged downtrends in the oil prices are usually unlikely.
You can also trade the USD/CAD currency pair in the opposite direction if the oil prices start to decline if it does happen. You can take advantage of the oil price movement. This trading strategy depends on just knowing which way the oil prices are moving right now. Oil prices have again started to climb. Prices have reached around $68. Take advantage of the rising oil prices by trading USD/CAD currency pair as described above.
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