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Trading Forex usually requires knowing technical analysis for currency pair price. A lot of technical signs exist which you can use for technical analysis. In the forex trading strategy given you here we apply 2 major indicators and one more indicator which is used as confirmation for the price trend.
The two signs that are used in the strategy are pivot point analysis and stochastic sign. The confirmation sign is the relative strength index (RSI). Let us see 1st an overview of these signs and find out then how are they applied together in the trading strategy to make final decision on whether to buy or sell.
The pivot point analysis requires determining support and resistance level. The support level is understood to be a level the currency pair can’t go below it for a large period of time. Similarly, the resistance level is synonymous with a level the currency pair can not go above it for a large time frame. The pivot point analysis identifies numerous levels at different strengths. The higher support or resistance levels the strongest level which means it’s more likely that the currency price reverse direction at this level. This is actually the first sign in our forex trading strategy.
The stochastic is an sign that determines the degree of increase or decrease for a given period. The higher the value, the more the currency price raises over the period. The lower the value, the less the price is going. If the price is always rising over the given period, the stochastic will be high for a large period and this is called overbought. To reverse is true and can lead to oversold condition. If this sign is more than 80 % for large period, we say this is overbought condition. Also when it is lower than 20% it is oversold condition. This is actually the second indicator that will be applied in our forex trading strategy.
The RSI is like the stochastic but uses various calculations. It can be used to find out the overbought and oversold conditions. It’s also used to figure out the price trend. When it is more than 50 % the price is going high and the reverse is true. This can be a confirmation sign in our forex trading strategy.
The forex trading strategy given uses the pivot point analysis and the stochastic as the major signs. The trader must first check the stochastic indicator. When it is high for reasonable length of time (especially more than 80%) then it is overbought condition. Likewise, if the stochastic is low for reasonable length of time(less than 20 %), then it is oversold condition. The trader must expect to have a reverse in the price when those two circumstances are seen.
Once overbought or oversold circumstances are seen on the price curve, the trader can see the pivot level from which the price reaches. The more the level the price reaches, a lot more likely that the price will reverse. For example, if the price is overbought and we see that the price reaches the R3 level or a higher resistance level, then a very strong probability that the price at certain point will reverse. The price also at this condition will alter really strong that will make numerous pips.
The entry point of the trade at this forex strategy can be driven by the RSI. Once the price is oversold or overbought and reached the highest pivot level (or break out that level) the RSI can be monitored to determine when to enter a trade. If it is higher than 50 %, the price is going high. If it less than 50 %, the price is going low.
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