Preparing analysis and tools - Trading with Strategy part 1

Trading on the Forex market means having a very large number of currency pairs on which it is possible to operate both from the long side and from the short one. For this reason, the trader has to perform immediately a precise selection of where to focus its analysis.

The first element to consider is the liquidity and then the bid-ask spread. The liquidity of EurUsd is always very high and this allows brokers to offer their clients even an only 1 pip spread. Instead, concerning the EurZar cross, the major trades are performed mainly during the opening of European markets with bid-ask spreads far beyond those of EurUsd.

Lower liquidity certainly means higher costs in the entry and in the exit phases from the trade, due to high spread between bid-ask. Here below a spread table (source Oanda).

Currency Pairs List

A second factor to consider when choosing the object of the trade is certainly represented by the correlations that may allow a concrete risk reduction. There are some currency crosses that historically tend to move together with other crosses, and there are others that move in the opposite direction. For example, it is useless to open two long trades on EurUsd and UsdChf because the correlation is historically always very close to 1.

Vice versa, the negative correlation between EurUsd and EurPln can allow the trader to play on two completely different tables, because if EurUsd rises, then EurPln falls (see table below).

Currency Pairs Tablet

After selecting the best cross on which we want to operate, the essential thing is creating a set of automated tools that allow the trader to find the most useful and quantitative information in the shortest time.

In this regard, the trader can generate numeric tables updated in real time if he has a subscription to a prices provider connected to a graphic software (e.g. Metastock). The trader can then summarize in a simple Excel spreadsheet several technical parameters for each currency cross; for example, the simple moving average at 50 and 200 days, the RSI at 14 periods, the Adx, the value of the MACD, higher and lower Bollinger’s bands, Fibonacci retracements, etc...

Basing on these parameters, it is possible to identify the cross with technical values that deserve to be analyzed in depth. After founding the potential objects of the trade, we have to look for the technical movements that are more relevant.

The aim is clearly to enter long / short signals supported by strong technical indications with a low risk of loss. Among the techniques used to identify graphic signals, the most immediate and simplest ones are the breaking of trend lines, supports and resistances, or the primary retracements. Here are some examples.

A good indicator to see when EurUsd is close to a primary top / bottom is the percentage difference between spot and simple moving average at 200 days. When this exceeds +1 (or - 1) standard deviations from the historical average, then we will have to study graphic elements of breaking pattern. In our strategy, there are two alternatives: entering short on EurUsd when the bullish steeper trend line is broken downward, or waiting for the slower signal of the golden cross (average at 50 days below the one at 200).

EURUSD Buy and Sell options

Second example. Choosing a cross with a very strong trend and in order to do so, using a classical oscillator like RSI combined with a strength indicator as Adx. Finding a cross (in this case EurJpy) with Rsi below 30 and Adx above 30, this indicates a clear situation of oversold against a very strong bearish trend.

We know that, in order to see a trend as finished, we need divergences between Rsi and price that we cannot see here. So, we will have to find the best entrance technical (broken trend line, moving average test, etc ...) to formalize the short signal.

EURJPY Sell Options

Among the various analytical tools available to each trader, there are also those related to the financial information and especially to the identification of macroeconomic variables that can create volatility on a cross.

For this reason, it is useful to monitor the macroeconomic daily schedule (see table source Forexfactory) in order to identify in advance the market mover that can generate volatility in the currency cross that we are keeping under observation.

Economic Calendar

In the next article we are going to see how to execute a trade adopting some methods of money management with the aim of reducing the risk..

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