One of the most often asked questions by traders (particularly those who are new in the markets) is how does one know when to enter a trade?
With all the different currency pairs that can be traded, how do you know which one to trade and when?
There’s no doubt that the need to know which forex pair to trade and when to enter a trade is always at the minds of traders.
This is one of the reasons behind the popularity of forex signal services, tipping sheets and similar services that identify trade setups for traders.
But if you don’t have access to a forex signal service, there are other ways for you to identify high-probability trade setups.
In this article, we will discuss two types of trade setups you can use.
But before we do that, one important thing to keep in mind is finding the right trade setup involves trial and error.
You need to test different market types and scenarios and use different entry parameters before you can come up with a setup strategy that fits your trading style.
And even if you have found a setup strategy that works, you need to keep an open mind and know that when market conditions change that particular setup strategy may not work anymore.
As you already know markets can be fickle and unpredictable. And the best strategy is to be flexible and be willing to adjust your trade setup strategy according to what’s happening in the markets.
Whether you are still searching for the best trade setups or you have found one that suits your trading style, here are a couple of the most commonly used setups you can use for your forex trading.
Traders who rely on technical analysis prefer technical setups that give them a visual guide of price movements. One good thing about technical setups is you can use pre-set parameters and time-tested indicators that can give you signals once your set conditions are met.
If you’re more of a technical analysis trader, you know you have a wide range of charting and analysis tools you can use to identify forex trade setups.
For example, some traders prefer to use only the basic and simple indicators like moving averages, which gives them the overall trend or price move direction.
Marty Schwartz’s favourite indicator
Marty Schwartz, the legendary Wall Street trader and author of the book ‘The PitBull’, had been quoted about the 10-day exponential moving average (10-EMA) as his favourite indicator to determine the major market trend.
According to Schwartz, “I call this (10-EMA) red light, green light because it’s imperative in trading to remain on the correct side of moving average to give yourself the best probability of success.
“When you are trading above the 10-day EMA, you have the green light, the market is in positive mode and you should be thinking buy. Conversely, trading below the average is a red light. The market is in negative mode and you should be thinking sell.”
Another popular type of trade setup is the news setup, which as the name suggests, is based on big and high-impact events that can affect the markets.
For some traders, using major global events as indicators or guide to look for trade setups can be an ongoing strategy. And why not, using the economic calendar on your trading platform, you can easily identify the major events moving the markets.
For example, the regular central bank decisions – from the US Federal Reserve, the Bank of England (BoE), Reserve Bank of Australia (RBA), European Central Bank (ECB) – are one of the major events being watched by all traders.
This is because central bank decisions can have some immediate impact on currency movements. If for example, the US Fed decides to increase interest rates it may boost the US dollar against other currencies. And the impact can be felt on the market immediately.
However, while news setups can be an ongoing source of trade opportunities, one thing to consider is high-impact and big news events can sometimes cause wild fluctuations on both sides of the price movement.
So, if you use news setups to identify trade opportunities, it is wise to have your exit strategy in place and be on the ready to take profit or to cut your losses. As you very well know, markets are driven by people and people are driven by emotions that can manifest in over-reaction to news and high-impact events.
In conclusion, while there are no perfect trade setups that will work in every market type, it is best that you develop and use the setup that will suit your trading style.
The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.
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