Top 3 Forex Trading Strategies
The most aggressive of them was Soros who performed this transaction every 5 minutes, profiting each time as the GBP fell by the minute. And then you buy back the sterling when the loan expires. In order to sustain the fixed rate, the Bank of England was buying 2 billion GBP an hour, which was an unprecedented amount. The policies of the ERM demanded that the countries with the strongest currencies have to sell their currencies and buy the weakest to help maintain the equilibrium.
In this case, the Bank of Germany had to sell Deutsche marks and buy pounds. In the late afternoon of September 16, as the traders understood that the Bank of England had insufficient amounts of foreign currencies to buy in all the pounds that were sold, they pushed even more which resulted in a collapse. Have a look at how the British Pound is doing against the US dollar today. Maybe you can spot a nice trend and make a profitable trade!
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The second most notorious trade of Soros came in when he saw a possibility that the Thai baht could go down. His actions were often considered a triggering factor, which resulted in the big Asian financial crisis that affected not only Thailand but also South Korea, Indonesia, Malaysia, Philippines, Hong Kong, and others. On July 2, Thailand is forced to give up the fixed rate of the baht and it starts to float freely. Thailand takes on hard austerity measures to secure the loan from the IMF. Since then, traders have been waiting for the yen to weaken.
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This started to happen at the end of when Shinzo Abe then a candidate for the Prime Minister post publicly spoke about his plans to weaken the yen in order to boost the economy. The first one to jump in was Soros who is legendary for his skills of shorting different currencies with high leverages and worldwide consequences.
This, in turn, was heavily criticized by EU countries who understood that such intervention would lower their export potential because Japanese production would cost less and less. Banks and hedge funds soon started telling their clients to go on this bet as well. The dollar increased even more when Shinzo Abe was elected as the Prime Minister on December 26, After this, even the Bank of America jumped in to make profits from this trend.
The main strategy of Soros and other traders is to spot upcoming economical vulnerability of a country and then go short on its currency right before the fall happens. The highest potential for currency fluctuations —and consequently, gains— is when a currency has a fixed rate tied to another currency, as in the case of the pound and the baht. In trading, a lot of people have a tendency to overcomplicate simple concepts.
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Sure, some of the concepts in trading are not the sort of things you would intuitively know. But many things actually are fairly easy; you just have to know what to look for. Imagine a forex trading strategy where all you need to look at is the price itself, and you need it to fulfill 3 simple criteria. Meet the pattern, sometimes also known as the A-B-C pattern.
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Sounds easy? The red circles on the chart represent point 1, 2, and 3, respectively. The first thing you may have noticed here is that we used a line chart to represent the price instead of the candlestick charts we typically use in trading. Most charting software packages have the option of choosing between many different chart types, so you can easily switch between these two representations.
A line chart simply makes it easier to spot the pattern because we remove so much of the clutter on our chart.
The idea of the strategy is that you enter you buy order after point 3, just as the price passes through the price level from point 2, as indicated by the red horizontal line. The stop-loss will usually be placed just below point 3, and the target price can be determined in a few different ways depending on your own preference. Some use Fibonacci extensions, while others look for the next natural resistance level.
The optimal choice here is beyond the scope of this post, but I encourage you to try to find a target price rule you feel comfortable with. The logic behind why the pattern works is really one of the most basic concepts in technical analysis and the art of reading charts. If you remember how an uptrend is defined, you are already on the right track.
An uptrend is defined as a series of higher highs and higher lows in a wave-like pattern. A pattern is, hold on! So there you have it, the pattern. Different traders will have different opinions on where exactly the best place to enter, place a stop, or place a target is, so I encourage you to go over your charts and do some visual backtesting for yourself on what works best for you.
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