New entries and order types for the new currency trader
Traders can enter the foreign exchange market in any number of ways, but when you’re just starting out, placing those first orders in the Forex can be nerve-wracking.
How do you know you’ve identified a currency that’s on the upswing? How can you evaluate whether a moving currency is going to continue to move in the direction you want it to?
These questions, and other like them are highly dependent on circumstances that are sometimes outside of any trader’s control, but there are some basic strategies for getting into a new currency purchase.
Let’s take a look at ways to start your Forex buying and selling, and some tips to help ensure that you’re working in an informed way when it comes to high-risk situations.
New Entries: In Search of the Strong Trend
The key step before pulling the trigger on a currency order is to have identified not only that the money-type in question is moving outside of its typical and average daily activity — see the Wall Street Survivor posting in this series on identifying movers on the FX charts — but that it is also bound in that direction for longer than just a market-sized hiccup.
To do that, think about the following approaches:
- Plot a Currency SMA: One way to estimate the probability of a strong trend is to build a chart that shows the currency’s simple moving average. Take several market-days, let’s say, and add together the closing price of the currency on each of those days. Then divide that total by the number of days involved. The result will be the first point on your new chart. Now, drop the first day from the original set and take the closing price from the day that comes after your last day in the original set. Redo the addition and division and that’s your second data point. Continue with this process until you’ve mapped out a period of time that’s useful (more on this in a moment). When you put these numbers up against the incremental measurement of a currency’s chart for that same period of time, you’ll see that the SMA is a “smoother” line. That’s because it’s absent all the little changes and represents something closer to the overall trend, minus all those pesky highs and lows.
- Strong Trends vs. Chop: Once you’ve started working with simple moving averages, John Goodman at Futures Magazine suggests you try a 90-day chart. Having created one, look at what the SMA does. If you see a strong trend upwards, a new entry into that currency is perhaps the way to go. But if you see a weak-looking upward slope to the line, or that the line goes flat, you’re likely dealing with a choppy currency that’s not ready for you to come in with a new buy. Standing aside in these cases is often a wise path to take.
Types of Orders
Once you’ve got a solid trend in front of you, it’s perhaps time to place an order in the Forex. Some major types of orders for the beginning trader are as follows.
- Market Order: Say the United States dollar and the Australian dollar have a bid/ask quote of 0.9456/0.9458. If you place a market order, the purchase price is 0.9648, exactly what it tells you in the quote. One and done. But let’s say you want to use the trend data you’ve just consulted and make a prediction about what the AUD is going to do.
- Stop-Entry Order: You’ve run a simple moving average chart that shows very little chop and a lot of promise on a 90-day run, when it comes to the AUD. So you set an order like this: when and if the ask for the USD/AUD hits 0.9700, you want your buy to kick in. That’s called a stop-entry order.
- Stop-Loss Order: On the other hand, if the AUD in the above pair were to dip below 0.9600, after you’ve bought at 0.9700, you probably want out at that point. Point is, you don’t lose a heck of a lot more than you put in. A stop-entry order can do that for you, and protect you from taking too much of a bath if your SMA turns out to have been more convincing on paper than it did in real life.
Rebounds/Reversals: Picking Up Where a Currency Left Off
New entries on a strong trend aren’t the only way into a currency. Some traders like to watch currencies that are plunging or just returning from a plunge. They work with what we’ll address in our next posting: retracements, sometimes known as rebounds or reversals.
Check out Wall Street Survivor’s whole series on the Forex, and have a look at our series partner, eToro. They include some great think-pieces on how to make entries to the market using a variety of investment strategies.