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Analysis and Trading Based on Envelopes, Waves, Cycles - Forex Trading Strategies

Dave

New member
Forex trading strategies are typically based either on news events or technical analysis or the trader’s fundamental knowledge. If you are a beginner in this field, you may be confused about which forex trading strategies are the best ones to use. Here is a closer look at analysis and trading based on waves, envelopes and cycles that can shape your forex trading strategy:

Forex trading strategies based on envelopes

Envelopes are a type of technical indicators plotted typically on a price chart with lower and upper bounds. They are the trend lines plotted below and above the current price and help shape forex trading strategies.

A trader will consider security overbought when the price touches the upper bound, generating a sell signal. On the other hand, when the lower bound is reached, the security is deemed to be oversold with a buy signal being generated.

The moving average envelope is the most commonly used trading tools. Moving averages help identify trend changes. It includes a moving average as well as two other lines. One of the lines is above the average, and the other one is below the average. These lines are the upper (the line that is above) and lower (the line below) envelopes.

Moving average envelopes are utilised to confirm the trend and identify oversold and overbought conditions.

Calculating moving average envelope

Typically, the SMA or simple moving average of the price is taken first. You can create the upper envelope by shifting this SMA a little distance over the price. Shift the SMA below the price at the same distance to form the lower envelope. Next, choose the time period to apply and then set the envelopes’ percentage value.

If the time period taken is 20 days and a percentage value of 2%, for instance, you can calculate the upper envelope by using this formula:

20-day SMA + (20-day SMA x 0.02)

For lower envelope: 20-day SMA – (20-day SMA x 0.02)

When the envelopes move higher, it indicates an uptrend of prices, while a downtrend is indicated when the envelopes move lower. Sideways movement indicates a neutral trend and directionless price.

Forex trading strategies based on waves

Whether you visit a leading EUR USD forum or forex signals forum, you are likely to come across the Elliott Wave Theory. The best forex tips also include this technical analysis theory that helps strengthen forex trading strategies.

The Elliott Wave Theory describes the movement of price in financial markets.

Instead of calculations, the Elliott Wave evaluates historical trends related to the financial markets to see how history repeats itself. This is attributed to the mass psychology of investors who typically share the same anxieties and hopes while reacting similarly to news events.

The theory consists of two types of waves called impulse wave and corrective waves. An impulse wave indicates a large price move and its associated trends. Corrective waves refer to the smaller waves occurring within a trend. One of the smart forex trading strategies is to trade in the impulse waves direction as the price makes the largest moves along that direction. Impulse waves offer better chances of securing a large profit as compared to corrective waves.

Forex trading strategies based on cycles

The best forex strategy forum will offer resources on using ‘cycles’ as part of your forex trading strategies.

The market cycle indicates the pattern of human behaviour in the financial markets. By charting these trends and predicting future behaviour, traders can make profits. There are four phases in the markets:
  • In the first stage, the currency pairs fluctuate between daily lows and highs that are predictable. This is the range bound stage where there is a lack of trend. In this scenario, it is advisable to make several short term trades.
  • The second stage is called the breakout stage, where the inertia of the market breaks. The range-bound movements get converted to clear downward or upward trends. The breakout can either be in the form of ‘straight up’ with a one-sided movement or high peaks and valleys.
  • The third stage is the decline stage, where prices peak out and return to former levels.
  • The last stage is the uncertainty phase, with the completion of bull and bear cycles. Although you can use technical analysis tools at this stage, it is best to stay away from trading given the volatility.
Fine-tuning forex trading strategies takes time, patience and practice. Joining a forex strategy forum is the best way to understand the various analytical tools and get insightful daily forex tips.
 
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