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Trading Strategy
Making trading decisions
and developing a sound and effective trading strategy is an important
foundation of trading.
Before developing a
trading strategy, a trader should have a working knowledge of technical
analysis as well as knowledge of some of the more popular technical
studies. Please visit these pages for detailed information.
Sample Strategy 1 - Simple Moving
Average
Successful trading is
often described as optimizing your risk with respect to your reward,
or upside. Any trading strategy should have a disciplined
method of limiting risk while making the most out of favorable market
moves. We will illustrate one decision making model which uses
a Simple Moving
Average ("SMA") technical study, based on a 12-period
SMA, where each period is 15 minutes. This is one example of a trading
decision making strategy, and we encourage any trader to research other
strategies as thoroughly as possible.
We will use a simple
algorithm: when the price of the currency crosses above the 12-period SMA,
it will be taken as a signal to buy at the market. When the currency
price crosses below the 12-period SMA, it will be a signal to "Stop
and Reverse" ("SAR"). In other words, a long position
will be liquidated and a short position will be established, both with
market orders. Thus this system will keep the traders "always
in" the market - he will always have either a long or short position
after the first signal. In the chart below, the white line
represents the price of USDJPY, the purple line represents the 12-period
SMA of USDJPY, and the red line indicates where USDJPY crosses above the
SMA, generating a buy signal at approximately 129.90:
This is a simple example of technical
analysis applied to trading. Many strategies used by professional
traders make use of moving averages along with other indicators or
"filters". Note that the moving average method has an
element of risk control built in: a long position will be stopped out
fairly quickly in a falling market because the price will drop below the
SMA, generating a stop-and-reverse signal. The same holds true for a
sell signal in a rising market. Note that the SMA is generated
automatically by GCI's integrated charting application.
Please review the technical
studies described in this site for additional resources on
developing technical trading strategy.
Sample Strategy 2 - Support and
Resistance Levels
One use of
technical analysis, apart from technical studies, is in deriving
"support" and "resistance" levels. The concept
here is that the market will tend to trade above its support levels and
trade below its resistance levels. If a support or resistance level
is broken, the market is then expected to follow through in that
direction. These levels are determined by analyzing the chart and
assessing where the market has encountered unbroken support or
resistance in the past.
For example, in
chart below EURUSD has established a resistance level at approximately
.9015. In other words, EURUSD has risen up to .9015 repeatedly, but
has been unable to move beyond that point:
The trading strategy would then be to
sell EURUSD the next time it gets close to .9015, with a stop placed just
above .9015, say at .9025. This would have indeed been a good
trade as EURUSD proceeded to fall sharply, without breaking the .9015
resistance. Hence a substantial upside can be achieved while only
risking 10 or 15 pips (.0010 or .0015 in EURUSD).
On GCI's integrated charting system (GCI
Multi-Currency Charts), the red support line shown above
can be drawn by clicking on the "Trend" button at the top of the
chart window, and then drawing a line by clicking the mouse once at the
beginning of the line, and again at the end of the line.
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