Trading Strategies –The 3-Elements Concept

Applying a strategy is ‘everything’ when you trade the global financial markets. The implementation of the right trading strategy is what really distinguishes winners from losers in the long-run.

“Trading Luck suddenly ends and there starts a Trading Strategy”

Applying a strategy when you are trading means building a system of knowing always what you must do next. If you want to evolve into a profitable trader these are the three elements you must incorporate into every trading decision, these 3 elements together form a complete trading strategy.

 

The 3 Elements of a Trading Strategy

A Trading Strategy has 3 main elements:

1st Element: Asset Allocation / Trend Identification

The first element involves the process of selecting the right asset to trade by knowing also if you should go Long (buy) or Short (sell) the market. The trend evaluation procedure must be always in accordance with the timeframe you trade. If you are a day trader there is no point of trying to evaluate a long-term trend.

Alternatively, you can use this definition for determining the trend in any timeframe:

Rising Trend: A Trend is rising when a local High is higher than the previous High and at the same time the recent Low is Higher than the previous Low.

□ Falling Trend: A Trend is falling when a Local Low is lower than the previous Low and at the same time the recent High was lower than the previous High.

2nd Element: Trading Signals and Timing

After the asset allocation/trend evaluation process, the 2nd element involves the selection of time that you should trade. That means the time to buy or to sell the previously allocated financial asset. At this point, you must use an additional indicator capable of confirming the trend and capable of providing trading signals. A trading signal indicates the entry and exit levels of a potential trade.

You can use commercial trading signals for a monthly subscription fee: Compare EA Trading Systems | ► EA Builder Systems

Trading Forex using Fundamental Analysis

Trading Forex and Fundamental Analysis

The fundamental analysis aims to predict the future market conditions based on the study of current economic indicators and other fundamental data.

The Important Role of Central Banks

Central Banks play a key role in the Foreign Exchange Market, more specifically:

  • They are applying the monetary policy by modifying interest rates

  • They help governments to implement their fiscal policy objectives

  • They are responsible for controlling the domestic banking sector

Central banks have the ability to adjust the level of interest rates at any given time. Therefore, they can control the demand for the domestic currency and the exchange rate of the domestic currency against foreign currencies.

“Trading against the Central Bank policies is madness unless your name is George Soros.” 

8 Major Categories of Fundamental Data

These are the eight (8) categories of fundamental data that are highly affecting the Forex markets.

Introduction to High-Frequency Trading (HFT)

High Frequency Trading (or HFT) in general is part of the electronic trading. This type of trading uses complex algorithms to analyze and to evaluate multiple markets simultaneously. Based on the market conditions High Frequency Trading systems are executing tens of orders in a matter of seconds.

 Based on the market conditions High Frequency Trading systems are executing tens of orders in a matter of seconds.

The High-Frequency Trading Domination in the US

High-Frequency trading systems open and close positions in a fraction of a second and form the million-second markets. These Fast-Markets are extremely liquid and can highly influence all real Equity Markets. It is estimated that 50% of the total US stock-trading volume is driven by computer-based high-frequency trading systems. Others believe that today the activity of HFT exceeds 65% of the total US stocks activity. High-Frequency Trading has become very popular nowadays. There are hundreds of new start-up companies worldwide focusing exclusively on exploiting opportunities deriving from this lucrative market. Only in the US, the High-Frequency Trading industry is estimated to worth about 300 billion USD. In overall, there are more than 20,000 firms in the US that are specialized in high-past computerized programs for trading stocks. The most important players in the HFT industry according to the Deutsche Bank are:

i) Multi-Service Firms: Citigroup and Goldman Sachs

ii) Hedge-Funds: Citadel and Renaissance Technologies

iii) Trading Firms: Getco, Optiver, and Tradebot

Why HFT makes Investors and Regulators Skeptical?

On May, 6th 2010 the Dow Jones Industrial plunged 600 points in just five minutes. This is the so-called "Flash Crash" of 2010. The DJIA after the 400-point drop was able to recover within 20 minutes and closed the day about 3.0% down. High-Frequency Trading held responsible for this abnormal DJIA behavior and since then HFT made everyone skeptical about the future.

Carry Trading StrategyCurrency Carry Trade Strategy

In general, carry trade means borrowing money at a low interest rate and investing in assets with higher returns.

 

Currency Carry Trade

Currency Carry Trade is a strategy that involves selling a currency offering a relatively low-interest rate and at the same time buying a currency offering a relative high-interest rate. The goal of Forex carry traders is to capture the interest rate differential between two currencies which can be substantial, depending on the rate of capital leverage they use.

Usually, currency investors are borrowing money in Japanese yen or Swiss francs which are two currencies offering traditionally very low-interest rates, close to zero. They use this money they borrowed for opening long positions in currencies backed by high-interest rates, such as the Canadian Dollar, the New Zealand Dollar and the Australian Dollar.

 

About Interest Rates

Interest rates affect the Foreign Exchange market in an extreme degree. Any interest rate change applied by one of the eight major global central banks can turn the Forex market upside down. Surprise rate changes have an even bigger impact on the market.

Interest rate change according to new economic conditions and every interest rate policy aims to stabilize the economy. The interest rate policies have two main missions, to enforce growth or to reduce inflation:

(i) Interest Rates Decrease aims to Increase Growth and to Lower Unemployment

(ii) Interest Rates Increase aims to Lower Inflation

As you can see in the following table, major central banks apply different interest rate policies. This is because monetary authorities have different goals and every economy in the world has its own unique characteristics. Japan and Switzerland are offering traditionally low-interest rates.

World's Major Central Banks and their Interest Rate Policies

Reserve Bank of Australia

2.00%

US Federal Reserve

0.50%

Swiss National Bank

-0.75%

European Central Bank

0.05%

Bank of Japan

-0.10%

Reserve Bank of New Zealand

2.50%

Bank of Canada

0.50%

Bank of England

0.50%

Interest Rate Trends

Interest rates move in trends and that is because the economy moves in cycles and it also trends upwards and then backward.

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Trade Systems

A trading system is a set of specific processes and rules that can help traders to optimize their trading process, or to develop automated trading strategies (EAs):

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