Many of the same successful trading patterns that dominate
equities trading can be transferred to the Forex markets. Moving averages,
pullbacks, historical volatility and RSI can be used in both markets to time
reversal moves and breakouts.
Let's take a look at a common pullback strategy which can be
used in the Forex markets to find the right price to buy in. When an index
or futures market (and in this case, a currency) pulls back to a significant
moving average, the moving average often acts as a level of support that the
price then bounces off of. The price is moving in a steady uptrend, moving
higher as the moving average follows behind, and the pullback is a staging area
for the next move.
We will use a 50-day simple
moving average
(SMA), to highlight
a longer term swing trade.
The GBP/JPY chart shows a solid uptrend since the beginning of May. From
April 27-May 4, the Pound gained steadily over the yen, breaking highs from a
few weeks before but getting stopped at resistance from highs in February (not
shown).
After testing these highs, the currency initiated a pullback to break support at
its 50-day simple moving average, a move which could be considered a very risky
pullback entry opportunity. Because price broke support at the 50-day SMA, this
entry is more risky because there is much less technical support at these
levels. A few days later GBP/JPY initiated another smaller pullback to the
50-day SMA, and this would have been our optimal entry point after the stock found
support at its 50-day SMA twice within a short period of time.
Here is another example of a Forex market pullback to the
50-day simple moving average. In December '05 the Euro rallied strong against the
Swiss Franc, easily rallying through the 50-day moving average resistance.
A sharp pullback brought price back through the 50-day, where the Euro started
to rally again, this time much more gradually. The Euro tested, broke and
then held the 50-day in a small, consolidating pullback. Unlike the
example from above, this pullback is a little riskier because price actually
broke the moving average during the pullback. However, the Euro was
trading above the average during the second pullback, and after two strong
moves, it would be right to wager that this price is working to stay bullish.
As we know from buying stocks and futures on pullbacks, many
times price will take a rest during an uptrend move, and fall back a couple of
points. Because the stock or currency is trading in a strong uptrend, this
pullback becomes a resting point before the price makes a continuation move in
its original trending direction, especially if the pullback occurs next to a
major
moving average.
John Patrick Lee
