Reversals are generally used by technical based traders during times of little fundamental activity. At these times the markets tend to ‘range’ or move sideways with no clear direction. Traders look for key price levels that they can use to trade directly from in expectation of a ‘bounce’ when price hits it. These bounces provide small, quick opportunities to take a profit from low volume market activity.
Again, the tools used for reversal trading are almost identical to those used in the previous strategies and include support and resistance and fundamental analysis.
Before trading reversals, you must be sure that there is no major news expected to be released during that session, and that no key monetary policy makers are speaking or making comments to the press. These events can trigger moves that will result in losses on your short term trading.
Once the fundamental picture is clear, we then need to focus on the technical analysis and in particular the support and resistance levels that are near the current price.
Common levels used by traders with this type of strategy include, old highs and lows from previous trading sessions, Pivot point levels, Fibonacci levels and areas at which all three of these levels overlap. These overlaps are known as confluences, and these provide excellent areas at which to look for the price to bounce from during the session.
The reactions vary but very often traders will be looking for only a few pips of profit from these reactions, rather than attempting to hold the positions over several trading sessions.
Trading reversals is strictly for times when the market is not trending in a clear direction, and should not be employed blindly during all market sessions as this will dramatically increase the amount of losses you suffer.
Momentum trading is much less concerned with ‘precise’ entries and more with the force and continuation of the move. Traders are not looking for the price to pull back or break out from any specific price, but merely to start moving more or less in the direction of the prevailing trend.
This type of trading is fundamentally based but also relies heavily on indicators such as moving averages and oscillators to give trading signals.
Traders will use momentum based strategies when they perceive a long term move to be taking place on the asset that they are trading. For example, if there is a significant change in the fundamentals of a nation that will result in an interest rate change, this will cause investors to act and begin buying or selling the currency of that nation in line with those changes. Other examples include geo political events that remain in place for many months and sometimes even years.
During these significant shifts, professional traders will be looking to trade these currencies over the long term, often holding their positions over a period of weeks and months.
Because of the longer term nature of this strategy traders are not as concerned about entry points and simply wait until minor technical analysis gives them an opportunity to profit from the move. A popular indicator for this type of trading includes the 200 period moving average, and very often traders will look for price to break above or below this moving average in line with the anticipated move, at which point they will enter the market and hold their positions.
Exits are generally governed by fundamentals in a similar way to entries, with traders watching the economic and geo political events very closely before deciding which trading approach they will take and how they will manage those ongoing positions.
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