When is the best time to enter a forex trade?
This is a fundamental question for traders. The trouble is that there is no a single answer as this depends on the strategy and style of trading, which is personal. Nevertheless, we can summarize three approaches which are among the most popular.
- Trend channels are among the most used techniques used by technical analysts to identify support and resistance levels. According to this approach, the right moment to enter the market is when a currency pair shows a clear higher high and higher low movement indicating a prominent uptrend. This enables a trader to determine a trading bias of ‘buying at support’ and ‘taking profit at resistance’. Once the price breaks these key levels of support and resistance, traders should then be aware of a potential breakout or reversal in trend.
- Candlestick patterns is another technique which enable traders to identify entry points. Patterns such as the engulfing and the shooting star are frequently used by the most experienced traders. Nevertheless, the identification of a hammer or any other pattern does not always justify an entry, as they are just as important as identifying the candlestick pattern. Entry points further validate the candlestick pattern therefore, risking less and giving traders a higher probability of beign successful. Usually, hammer signals potential reversals without some form of confirmation of the pattern may indicate a false signal. In this case, the entry has been identified after a confirmation close higher than the close of the hammer candle. This gives a stronger upward bias to the trader and endorsement of the hammer candlestick pattern. Traders often look for multiple signs of trade validation such as indicators in conjunction with candlestick patterns, price action and news but for the purpose of this article we have isolated different strategies into their component parts for simplicity.
- Breakouts are very utilised as trade entry tools by traders. Breakout trading involves identifying key levels and using these as markers to enter trades. Price action expertise is key to successfully using breakout strategies. The basis of breakout trading comprises forex prices moving beyond a demarcated level of support or resistance. Due to the simplicity of this strategy, breakout entry points are suitable for novice traders. A good moment to entry the market is when, given a key level of support, a breakout occurs along with increased volume which further supports the move to the downside. Entry is prompted by a simple break of support. In other cases, traders look for a confirmation candle close outside of the delineated key level.
The most popular forex entry indicators tie in with the trading strategy adopted. The two most used entry indicators are RSI, which identifies overbought and oversold signals, most effective within range bound and trending markets, and Moving Average (MA) crossovers between short and long periods. MACD indicator works best in range or trending markets.