If you want to understand forex markets and trade them for bigger profits, then you need to understand the concept of fair value. Most traders don’t – but if you do, you can turn this to your advantage and make huge long term profits.
So what moves forex markets? Here is a simple equation:
Forex Fundamentals + Investor Perception of them = Price.
It’s a fact that the fundamentals are unimportant by themselves – it’s how investors perceive them, that is vital to understanding price. We all have the same facts to look at but we all draw our own conclusions about them, colored by the emotions of greed and fear.
Over the longer term prices tend to respond to the long term fundamentals – but in the short term traders always push prices to far up or down with there emotions and we see prices spike away from fair value.
You can see them easily on a forex chart and these forex price spikes never last and prices eventually come back to more realistic levels. This is simply the way any free market works not just forex markets but how do you take advantage of fair value and how do you judge it?
One of the simplest ways to judge fair value is to use a longer term moving average.
In big bull trends the 40 ma will normally act as great support for the longer term trend and dips back to the 18 day ma, are normally a good area to load in positions in the direction of the prevailing trend.
Look at any trend and you will see how effective these averages are to buy or sell into, after a surge up or down.
When prices dip to these averages you don’t just buy into them, you wait for momentum to turn up in the direction you wish to trade. Here you should use some momentum indicators to time your trading signal.
There are a lot of them and we have written frequently about them – but the stochastic and the RSI, are good ones to use so check them out.
The trend is your friend, as the old saying goes and a trend in motion is more likely to continue than reverse.
This is why this strategy works. Check a forex chart and you will see how often buying back to key moving averages supported by momentum works. Forex trends last for months or years and by buying back to these areas of fair value, you can make a lot of money.
A forex trading strategy that buys back to fair value can make you a lot of money.
This is a simple forex trading strategy and it’s highly effective, when a market is trending and you want to get in on the direction of the major trend at the best price in terms of risk to reward.
In part 2 of this article series, we will look at how to take advantage of price spikes to initiate counter trend trades which, can offer spectacular profits with low risk.