Back in my late 20s, I had a good friend named Smutri. I met her at the stock brokerage firm where we both worked.
Soon after we met, Smutri got engaged and started planning her wedding.
There was just one problem with that. She and her fiancé didn’t have enough money to plan the kind of wedding they wanted. In fact, they barely scraped together $2,000.
So Smutri had this idea…
She came to me one day and asked if I would take that $2,000 and trade it for her. She was convinced I could grow her wedding fund for her.
Now, if Smutri came to me today and asked that, I would tell her she was crazy to risk her entire wedding fund in any market. But at the time, I was still young (and a bit reckless), so I agreed.
I put her entire $2,000 into this extremely volatile mutual fund that used leverage to increase returns. Then I watched it like a hawk using this special indicator (more on that in a moment).
In a few months, her paltry $2,000 grew to $10,000.
Smutri was ecstatic. Needless to say, I was the guest of honor when I attended her extremely nice $10,000 wedding a few months later.
In reality, all I did was figure out which way this mutual fund was heading. Today, I’m going to show you how to do the same, in my #1 favorite market – the foreign currency market.
The $4 trillion “forex”…or foreign exchange…market is potentially one of the most profitable markets for individual investors. You have the opportunity to make triple-digits on single trades.
Unfortunately, most new traders tend to stumble because they don’t know the basics.
For instance, they have no idea how to tell which way a currency is heading. Half the time, they wind up playing against the trend. No wonder they’re so frustrated!
Fortunately, there are two simple ways to help cure this ailment. Each strategy revolves around price action.
Tip #1: Don’t Trade Against the Trend!
Trends last much longer in currencies than in stocks. So as a trader, you absolutely MUST know which way currencies are heading overall.
One of the best ways to determine the overall trend is to drop a 50-period simple moving average on a currency pair’s daily chart. Check out an example of this below.
If the trend line (in black on this chart) is pointing down, you know you have a better shot at selling short this currency. If the trend line is pointing up, you will have better odds if you buy the pair.
Do this, and always, always trend in the same direction as the trend line. Just by doing that, you will gain a significant edge over other new traders.
Tip #2: Let the Price Prove to You Which Way It’s Going
There’s another way to determine which way currencies are headed. You simply draw support and resistance lines on the chart.
The best way to do this is pick a chart that goes back a long ways. The more days of data that you can see, the more likely you are to draw these lines right.
When you connect the major low points on the chart, you’re drawing the support line. When you connect the major highs on the chart, you’re drawing the resistance line. Check out an example below.
As in the example above, once you see which way the price breaks out, then you have your trading direction. (In this case, it’s very clear: go short, since the breakout was to the downside through the support line).
By using these two trading tools… the 50-period moving averages and support and resistance lines, you can trade WITH the trend instead of against it.
That alone will put you far ahead of the investing crowd. You’d be surprised how many folks ignore these fundamentals!
Editor’s Note: There are lots of different ways to harness the power of the currency markets – including a way to create an income stream that pays 22 times more than Treasury bonds. Find out all about it here.