Crafting the Necessary Edge
In the Foreign Exchange Market, there is a good reason that almost 90% of all investors fail to profit in the long-term. It all has to do with the edge you’re bringing to the table. In professional sports, an athlete will tell you that having an edge is important – more than an attitude but a beneficial factor that helps you stand out above your opponent, like a big lineman vs. a small linebacker.
The same holds true in Forex. If you can pair up a strong currency vs. a weak currency, or even a weak currency vs. a strong currency, you can find the edge necessary to profit. Of course, pairing currencies of equal value all but eliminates your edge, and this is the reason why a lot of investors fail. Playing any currency valued lower than its mate causes some to panic. It’s a risk they are not comfortable taking.
If you are looking to profit with Forex, then crafting an edge is something you should be doing every time you attempt to trade. An edge means you have a leg up on the competition, and any advantage at all can mean profit.
Explaining the Edge
Matching up a strong currency with a weak currency will help you gain a bit more confidence in knowing the likely direction of any move. If you can match that projected direction with the direction of a trend on a daily chart, you have a clear trading edge that you will help you profit in the market.
As an example: Take a look at one of the latest downtrends in the market, the USD/CHF pair. Using the strong vs. weak formula, we see that the USD is weak while the CHF is strong. To sell that pair in the same direction of the daily chart gives you a high probability trade.
In order to tell which currencies are weak and which are strong, you will need to pay attention to the charts. Use a 4-hour chart with a 200 SMA on it. You will be able to easily find the stronger currencies here. For instance, the EUR/USD pair – if the trading is above 200 SMA, this means the EUR is stronger. Make a note of that with all currency pairs—at least a dozen—and now you have a baseline for trading.
Next, match your strongest with the weakest and trade on the trend while you can. You can work both ways here. You can trade strong on the uptrend or weak on the downtrend. It’s up to you how to trade the pairs.
The important thing here is that you always bring that edge to the table. Take your time to find out the trends and to spot the strong and weak players. Never fall in love with one type of currency or any one pairing. Mix it up and allow the market to dictate your moves.