3 Trading Entry Strategies: How to Enter a Forex Trade
Deciding when to enter a forex trade can be complex for traders because of the abundance of variable inputs that move the forex market. This article will cover how to enter a forex trade and outline the following entry strategies:
- Trend channels
- Candlestick patterns
When is the best time to enter a forex trade?
The best time to enter a forex trade depends on the strategy and style of trading. There are several different approaches and the three discussed below are popular approaches and are not meant to be all of the methods available. Join the DailyFX analysts on webinars to see how each of them approaches the market.
Discover the benefits of using entry orders in forex trading
Forex Entry Strategy #1
Trendlines are fundamental tools used by technical analysts to identify support and resistance levels. In the example below, the price shows a clear higher high and higher low movement indicating a prominent uptrend. This enables to determine a trading bias of buying at support and taking profit at resistance (see chart below). Once price breaks these key levels of support and resistance, traders should then be aware of a potential breakout or reversal in trend.
Forex entry strategy based on trend channels, weekly USD/ZAR chart:
Forex Entry Strategy #2
Candlestick patterns are powerful tools used by traders to look for entry points and signals for forex. Patterns such as the engulfing and the shooting star are frequently used by experienced traders. In the example below, the hammer candlestick pattern can be seen as a reversal trigger entry point on EUR/USD.
Identifying the hammer or any other candlestick pattern does not confirm an entry point into the trade. Entry points 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 success.
As you can see on the chart, the hammer formation is circled in blue. It is known that the hammer signals potential reversals however, without some form of confirmation 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.
Forex Entry Strategy #3
Using breakouts as entry signals is one of the most utilised 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. The example below shows a key level of support (red), after which 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.
Forex entry strategy based on breakouts, daily USD/JPY chart:
Popular Forex Entry Indicators
The most popular forex entry indicators tie in with the trading strategy adopted. Indicators are regularly used as support for the aforementioned entry strategies.
The table below illustrates some of the best forex entry indicators as well as how they are used:
Identifies overbought and oversold signals. Most effective within range bound and trending markets.
Moving Average (MA) crossover
Using multiple MA’s, traders look for crossovers between short and long periods to generate entry signals.
Works best in range or trending markets. Taking MACD crossover points in direction of the existing trend.
Forex Entry Strategies: A Summary
- Gain a solid preparatory understanding of technical indicators in the forex environment
- Explore the differences between technical and fundamental analysis
- Get acquainted with the top 10 candlestick patterns to trade the markets
- Need a recap of the basics? Download our New to Forex guide.
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.