The Mathematics of Short Term Forex

Perhaps unlike most other markets, the foreign exchange markets rely heavily on mathematics and technicals in the short-term. Whereas the stock markets shuffle a few hundred billion dollars daily, short-term forex trading generates as much as $3 trillion a day in global volume. With so much turnover, much of which is due to short-term speculation, this is one market where the mathematical and analytical trader wins out.

Predicting Central Banks

In the long run, making money in the currency markets requires that you first understand the actions of policy makers and central banks, as well as calculate how each nation will increase or decrease the amount of currency in circulation via market activity. Of course, for most people, this is nearly impossible, since the biggest variable of this equation is central bank and legislative action. To predict what a government or central bank will do before it happens is a job best left for mind reading economists – not traders who focus on short-term forex strategy.

Short Term Forex

Much of the speculative activity in the currency markets is in the short-term, where traders buy and sell in minutes to ride the waves created by larger activity. As mentioned above, in short-term forex, most of the volume is speculative, however, there is also plenty of utility volume.

Inside the daily transactions and volume numbers are many different kinds of trades. Businesses operating internationally may swap international currencies for local currency before reporting quarterly earnings. A company may buy a company located in another country that uses a different currency, and subsequently, this transaction is counted in foreign exchange volume. The large transactions create huge waves on the currency markets, and short-term forex strategy speculators are there to ride them into profits.

Short Term Forex Indicators

Popular indicators for short-term forex trading include moving averages, oscillators, and trendlines. Moving averages are by far the most popular, since they allow traders to see the average price in any number of previous bars or trading sessions. When two moving averages are used in conjunction, the crosses between two moving averages prove to be an excellent buy or sell indicator.

Oscillators are also popular for a short-term forex trading strategy. The Relative Strength Index and Stochastics are oscillators most frequently deployed. An oscillator attempts to show a trader how strong or weak a current trend might be and indicates in advance when a reversal is soon to come.

Finally, trendlines are a great tool for highlighting price points at which larger traders, or a large number of smaller traders, are coming into the market. Large amounts of volume creates price activity, and thus, if you consistently see a pair bouncing off a certain value, it is likely that a large limit order issued by an investment bank or corporation is being fulfilled at that price.

Short-term forex is one part speculation, one part utility, and several part indicators. If you can manage all of the equations, then your short-term forex trading strategy can turn into a very lucrative endeavor for you.
Tim Ord
Ord Oracle

Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...
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