Many traders in the foreign exchange (forex) market start out making trades based on intraday charts that measure currency price changes in five- or 15-minute increments or daily charts that show price changes for a single trading day. Novice traders who try to implement these kinds of systems often don't fare well. That's because, in general, these shorter-term systems require more experience and trading skill, but also because when they're trading using a short-term chart, traders may inadvertently be betting against a larger, more significant overall trend—the kind of trend that weekly charts are more likely to reveal. And trading against the trend, needless to say, is a recipe for disaster.
A weekly trading system is likely to produce better results. Forex trading is ultimately about trading with the trend or momentum, and using specific technical indicators on a weekly chart can help you stay on top of the direction of momentum and not get caught up in trading on minor shifts within the bigger trend.
If you take a look at any given forex chart, you'll notice a currency pair rarely oscillates up and down statically. There's almost always some larger overall rising or falling trend. This larger trend is the forex equivalent of Newton's First Law of Motion: objects that are in motion tend to stay in motion unless acted upon by some external force.
A currency that's rising in value will probably have many small ups and downs along the way but will do so within a larger, more consistently rising trend that continues until some market event or external political or economic event brings the trend to a halt. A winning trade involves a certain momentum that doesn't guarantee but suggests that the next move will be in the same direction.
Less Time Commitment
In addition to enabling traders to better see the larger trend picture, weekly charts have the added advantage of being less labor-intensive than daily or intraday charts. Traders who develop a weekly trading system can spend more time away from their monitors.
Four technical indicators can be especially helpful in identifying trends and trading opportunities in a weekly forex chart.
- Moving Averages (MAs): This is the simplest and most popular type of all the trend indicators. Moving average charts plot the average price for a currency pair over a time frame you select. The MA can be simple, meaning just the prices added up and divided by the number of prices. Or it can be a weighted or exponential MA that gives more recent prices greater importance than earlier prices. Traders may choose to show MAs for two different time periods and buy when the MA with the shorter time frame moves above the MA with the longer time frame and sell when the MA with the shorter time frame moves below the other MA.
- Stochastics: This indicator differs from a moving averages chart in that it looks specifically at the velocity of price changes in a currency pair. If the speed of price increases is rising, the currency appears to have an underlying strength that will likely continue, at least until something happens that stops it. If the speed of price increases is losing momentum, it may be time to sell. The same strategies apply to the velocity of a currency pair whose price is declining.
- Relative Strength Index: This indicator suggests when a currency pair may be overbought and so due to be sold or oversold and so due to be bought. It plots relative strength on a scale of 0 to 100. A reading between 0 and 30 is considered to be oversold territory, while a reading of 70 to 100 is considered to be overbought territory. Crossing the center line (at 50) from above is seen as a sell signal; crossing it from below is seen as a buy signal.
- Bollinger Bands: This indicator, whose name is a registered trademark of its inventor, John Bollinger, is related to Moving Averages but uses a more complicated calculation process that incorporates standard deviations above and below a moving average price. Bollinger Bands consist of three lines. A price move above the upper band can be a signal to sell; a price move below the lower band can be a signal to buy.
Trading With Multiple-Indicator Charts
It's not terribly common for all momentum indicators to point in the same direction on a given weekly chart; sometimes you'll need to wait to make a trade until they're more favorable in aggregate.
The main thing to remember is to trade small and be patient. If you normally trade a mini lot (10,00 units of a currency), use a micro lot (1,000 units) instead, because the price differences for trades on a weekly scale can be significantly greater than when trading over shorter time periods.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.