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Foreign exchange trading demands a keen understanding of the intricate and ever-evolving market forces at play. In A Three Dimensional Approach To Forex Trading, Anna Coulling offers a comprehensive guide for navigating the complexities of currency trading.

She explores the impacts of economic policies and central bank interventions, dynamics of trade and interest rates, inflation indicators, characteristics of major economies, and technical analysis tools essential for effective trading. Additionally, Coulling emphasizes the importance of monitoring market sentiment through relational analysis of interrelated markets like bonds and commodities.

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Anna Coulling delves into the difficulties Japan encountered in its efforts to recover from the economic slump succeeding a period of growth driven by excessive borrowing, a situation that characterized the 'lost decade' of the 1990s. Anna Coulling explores the wider impacts of the economic downturn, emphasizing the transformation of the Japanese yen into the preferred currency for funding carry trade deals due to its consistently low lending rates.

Anna Coulling explains the strategy where investors obtain financing by exchanging currencies that yield lower returns, like the yen, and then allocate those funds into higher-yielding investments, a process that typically leads to a decrease in the value of the yen as it is traded to support these investments.

Anna Coulling explores the collaborative efforts of the Bank of Japan and the country's authorities to participate in the foreign exchange markets, resulting in a decrease in the yen's value that consequently boosts the competitiveness of the export industry. Grasping the complexities of Japan's economic environment, recognizing the importance of the carry trade, and being aware of the Bank of Japan's propensity to intervene are crucial elements for effectively trading in yen-based currency pairs.

The influence exerted by the European Central Bank's actions on the Euro's trajectory, as well as the diverse cultural and economic terrains among the nations in the Eurozone.

Coulling scrutinizes the inception of the Euro, highlighting its inherent structural flaws and the persistent challenges faced by the nations within the Eurozone. She criticizes the eurozone for depending exclusively on a monetary union while lacking the essential integration of political and budgetary policies necessary for lasting stability. Coulling argues that the ongoing tension between member states stems from their differing economic strengths and unique cultural views on tax and financial responsibility, illustrating this point.

Coulling analyzes the roles of the European Central Bank (ECB), emphasizing its primary political motivations and dedication to upholding the continuity of the Euro initiative, occasionally placing it above sound economic decisions. She emphasizes the difficulties faced by the central banking authority of the Eurozone in balancing interest rate policies and inflation control, alongside assisting countries in the bloc that are experiencing difficulties, all to maintain the Eurozone's stability.

Coulling posits that predicting the Euro's stability is challenging due to ongoing disruptions and fundamental weaknesses within its framework. She advises those involved in the forex market to pay close attention to announcements from the European Central Bank and assess the changing political and economic landscape of the Eurozone.

Fluctuations in commodity prices considerably impact the economies of Australia, Canada, New Zealand, and Norway, subsequently altering the worth of their respective currencies.

Coulling notes that the value of the currencies from Australia, Canada, New Zealand, and Norway is significantly influenced by changes in the prices of commodities. She explains that these countries' economies are heavily dependent on their natural resource wealth for exporting commodities.

Coulling notes that the financial health of certain countries frequently gets a boost from rising commodity prices, which typically leads to a strengthening of their national currency as a result of increased demand for their exports. A drop in the prices of commodities could negatively impact their economic health, leading to a lower value of their currency.

She emphasizes the importance of fully understanding the diverse range of commodities traded globally, identifying the distinctive goods that countries export, and perceiving the connection between these exports and the global economic cycle as essential for prosperous currency trading. Coulling highlights the necessity of analyzing commodity price volatility, recognizing the dynamics of market supply and demand, and taking into account the impact of major importers like China in evaluating the repercussions on 'commodity dollars' and identifying trading opportunities.

Traders engaging with emerging economies such as Brazil, Russia, and India encounter unique opportunities and challenges in the foreign exchange market.

Coulling recognizes the growing importance of emerging economies such as Brazil, Russia, and India, highlighting their rapid economic growth and the challenges and opportunities it creates for forex market participants. She notes that as these economies grow in importance and influence on global markets, they offer appealing investment prospects but also introduce heightened risks associated with political and economic instability.

Understanding the unique characteristics, economic drivers, and specific regulatory and policy landscapes is essential for successful navigation in emerging markets. She recommends diligently monitoring key economic indicators, keeping abreast of political developments, and being alert to swift shifts in market sentiment and associated volatility to succeed in the constantly evolving trading environments.

Other Perspectives

  • While economies do exhibit cyclical patterns, the predictability of these cycles can be overstated, and unexpected events such as technological breakthroughs or geopolitical conflicts can disrupt these cycles.
  • The impact of economic phases on currency values is complex and can be influenced by a multitude of factors beyond the cyclical nature of economies, including investor sentiment, government policies, and international capital flows.
  • The relationship between economic activity and currency valuation is not always straightforward; for instance, a strong economy could lead to a weaker currency if it results in a higher trade deficit.
  • Inflation measures like the Consumer Price Index and the Producer Price Index have their limitations and may not capture the full picture of inflationary pressures, especially in a rapidly changing economic environment.
  • Central banks may not always respond to inflation or deflation in predictable ways, as their policies can also be influenced by political pressures or the need to stabilize financial markets.
  • The concept of stagflation presents a theoretical challenge to traditional economic models, and there is debate about the best policy responses to such a scenario.
  • The analysis of major economic systems and their currencies may oversimplify the complexities and interdependencies of global economies.
  • China's currency policy is often criticized, but it can also be argued that it has contributed to global economic stability and growth, particularly in developing countries.
  • The role of the Federal Reserve and its impact on the US dollar can be viewed differently, with some arguing that its policies have been necessary for economic recovery and stability.
  • The yen's status as a stable currency and its use in carry trades can be seen as a symptom of broader issues in the global financial system, such as imbalances in trade and investment flows.
  • The European Central Bank's actions and the trajectory of the Euro are subject to debate, with some arguing that the ECB has managed to navigate the Eurozone's challenges effectively.
  • The link between commodity prices and the currencies of commodity-exporting countries may not be as strong as suggested, as other factors like technological change and diversification of economies play a role.
  • Engaging with emerging economies does present unique opportunities and challenges, but these markets can also offer resilience and growth potential that may offset some of the risks.

Analyzing Forex Markets Technically

The dialogue underscores the importance of adopting a comprehensive approach to forex trading, which involves analyzing price fluctuations, validating these observations with data on trading volumes, and incorporating additional tools to deepen comprehension. Coulling urges traders to develop the skills needed to analyze charts and recognize key patterns and signals, stressing that technical analysis should serve as a tool for validation and confirmation, rather than a replacement for discretionary trading decisions.

Market movement

Coulling introduces price action as the core element of technical analysis, stressing that it is the visual representation of market sentiment. She advises the use of candlestick charts for their superior clarity in depicting price fluctuations, and she explores various candle patterns that may signal impending shifts in market direction.

Candlestick charts are crucial in revealing the current market mood and signaling potential turning points in trading.

Coulling advises employing candlestick charts as they provide a more effective visual depiction of market sentiment and potential turning points compared to traditional bar charts. Anna Coulling explains that each mark on a graph represents a specific period, and with its body and wicks, it conveys the opening and closing values, along with the highest and lowest points, thus capturing the market's volatility and the intense struggle between buyers and sellers during that period.

Coulling explains that every candlestick on a chart captures the ongoing tug-of-war between buyers and sellers, representing the nuanced shifts in market sentiment. Analyzing candlestick patterns and their placement within a trend helps traders identify potential reversals and supports decision-making as the market unfolds in real time.

Understanding the importance of key candlestick formations, including the inverted hammer, falling star, doji, and the pivotal engulfing and tweezer patterns, is essential.

Coulling discusses her favored candlestick patterns and what they suggest about the mindset of the market. The emergence of a hammer pattern after a decline often indicates that traders are starting to engage in buying, which could denote a potential reversal to an uptrend. When a shooting star pattern appears at the peak of an uptrend, it may indicate a shift towards a seller-controlled market, suggesting an impending downtrend. A long-legged doji, characterized by its extended shadows and diminutive central area, indicates that traders are uncertain and this pattern may signal an upcoming change in market trend.

Anna Coulling points out that a substantial change in the trend's direction is frequently signaled when one candlestick completely encompasses its predecessor. The emergence of a bearish engulfing pattern following an uptrend indicates a shift in market sentiment, now favoring a downward trend. The emergence of a bullish engulfing pattern at the lowest point of a downtrend often signifies the likelihood of a transition to an uptrend.

Finally, tweezers, which are identified by a pair of candles that have the same high or low points and extended shadows, indicate a pause at resistance or areas of support, hinting at possible trend reversals in rapid trading periods as illustrated in figures 17.17 and 17.18. Coulling emphasizes the need to identify these patterns as early signs of possible market price changes and stresses the importance of seeking further verification before initiating any transactions.

Volume

Coulling underscores the significance of examining the volume of individual trades in the spot forex market as a means to validate price shifts and differentiate between genuine and misleading trends. She underscores the significance of augmenting her analysis through meticulous scrutiny of patterns in related markets.

In foreign exchange spot markets, tick data is utilized as a proxy to reflect the actual volume of trade activity.

Anna Coulling explains that the absence of a central governing body in the spot forex market results in the unavailability of a straightforward method to record trading volumes, which are crucial for validating price changes and understanding the overall sentiment of the market. To address this obstacle, she recommends using the observable tick movements on various trading platforms as proxies for the actual volume of trades. Market dynamics can be assessed by monitoring the frequency of price changes within a given period, which is an indicator of market activity.

Coulling asserts that while tick volume may not exactly replicate the true volume of transactions, it acts as a reliable indicator for interpreting market dynamics and is subject to analysis akin to traditional trading volume metrics. Analyzing tick volume alongside price changes offers a comprehensive insight into the primary elements that affect currency value shifts.

Coulling emphasizes the significance of using trading volume to confirm the pertinence of candlestick patterns. A spike in trading activity that coincides with a candlestick pattern signifies a strong agreement among market participants on the price trend, while a lack of volume suggests limited market engagement, potentially resulting in a deceptive signal. For example, the occurrence of a specific candlestick pattern resembling a hammer, especially when paired with significant trading volumes, often signals a potential move to a bullish trend, while a shooting star pattern, if it appears during a period of minimal trading, may not truly suggest a bearish market direction.

Coulling underscores the necessity of scrutinizing market transaction quantities to differentiate genuine market movements from misleading tactics. Sudden shifts in price with minimal trading volume, often during incidents that swiftly attract market attention, suggest a higher likelihood that the current trend may reverse. By analyzing volume alongside price movements, traders can improve their trade entry or exit decisions, as this combination aids in validating the strength of trading signals.

Coulling emphasizes the significance of validating trends in the spot forex markets by examining volume information from related markets such as currency futures and ETFs. This approach underscores the anticipation that major movements in interlinked markets will be reflected in the associated trade volumes, an essential element for examining the interplay between market activity and transaction quantities in foreign exchange trading.

The Euro has experienced a significant increase in its valuation compared to the US dollar, and this rise, coupled with an evident increase in Euro futures trading, further solidifies the strength of this trend. The dependability of the price movement is further confirmed when the USD/JPY pair shows a bearish engulfing pattern alongside an increase in the trading volume of the Yen ETF. Coulling recommends that traders reinforce their confidence and substantiate their evaluations by integrating an examination of transaction volumes from associated markets into their decision-making process.

Indicators

Anna Coulling underscores the role of technical indicators as tools that enhance the process of making decisions instead of supplanting it. She advises careful utilization of technical tools, drawing on historical market patterns, and provides insight into established indicators, highlighting their limitations and advocating for their judicious application.

Coulling explains that by using moving averages, one can determine the market's overall direction, known for their ability to smooth out fluctuations in price. Anna Coulling underscores the importance of calculating the average price over a user-selected period, a method known as simple moving averages, as illustrated in a specific diagram. Coulling observes that shorter-term moving averages are more closely aligned with immediate price changes, providing quick signals but sometimes resulting in false alarms. Moving averages over extended periods provide a more stable trend line that necessitates more significant price shifts for validation.

Traders often begin trading when the price ascends past a moving average in an uptrend and decide to exit their trades when it falls below that moving average. Signals are produced through a unique technique when moving averages of different durations intersect.

Coulling points out that while utilizing moving averages may assist in identifying trends, their utility is reduced in markets that do not exhibit a distinct trend, which can result in cycles that reinforce themselves as a multitude of traders react to the same indicators at the same time.

Understanding shifts in market volatility can be achieved by analyzing patterns characterized by the contraction and expansion of Bollinger bands.

Coulling clarifies how volatility metrics serve as tools to monitor price fluctuations over time and signal potential trend reversals or the beginnings of new trends. She underscores the importance of employing Bollinger bands, which are plotted as two lines set at a distance equal to twice the standard deviation from a moving average, a commonly used tool for gauging market volatility.

Coulling highlights that Bollinger bands signal periods of heightened or diminished market volatility, rather than providing clear-cut prompts for entering or exiting trades. Narrowing of the bands typically precedes a significant price movement, while a widening indicates increased price volatility. She emphasizes the necessity of grasping changes in volatility to predict market movements, pointing out that these metrics should serve as corroborative instruments rather than the sole basis for trade-related choices.

Analyzing market cycles can be achieved by employing techniques such as the Elliott Wave Principle along with Fibonacci retracement analysis.

Coulling acknowledges the attraction of tools that, by using mathematical analysis, identify consistent patterns and cycles in the market. She explains Fibonacci retracements, a common cyclical measure where each number in the sequence results from adding the two numbers before it, as shown in Figure 18.13. Fibonacci retracement levels, derived from specific ratios in this sequence, act as markers for possible zones where prices might stabilize or face opposition during times when the market is correcting or retracting.

Coulling delves into the idea that markets demonstrate recurring patterns, often appearing as a series of five upward waves followed by three downward ones. She underscores the importance of considering Fibonacci and Elliott Wave levels as zones that could potentially act as barriers or foundations, instead of pinpointing them as precise points of trend reversal.

Coulling describes how momentum indicators are intended to assess the vigor of a trend and indicate possible points where it might reverse. Anna Coulling describes how the MACD, a popular momentum indicator, is derived by determining the difference between two separate exponential moving averages. Coulling highlights that a potential shift in the trend could be on the horizon when there is a divergence between the MACD indicator's direction and the trajectory of the price, as illustrated in Figure 18.14.

Anna Coulling explores the RSI (Relative Strength Index), an indicator that evaluates the momentum of recent price changes by comparing the average of upward movements against downward ones, typically displayed on a scale that extends from zero to one hundred. Values of the Relative Strength Index (RSI) exceeding 70 often indicate that an asset might be overpriced, while those falling below 30 hint at a potential undervaluation, possibly signaling upcoming shifts in the market's direction.

Coulling highlights that when a market does not exhibit a distinct trend, indicators like MACD and RSI tend to perform poorly and may generate deceptive signals. She underscores the significance of employing these instruments primarily to confirm a trend that has been detected, and also points out the need to acknowledge their limitations and to refrain from relying solely on them when making trading decisions.

The Wyckoff Principle

Anna Coulling advises incorporating the holistic Wyckoff Method, developed by the esteemed trader Richard Wyckoff, into forex trading strategies. She explains that by confirming price changes through the examination of trade volumes, one can identify key stages of market behavior and pinpoint the most favorable times to carry out trades.

In the realm of foreign exchange trading, applying the principles of Wyckoff involves recognizing the phases of market accumulation and distribution, as well as pinpointing the moments where encountering resistance from both purchasers and vendors is likely.

Coulling clarifies that the Wyckoff Principle emphasizes the necessity of understanding how supply and demand interact by scrutinizing how market trends, temporal factors, and variations in volume and pricing are interconnected. Anna Coulling elucidates the concepts of accumulation and distribution, emphasizing the way in which major entities such as institutions methodically modify their positions, thereby imprinting a distinctive signature on the trends of price and volume.

During the accumulation phase, as indicators of a market downturn emerge, these traders initiate purchases, leading to a rise in trading volume that manifests as a triangular configuration on the graph, suggesting a possible uptrend. In contrast, during the distribution phase, they begin selling as prices climb, resulting in the emergence of patterns that signal an impending reversal to a downward trend due to increased selling activity. The author emphasizes the significance of identifying particular patterns and their associated volume profiles to identify potential trading opportunities by monitoring the actions of 'smart money' investors.

Coulling delves into the idea that the length of time a trading range takes to form has a direct relationship with the subsequent price movement's extent. Anna Coulling explains that when a market remains in a consolidation phase for an extended time, it often results in a more dynamic breakout, potentially giving rise to a longer-lasting trend.

The author emphasizes the importance of caution and confirmation before entering into any trade. Coulling advises traders to give precedence to trading opportunities that arise after the market has experienced extended periods of consolidation, which allows for the accumulation of momentum and increases the chances of a persistent trend.

Identifying times when the market consolidates prior to initiating a substantial shift is crucial for taking advantage of the best opportunities to carry out trading transactions.

Coulling highlights the significance of focusing on times when there is minimal movement in prices, as these are essential for applying the Wyckoff Principle. During these phases, illustrated in Figures 19.21 and 19.22, a battle for control ensues between potential buyers and sellers. Markets frequently gain significant momentum after experiencing an extended phase of stability.

Coulling underscores the importance of validating breakout points by examining the quantity of trading activity. She notes that the presence of substantial trading volume alongside breakouts suggests genuine market participation, which increases the likelihood of the trend's continuation. Anna Coulling underscores the significance of recognizing how the wider market cycle impacts breakouts and suggests taking into account the prevailing trend, as breakouts that occur in harmony with the current market trajectory are generally more reliable.

Other Perspectives

  • Candlestick charts, while popular, are not the only method for analyzing market sentiment, and some traders may find other chart types, like Renko or Point & Figure charts, to be more informative for their strategies.
  • The interpretation of candlestick patterns can be subjective, and not all traders agree on the significance or predictive power of patterns like the inverted hammer or doji.
  • Tick data as a proxy for volume can be misleading due to the decentralized nature of forex markets, and it may not accurately represent the entire market's trading activity.
  • Volume analysis in forex is challenging due to the lack of centralized data, and conclusions drawn from volume can be speculative.
  • Trading activity in related markets like futures and ETFs may not always accurately reflect or predict movements in the spot forex market due to differences in market participants and liquidity.
  • Moving averages can be lagging indicators and may not be as useful in markets that are consolidating or lack a clear trend.
  • Bollinger bands and other volatility indicators can provide false signals in markets that are prone to sudden price spikes or drops, which are not indicative of a true trend.
  • The Elliott Wave Principle and Fibonacci retracement analysis are based on retrospective patterns and may not reliably predict future market movements.
  • Momentum indicators such as MACD and RSI can produce many false signals in choppy or sideways markets and are often best used in conjunction with other analysis methods.
  • The Wyckoff Method, while comprehensive, may not account for all the variables affecting price movements in the highly complex and global forex market.
  • The impact of time on price fluctuations can be inconsistent, and extended periods of consolidation do not always lead to significant breakouts.
  • Identifying consolidation periods can be difficult in real-time, and traders may miss the initial phase of a substantial shift if they wait too long for confirmation.

A Thorough Analysis of the Factors Influencing the Foreign Exchange Markets

In the book's final section, Coulling highlights the necessity of adopting a comprehensive approach to forex trading, which integrates relational, fundamental, and technical analysis, providing traders with a thorough understanding of the market to inform their decisions.

Taking into account the current sentiment of the marketplace.

Coulling emphasizes the importance of considering the current sentiment in the market to comprehend price fluctuations, recognizing that the complex interactions between economic forces, government measures, and the collective attitudes of traders mold the intricacies of the foreign exchange markets. She argues that fully grasping the narratives influencing price movements necessitates the integration of insights from relational analysis.

Assessing the market's sentiment and investor risk appetite through the examination of interrelated factors.

Relational analysis, as described by Coulling, involves a thorough investigation into how different markets, including bonds, commodities, and stock indices, interact with one another, providing insight into the market's appetite for investment and its tolerance for potential risks. She argues that these trading platforms offer indicators which not only corroborate but often predict changes in foreign exchange rates, thus amplifying the effectiveness of using technical analysis methods.

During periods of uncertainty, as bond yields fall, investors often gravitate towards assets deemed more secure, which results in a rise in the worth of traditionally safe currencies like the yen and the US dollar. A rise in commodity prices may indicate a strengthening of commodity-linked currencies like the Australian and Canadian dollars, pointing to a market climate that is conducive to a preference for riskier investments.

Examining signals derived from the bond and commodity sectors.

Coulling emphasizes the importance of deciphering the cues from interconnected financial arenas. When the VIX, an indicator of heightened volatility in the US stock market, goes up, it often corresponds with a stronger relationship between USD/JPY, as the yen is typically sought after as a secure asset in periods of market unpredictability.

A simultaneous decline in the value of the US dollar and a fall in a benchmark commodity index like the CRB indicates a potential shift in preference toward conventional assets associated with risk, like equities. Coulling stresses the necessity for traders to develop the ability to discern signals from different trading arenas, enhancing their technical chart analysis and anticipating shifts in market sentiment and price trends prior to their manifestation in the forex markets.

The varying strength or weakness of various currencies.

Coulling emphasizes the necessity of assessing and gauging the relative robustness or weakness of various currency pairs, which is crucial for attaining success in the complex and ever-changing foreign exchange market.

Utilizing a currency matrix is crucial to ascertain the strength or weakness of different currency pairs.

Anna Coulling describes the currency matrix as a vital tool for verifying the strength or weakness of a currency. She recommends setting up a specialized trading space with screens that display each major currency alongside other important currencies. By examining the strength or weakness of a currency through its interactions with different pairs, traders can acquire a comprehensive insight into its present state, as explained in the final section of Chapter Twenty in the book.

A consistent increase in the value of currency pairs that include the Euro indicates a strong performance of the Eurozone's currency. The evaluation suggests that opting for a long position on EUR/GBP is driven more by the strength of the euro than by any weakening of the British pound. The method determines which currency pairs are best suited for trading by examining their current trend patterns.

Employing measures of currency strength to pinpoint instances when there is a substantial exchange of currency ownership.

Coulling recommends using instruments that measure and assess the strength and weaknesses of different currencies by analyzing their behavior in a range of pairings. These indicators enable traders to quickly identify situations that suggest a trend has reached its peak or trough, indicating a potential reversal or continuation of the trend.

For example, should a tool used to evaluate currency robustness show a widespread weakening of the US dollar and at the same time imply that the Japanese yen is significantly undervalued, this might signal a forthcoming change in the USD/JPY currency pair value. Anna Coulling highlights the importance of instruments that swiftly evaluate the strength of currency interactions, aiding traders in determining which currency pairs warrant closer examination.

Determining which currency pairs are most advantageous for trading through an assessment of their individual strengths and weaknesses.

Anna Coulling emphasizes the significance of choosing currency pairs for trading that offer the greatest benefit by evaluating the wide range of currency strength, which is ascertained using a currency matrix and supported by additional evidence from currency strength indicators. The method prioritizes evaluating the enduring trend of individual currencies to determine which pairs warrant focus, rather than just focusing on the short-term price fluctuations of a single currency pair.

Investors can focus on identifying specific currency pairs that include the Australian dollar, which show the most promising technical setups, and thus coordinate their trading approaches with the prevailing trend when the matrix signals strong Australian dollar performance, supported by currency strength indicators.

Other Perspectives

  • While comprehensive analysis is beneficial, it can also lead to information overload and analysis paralysis, where a trader may become overwhelmed by conflicting signals and fail to make timely decisions.
  • Market sentiment can be incredibly volatile and may not always accurately reflect underlying economic fundamentals, leading traders to make decisions based on short-term noise rather than long-term trends.
  • Relational analysis assumes that markets are rational and that correlations between different asset classes remain stable over time, which is not always the case, especially during times of market stress or disruption.
  • The focus on safe assets like the yen and the US dollar during times of falling bond yields may not always hold true, as geopolitical events or changes in monetary policy can alter traditional risk dynamics.
  • Rising commodity prices do not always indicate a preference for riskier investments, as they can also be driven by supply constraints or geopolitical tensions that have different implications for currency markets.
  • The VIX and other indicators of market volatility are not infallible predictors of currency movements and can sometimes give false signals if used in isolation.
  • The use of a currency matrix and currency strength indicators relies on historical data, which may not always be a reliable guide to future performance, especially in a rapidly changing economic environment.
  • The emphasis on technical analysis and currency strength may underplay the role of macroeconomic fundamentals, which can have a profound impact on currency values over the medium to long term.
  • The strategy of choosing currency pairs based on their individual strengths and weaknesses may not account for sudden shifts in central bank policies or unexpected economic data releases, which can quickly reverse currency trends.
  • The approach may not be suitable for all traders, particularly those with a lower risk tolerance or those who prefer a more simplified trading strategy.

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