Forex Trading Strategy
As soon as you have started your journey to become a forex trader, you need to find a forex trading strategy that works for you.
You can’t just open trades with a variety of methods; you need to commit to a single strategy. If you want to try out a different type of strategy, you should try at least to open different FX trading accounts and separate each strategy from each other. Otherwise you won’t be able to accurately determine whether the strategy is working and you won’t be able to maintain your trading discipline.
Try reading: How to Find a Reliable Forex Broker
Here are some of the most popular and widely used trading strategies available to you. Pick one which best suits the trading style you would like to deploy:
1. Candlestick Trading
Candlestick trading has been used for over a hundred years to describe economic conditions. It originated in Japan in the 1700’s to understand rice prices. It can be inscrutable to some new traders, but it’s deceptively simple; most charting software does the work for the trader. A candlestick chart is distinguished by “candlestick” looking marks, which show a large thick body and a thinner line rising up from it and below it.
The shape of these candlesticks tells you important information about the pair. Spinning tops (long lines with a small body) are relatively stable pairs. Long, black bodies indicate bearish periods while long, light bodies indicate bullish periods. Most trading platforms have indicators available for candlestick trading and even other strategies may utilize candlestick markers.
Some investors hedge their trading by initiating an opposite trade just in case. There are direct hedges in addition to indirect hedges. A direct hedge would be the exact same currency pair in the other direction, whereas an indirect hedge could only involve one of the currencies in the pair. The goal of a hedged trade is to offer the investor an out if the trade doesn’t go well. The hedged trade generally does not have even close to the value of the original trade because it will lose value as the original trade gains it. Hedging can be done with any other trading strategy. Proponents of hedging believe that it helps them capture more profit, but there are some significant criticisms as well. Many people believe that hedging indicates a lack of faith in trading and it also increased the amount of fees that need to be paid. Rather than hedging bets, traders can also choose to capture profits early on.
3. Trend Trading
Trend trading is a very simple form of trading that simply analyzes whether the currency pair is moving upwards or downwards over a certain amount of time. Different strategies will initiate trades based on various durations and severities of trend, but the overall concept is very simple.
Trend trading simply assumes that the trend will continue regardless of the cause behind it. There are short term trend traders who may trade based in minutes at a time, intermediate traders who will trade based on trends that are hourly or daily, and more long-term traders who can hold trades for days. Very short term trend traders are also known as scalpers.
4. Support and Resistance Trading
Support and resistance trading is based on the idea at there are certain levels a pair will never go above or beneath. When a pair is below the support level, a support and resistance trader will believe that it will go up to maintain that support level. When a trade is above the resistance level, the trader will realize that it must now go down below that resistance level. The theory about support and resistance is based on a fairly firm foundation; historically most pairs won’t go far above and beyond their support and resistance values. Support and resistance values can change over time but they generally remain fairly stable. The most common currency pairs tend to be best for support and resistance trading because they remain most stable over time.
Scalping is a very controversial method. It’s a bit of a “death by a thousand cuts” strategy and is closely linked to trend trading. A scalper tries to initiate trades very quickly and captures extremely small amounts of profit each time.
Scalpers can almost always make a profit in this way because they are closing their trades the instant that they profit. But they can’t make much money this way because they capture so little profit each time. Scalpers will often work with more volatile currency pairs because these offer the most significant opportunities. Scalping will require you to open and close a higher number of trades per day, and to be frequently monitoring those trades.
6. News Trading
Some traders decide to trade based on news rather than trends. As an example, traders might want to make a currency trade based on issues that are occurring in the world, such as a country that had currently been dealing with debt issues. News trading can be incredibly powerful but it also has fewer opportunities to trade. News traders must be vigilant regarding their research and will also need to take advantage of news very quickly.
Some traders will concentrate on other strategies while also entering into occasional news trades as necessary. News traders can be very profitable because the direction that the currencies will go in is very obvious. The biggest challenge for a news trader is knowing when to get out of the trade. The timing of the trade is important because the trader has to know when the currency pair will return to status quo. News trading tends to be more effective with lower volume currency pairs that aren’t as volatile as the more popular pairs.
7. Forex Signals Trading
Forex trading is extremely complex. Though you can make a lot of money at once, you can also lose it extremely quickly. Trading using forex signals can mitigate some of this risk. When you trade based on signals you get trades delivered directly to you from a signal provider.
The signal provider does all the analysis and research for you; you simple commit to the trades. This lets you benefit from their own developed strategies without having to invest a lot of time, money, and effort into learning about the constantly growing and developing forex market.
Next up, Create a Trading Plan!
Once you have decided on a strategy, you need to plan how you will trade. The most important component to successful trading is consistency. Creating a trading plan involves settling on one of the trading strategies and also deciding how much you will be trading at any given time. How much risk are you able to take on? How often do you want to trade? You will need to have these questions answered before proceeding to trade. Creating a trading plan that is workable and tailored to you, and one that is inline with your financial investment levels is crucial to being able to execute your strategy effectively.
Ultimately, it’s important that you choose the best forex trading strategy for yourself as a trader. All of these trading strategies exist because they are useful: there is no one that is inherently better than all of the others. Instead, there are some forex strategies that are better for certain types of investor. Some investors want to do a lot of research before they initiate a trade. Other investors want to initiate and close many trades per minute.
Knowing your own type of trading temperament will help you in choosing the right strategy for you.