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5 Forex Trading Strategies You Should Know

5 Forex Trading Strategies You Should Know

A forex trading strategy defines a system that a forex trader uses to determine when to buy or sell a currency pair. There are various forex strategies that traders can use including technical analysis or fundamental analysis. A good forex trading strategy allows for a trader to analyze the market and confidently execute trades with sound risk management techniques after they learn trading.

1. Position Trading

Position trading is a longer-term trading approach where you can hold trades for weeks or even months.

The timeframes you’ll trade on are usually Daily or Weekly.

As a position trader, you mainly rely on fundamental analysis in your trading.

Also, you might use technical analysis to better time your entries.

Let’s assume:

You analyze the fundamentals of EUR/USD and determine it’s bullish. But, you don’t want to go long at any price.

So, you wait for EUR/USD to come to Support before taking your position.

Now if your analysis is correct, you could enter at the start of a new trend before anyone else.

Pros:

  • Don’t need to spend much time trading because your trades are longer-term
  • Less stress in your trading as you’re not concerned with the short-term price fluctuations
  • A favorable risk to reward on your trades – possibly 1 to 5 or more

Cons:

  • Require a firm understanding of fundamentals driving the market
  • Need a larger capital base because your stop loss is wide
  • May not make a profit every year because of the low number of trades

This strategy is similar to a trading strategy called Trend Following – the only difference is Trend Following is purely a technical approach that doesn’t use any fundamentals.

2. Swing Trading

Swing trading is a medium-term trading strategy where you can hold trades for days or even weeks.

The timeframes you’ll trade on are usually 1-hour or 4-hour.

As a swing trader, your concern is to capture “a single move” in the market – otherwise called a swing.

To achieve this, you’ll likely:

  • Buy Support
  • Sell Resistance
  • Trade breakouts
  • Trade pullbacks
  • Trade the bounce of the moving average

Thus, it’s important to learn technical concepts like Support & Resistance, candlestick patterns, and moving average.

Pros:

  • Don’t have to quit your full-time job to be a swing trader
  • It’s possible to be profitable every year because you have more trading opportunities

Cons:

  • Won’t be able to ride big trends
  • Have overnight risk

3. Day Trading

Day trading is a short-term trading strategy where you’ll hold your trades for minutes or even hours – it’s similar to swing trading but at a “faster” pace. The timeframes you’ll trade on are usually the 5mins or 15mins.

As a day trader, your concern is to capture the intraday volatility. This means you must trade the most volatile session of your instrument because that’s where the money is made.

So, you’ll likely:

  • Buy Support
  • Sell Resistance
  • Trade breakouts
  • Trade pullbacks
  • Trade the bounce of the moving average

If you’re a day trader, you won’t be concerned with the fundamentals of the economy or the long-term trend because it’s irrelevant.

Instead, you’ll identify your position for the day – be it long or short, and trade that direction for the session.

Pros:

  • If you’re good, you can make money on most months
  • No overnight risk because you close your positions by the end of the day

Cons:

  • It’s stressful as you’re constantly watching the markets
  • Can lose a lot more than intended if you suffer massive slippage (from Black Swan events)
  • Huge opportunity cost as you could be earning a full-time salary elsewhere

4. Scalping

Scalping is a very short-term strategy where you’ll hold trades for minutes or even seconds.

As a scalper, you are most concerned with what the market is doing now and how you can take advantage of it.

The main tool you’ll use to trade is order flow – this shows you the buy and sells orders in the market.

If you are a retail trader then I don’t recommend scalping because the transaction cost will eat up most of your profits.

And you’d also be slower than the machines which put you at a major disadvantage.

Still, If you want to be a scalper, I recommend you join a trading firm because they will provide the tools to help you with it. This also works in cryptocurrency and bitcoin trading using bitcoin code.

Pros

  • Have lots of trading opportunities each day
  • Can make a healthy income from trading

Cons

  • High financial cost – this includes paying for software, newsfeed, connection, etc.
  • Glued to the screen for many hours a day
  • It’s a highly stressful endeavor

5. Trend Trading Strategy

Trend trading is a simple forex strategy used by many traders of all experience levels. Trend trading attempts to yield positive returns by exploiting a market’s directional momentum.

Trend trading generally takes place over the medium to long-term time horizon as trends themselves fluctuate in length. As with price action, multiple time frame analyses can be adopted in trend trading.

Identifying a strong trend is important for a fruitful trend trading strategy.

Trend trading can be reasonably labor intensive with many variables to consider. The list of pros and cons may assist you in identifying if trend trading is for you.

Pros:

  • A substantial number of trading opportunities
  • Favorable risk-to-reward ratio

Cons:

  • Requires lengthy periods of investment
  • Entails strong appreciation of technical analysis

In Conclusion,

Before you learn any forex trading strategies, you must consider:

  • Your trading goals
  • Your time
  • Whether the strategy fits your personality –  how long can you stick it out, win or lose.

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