Forex Trading Strategies Explained

Posted in Forex Education

Forex Trading StrategiesForex trading is touted as one of the easy ways to make lots of money. Though it is true that some traders do make a lot of money through forex trading, it is not true for everyone. To trade successfully, the trader has to latch with a reliable system in the first place. The trader can also make use of some time-tested strategies to make profitable trades. This article aims to familiarize the trader with the best trading strategies (both simple and advanced) that can be applied in other markets as well. It is also important for the trader to understand that a strategy is only one of the keys to trading successfully. Knowledge of the forex market and the performance of the instruments are also of utmost importance for the trader to be effective.

Trend Trading

Throughout the history of forex trading it has been observed that the strategy used by the most successful traders to book profits has been trend trading. The currency pairs often stay within narrow ranges. A trader should know that when they stay for a long period within a narrow range, they tend to burst out powerfully into a long-term move. Most investors and hedge funds make money during such bursts. Orders can be placed to buy above the peak of the range or sell below the lowest values in the range. When the price moves beyond one of the levels specified you can surf the market.

It is very important to time the exit from the market. It is recommended that you exit when the markets show the slightest signs of reversal. Getting out too early from the market with little profit or keeping the positions for too long and losing all the profits earned is not recommended.

Breakout Trading

Breakout may happen frequently in the forex markets, sometimes on a minute or hourly basis. The trader should find a period when the currency pair is contained within a specific range and wait for it to break through to make some profits. A trader also has to be aware of false breakouts to minimize losses. False breakouts can be identified by having a number of technical filters in place. They provide indications as to when traders should get in and whether they should stay on in the market. Expert traders recommend that a breakout that happens on the release of fundamental news is a more reliable one. It is recommended to trade on breakouts of this nature rather than the ones that happen on technical indicators alone.

Swing Trading

Swing trading is very similar to trend trading. Swing trading is usually executed on a market move that is shorter than a trend. Whereas swing periods may last for a few days or sometimes weeks, trend periods are usually longer: typically months to years. Traders make their moves based on some news that moves currency pairs favorably without stopping for a few days.

Volatility

Economic news releases such as announcements of interest rates or NFPs can cause volatility of markets. Such events have been observed to move the forex market by as much as 400 pips in a minute. However, it is recommended to stay out of the market if the trader does not have sufficient knowledge about how to trade during periods of volatility. Experienced traders make the most of such periods by placing buy-stop or sell-stop orders moments before such events happen. It is best that beginners avoid this trading method. They can learn to analyze such situations from the outside without making any financial commitments.

Forex Scalping

Forex is a liquid market and owing to this reason traders open and close huge positions within minutes and sometimes seconds. As soon as the trader makes a profit of a few pips he/she moves out of position. Day traders are known to execute hundreds of such trades in a day and this is technique is called scalping. Traders can choose currency pairs depending on their style of trading (risky or conservative). Scalping traders work with very low spread broker. To be successful in scalping trades, the trader should not go against the theory of probability.

Turtle Trading

This method was propounded by Richard Dennis, a famous trader, who trained a team of traders to make money in the financial markets using this method. He would buy a security when the price exceeded a 20-day high and sell when the price went down below a 20-day low. The same was done for different periods. Though it is a good method to trade with, it is recommended that sufficient filters be placed before entering such trades. Some rules for placing stops, exits, and sizing positions have to be followed to get favorable results for turtle trading.

The disadvantages of this method are that a trader cannot make too many trades in a day and may lose out on many swing opportunities. This strategy suits investments in forex rather than speculative trades. This technique requires practice and it is recommended that the traders try it on free demo accounts offered by trading platforms.

Trading Charts

Following trading charts is a great way to learn forex trading. Understanding what the different chart patterns (triangles, head and shoulders, parabolic curve, cup and handle, etc.) and what they mean can help the trader to place successful trades. Chart patterns help to indicate sudden market turns and can also tell the trader whether the market will continue its current course or not.

RSI Indicator

Many technical indicators can be used to execute successful forex trades; however, the daily RSI indicator is better than many others. Daily RSI is a good indicator for both short-and long-term trades. Bigger market moves are well indicated by the 14-day RSI. The daily RSI works well when markets have big swings; however, it does not work well when the market moves sideways.

This list of forex trading strategies is not exhaustive. There are many more strategies that can be used profitably by the trader. There are more than a hundred trading strategies that are existent in the markets today. It is best for any individual forex trader to choose a reliable system and a strategy that suits his/her personality and style of trading to get maximum benefits.

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