Forex Trading Strategies
FOREX EDUCATION
Forex Trading Strategies
Picking the right Forex trading strategy
How to Pick the Right One
Forex Trading Strategies
What is Foreign Exchange Market?
The Forex market is still waiting for a lot of aspiring traders to tap into it. However, it’s not as if we can just trade willy-nilly and make money. Like with anything else in life, we have to think things through carefully and pick the best approach in order to reap some (or most) benefits. First and foremost, traders should study and build up their knowledge regarding the forex industry, trading tools that can help them make the most informative decisions, types of trading and trading strategies etc. This is deemed crucial for any potential success in forex trading, while any different approach, especially trading on gut feeling is most certainly damned to fail.
That’s precisely why Forex trading strategies are vital to your success. If you pick the right one, currency trading can become your bread and butter.
What Are Forex Trading Strategies?
Making market moves based on your gut feeling might seem like a good idea. However, impulse decisions, especially those based on emotions, are rarely good. It’s much better to identify trading opportunities based on knowledge and seize them.
But how do they make that decision? Well, all strategies have the goal of generating trading signals. These signals trigger decisions. You’ll buy or sell currency based on what the signals are telling you.
A part of that knowledge is knowing which style and strategy to use. Forex trading strategies sound complicated, but, in reality, they are nothing more than techniques that traders use to decide if they are going to sell or buy a specific currency within particular time frames.
Signal generation can be manual or automated. A Forex trader can manually look for trading signals (by using technical analysis or analyzing world events and market moves). They can also remove all emotion from the equation and use an automated system.
There are plenty of trading styles and strategies out there. Some traders even develop their own. It’s vital that you find the one that works best for you. What are your financial goals? What about your lifestyle? These are important determining factors when it comes to choosing a good strategy.
Types of Trading
Before we jump into the strategies, here’s a quick glimpse of different types of trading. Some require you to make fast decisions, while others are a longer-term type of waiting game.
Day Trading
Day trading is a short-term, fast-paced type of trading. Although not as nerve-wracking as the next one on our list, day trading still requires you to close all positions within the same workday. That way, day traders are avoiding the risk of potential overnight changes.
With day trading, a trader uses both technical analysis and charting systems of daily charts to make as many trades in one day as possible. These are usually small profit trades.
Timeframe:
Short term
Pros:
There are instant results with no massive risks that come with overnight changes in the market. Furthermore, you can use a variety of trading strategies.
Cons:
The profit potential is limited. What’s more, because day trading is fast-paced, you’ll have to deal with a lot of market noise (the erratic price movements that you can’t predict or explain).
Trade Time Period:
Maximum of one workday, no overnight holds.
There are instant results with no massive risks that come with overnight changes in the market. Furthermore, you can use a variety of trading strategies.
Cons:
The profit potential is limited. What’s more, because day trading is fast-paced, you’ll have to deal with a lot of market noise (the erratic price movements that you can’t predict or explain).
Trade Time Period:
Maximum of one workday, no overnight holds.
Scalping Trading
Liquidity and volatility are the two main benefits of scalping. It’s a trade that focuses on bringing in small profits from a vast number of transactions. So, rather than going big or going home, scalpers go small, lots of times, and then go home with a hefty profit in their pockets. By using day and hour charts, they make decisions based on small fluctuations in the price.
Timeframe:
Short term
Pros:
You don’t have to spend hours deciding which trade to make because there’s no time for overthinking. Also, trade sizes are small, so there’s no substantial capital-intensive requirement.
Cons:
More orders mean more trading costs. What’s more, lots of small trades require careful management, and there’s a more significant risk of error.
Trade Time Period:
Usually minutes or even seconds.
You don’t have to spend hours deciding which trade to make because there’s no time for overthinking. Also, trade sizes are small, so there’s no substantial capital-intensive requirement.
Cons:
More orders mean more trading costs. What’s more, lots of small trades require careful management, and there’s a more significant risk of error.
Trade Time Period:
Usually minutes or even seconds.
Position Trading
Position trading means a trader is shooting on making a profit from significant shifts in prices. Since those don’t happen every day, position trading usually lasts for a long period of time (weeks, months, and sometimes years).
To determine long-term price movement, position traders use monthly price charts and evaluate all markets. They also use a combo of fundamental analysis and technical indicators to best decide which entry and exit points to go for.
Timeframe:
Long term
Pros:
There’s no need for constant position monitoring. There’s also less risk involved since the market volatility and daily price fluctuation don’t affect you.
Cons:
You need a large capital base. What’s more, long-term trades leave you with less liquidity because your investments are tied up. You have to have a thorough understanding of market fundamentals in order to make a profit as a position trader.
Trade Time Period:
Anywhere between several weeks and a couple of years.
There’s no need for constant position monitoring. There’s also less risk involved since the market volatility and daily price fluctuation don’t affect you.
Cons:
You need a large capital base. What’s more, long-term trades leave you with less liquidity because your investments are tied up. You have to have a thorough understanding of market fundamentals in order to make a profit as a position trader.
Trade Time Period:
Anywhere between several weeks and a couple of years.
Swing Trading
Swing trading is a medium-term trading style that focuses on making a profit from trading in the highs and lows of a specific trend. Unlike with position trading, you won’t hold positions for weeks or months, but between one and 48 hours. Typically, you won’t hold a position for more than a week, at most.
Swing traders focus on the markets where there are patterned moving averages. These are passive markets that have predictable rises and falls of assets.
Timeframe:
Short to medium term
Pros:
There are more trading opportunities compared to other long-term trading styles, and there’s minimal risk of losing profit due to an unexpected trend reversal.
Cons:
You have to use technical indicators to see when a price will move (and hit its peak). Because of that, decisions are riskier, and there’s also the risk of overnight price changes.
Trade Time Period:
Days or sometimes weeks.
There are more trading opportunities compared to other long-term trading styles, and there’s minimal risk of losing profit due to an unexpected trend reversal.
Cons:
You have to use technical indicators to see when a price will move (and hit its peak). Because of that, decisions are riskier, and there’s also the risk of overnight price changes.
Trade Time Period:
Days or sometimes weeks.
Carry Trading
A Forex-based trading style, carry trading is essentially borrowing one currency and buying another currency with it. But, where’s the profit? Well, the trick is to pick a currency with a low rate and invest in one with a high-interest rate. The difference between the two is the profit the trader makes.
Timeframe:
Medium to long term
Pros:
You get trading gains and interest gains on top of that. So, the potential profit is hefty.
Cons:
Because exchange rates aren’t stable or even certain, there’s a significant risk of losing investments. Even small movements in the market can lead to losses (depending on the size of the leverage used).
Trade Time Period:
Usually weeks or months, sometimes years.
You get trading gains and interest gains on top of that. So, the potential profit is hefty.
Cons:
Because exchange rates aren’t stable or even certain, there’s a significant risk of losing investments. Even small movements in the market can lead to losses (depending on the size of the leverage used).
Trade Time Period:
Usually weeks or months, sometimes years.
Range Trading
With range trading, a trader analyzes and identifies the areas of support and resistance (figuring out which currency is either oversold or overbought). Once they have that info, they buy currency when it’s oversold (that’s the support period) and sell it when it’s overbought (the resistance period).
Timeframe:
All timeframes
Pros:
You don’t really need a big trading fund to start with range trading. What’s more, there are plenty of opportunities out there that will surely make a profit for you, given their low-risk-high-reward status.
Cons:
Range trades require a lot of time analysis-wise. You have to really know your stuff when it comes to technical analysis in order to try your luck with range trading.
Trade Time Period:
Varies.
You don’t really need a big trading fund to start with range trading. What’s more, there are plenty of opportunities out there that will surely make a profit for you, given their low-risk-high-reward status.
Cons:
Range trades require a lot of time analysis-wise. You have to really know your stuff when it comes to technical analysis in order to try your luck with range trading.
Trade Time Period:
Varies.
Trend Trading
Trend trading is all about making a profit by capitalizing on the directional momentum of a specific market. The focus of trend trading is broad economic news (unlike other medium to long-term styles which focus on short-term price changes). The trick is to catch a big trend in the market and ride on it as long as possible.
Timeframe:
Mediumm to long-term
Pros:
You can identify a market gaining momentum right from the get-go. Similarly, you can also clearly see when the ship is about to sink, so you can quickly pull your trades and cut losses early. What’s more, because this isn’t a fast-paced trading strategy, you’ll have lower transactional costs.
Cons:
Trends take time to gain momentum and fraction, so there’s quite a bit of waiting around with trend trading. Furthermore, if a trend doesn’t get any traction, you’re looking at a lot of potential losses.
Trade Time Period:
Several months (or more).
You can identify a market gaining momentum right from the get-go. Similarly, you can also clearly see when the ship is about to sink, so you can quickly pull your trades and cut losses early. What’s more, because this isn’t a fast-paced trading strategy, you’ll have lower transactional costs.
Cons:
Trends take time to gain momentum and fraction, so there’s quite a bit of waiting around with trend trading. Furthermore, if a trend doesn’t get any traction, you’re looking at a lot of potential losses.
Trade Time Period:
Several months (or more).
Trading Strategies
Now that we know which styles are out there let’s get to the Forex trading strategies.
1.
The Bladerunner Trade
The Bladerunner is quite popular among Forex traders because it works with a lot of time frames and assets. Traders use it to determine the best entry and exit points. You can hypothesize the prices will rise and go long or that they’ll fall and go short.
But how do you make that distinction?
Indicators
The Bladerunner is price action trading that relies on the 20-day EMA (exponential moving average).
The moving average shows recent price movements and cuts the price in half after the 20 day period (hence the name of the strategy). Once the cut is made, if the price is above the EMA, then chances are, the market will keep going up (so you can go long). Of course, if the price is below, the market will probably go down, which means you can go short.
Signals and Entry Points
If the price is below or above the EMA and it continues to bounce off the line, then that’s a signal to enter the trend and trade.
2.
Daily Fibonacci Pivot Trade
This one relies on pivot points, technical analysis indicators. You can use these to see how the market acts over a certain period of time and pinpoint overall trends.
A pivot point is actually an average of that day’s highs and lows as well as the closing price. Once you know that average, you can either trade above or below it (pick the bullish or bearish approach).
The Fibonacci pivot trade means that you’ll draw lines on the chart of averages to connect any price points and mark potential areas of support and resistance (overselling and overbuying).
3.
Bolly Band Bounce Trade
Ideal for everyone who wants to try their hand in range trading, the Bolly Band Bounce Trade is a one-indicator trade strategy. It uses the Bollinger Band indicator to trade in the down periods of the market. This strategy doesn’t work on volatile markets that have a lot of trends. It’s actually what makes it a perfect choice for those who want to trade on a flat market (you didn’t think that was possible, did you?).
4.
Forex Overlapping Fibonacci Trade
This strategy is basically using all the might of two Fibonacci retracements and extensions. Similar to the Daily Pivot Fibonacci Trade, this one uses the Fibonacci line to connect price points. However, it also uses another line in an area of support and resistance. These two Fibinnaci levels work in confluence to yield a usable reaction.
What does that mean? It means that you can find your entry point without any difficulty. The confluence of two lines marks the spot. This strategy is simple and, whether you pick the bullish or the bearish approach, you’ll undoubtedly make a profit.
5.
London Hammer Trade
The beauty of this strategy is that there are no indicators that you have to keep track of. However, it is only possible to pull it off on the London markets.
During the opening and closing times of the London trading sessions, there’s a lot of activity. Traders are highly active, which makes the market volatile. All you have to do is take advantage of that.
You do need a good understanding of the candlestick analysis. Monitoring the chart and catching the hammer candlestick when it’s near the support and resistance levels is critical. You have to see it right after the narrow trading range and then buy or sell positions as the hammer indicates (in the same direction, of course).
6.
Trading the Forex Fractal
If you think the prices fluctuate randomly, you’re wrong. They actually have repeating patterns, one of which is a fractal. If you understand fractals, you know how the market moves and changes which will make trading easier. So, this isn’t as much a strategy as it is a lesson every trader needs to know by heart.
Fractals are reverse market movements. Thanks to them, you can guess the liquidity and investor horizons, which will ultimately lead to you figuring out the way the market will change.
7.
The Pop ‘N’ Stop Trade
Breakouts are challenging to forecast, which is why they bring in the most significant profit. But, figuring out how a breakout will move is no easy task. Even catching a breakout is difficult. The whole goal of making a profit on a breakout is that you make your move before the breakout actually happens. If the price has left its own range due to robust and unexpected price movements, and when you spot it, it’s already too late.
But, because they have such high rewards, breakouts are still the number one trade goal of many traders. So how do they make a profit on them? Well, some do it with the Pop ‘N’ Stop strategy.
This strategy relies on the fact that after a price moves upward (pops out of its range limit), it will eventually pause (or stop). After this pause, the price will keep moving in the general breakout direction. The Pop ‘N’ Stop strategy makes good use of this pause as that’s when traders look for candlestick signals (usually Japanese bullish ones) to figure out which direction the price will go on it.
8.
The Drop ‘N’ Stop Trade
This is the complete opposite of the previous strategy. With the Drop ‘N’ Stop strategy, you follow a breakout but to the downside. Unlike with the previous strategy, here, you’ll use the bearish approach.
Final Thoughts
How to Choose the Best Strategy
Just because a successful trader picked a specific strategy doesn’t mean you have to go the same route. What’s more, choosing a different strategy doesn’t mean you won’t be successful because the key is to pick the one that is the best fit for you.
Besides these reasons, in their search for a secondary source of income or a complete financial freedom, traders are looking into forex because of its unbelievable daily turnovers, as well as the availability of leverage which is enabling them to significantly increase their winnings/profit if their transaction is successful.
Your choice has to be based on:
Your trading or investing goals
The amount of time you can devote to trading
Are you looking to turn a quick profit? Then look into short-term trading styles and strategies. Alternatively, if you have a lot of time on your hands and don’t mind digging deep into technical analysis, some long-term strategies might be a better fit for you.
Just remember, making a profit on the Forex market IS possible. All you have to do is stick it out through the trial and error period. Ultimately, you’re the only one who can say which Forex trading strategy is the best one.
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