The foreign exchange (forex) market is a global marketplace where the participants exchange one national currency for another. According to Wikipedia, the forex market is by far the largest market in the world in terms of trading volume. The market is open 24/5 and determines the exchange rates which continue to fluctuate endlessly as buyers and sellers do their businesses. Forex trading is the conversion of one currency into another especially with the aim of making a profit. Since the forex market prices are unstable, traders utilize forex trading strategies to determine when and how to approach the market at any time.
Forex trading strategies are elaborate course of actions deployed by forex traders to utilise technical analysis to take advantage of price fluctuations at any given time. The strategies may be manual or automated. Manual strategies are mainly derived from technical or fundamental analyses methods of scrutinizing the markets.
Automated strategies are computer programs scripted and configured to scan the charts, enable traders to set specific rules for trade entries and exits, which when programmed, can be executed electronically. They are generally known as ‘forex robots’ but they are called ‘Expert Advisors’ by MetaTrader; owners of the popular MT4 and MT5 trading platforms.
This is a popular strategy widely used in the financial markets. Day trading is the trading style where the trader opens and closes all trading positions on the same day. The overall objective of the trader is to take advantage of the intraday price movements and avoid rollover fees. Most day traders derive their trading strategies from technical analysis which analyzes the price charts looking for trends and patterns with the belief that they will repeat in future.
Swap fees are incurred by forex traders who maintain open positions overnight. Gapping is when the price of a forex pair opens at a different price from the previous closing price without any trading in between.
Day traders do not incur swap fees and weekend gapping. In times of market reversals, the trader can close the losing trades in time in order to curb losses. But, day trading requires in-depth knowledge of technical analysis, patience and reliable exit strategies. Some manual day traders sit in front of the computer all day which is exhausting and unpleasant.
Scalping is one of the fast-paced forex trading strategies employed by traders in an attempt to take advantage of the small price movements of the currency pairs. It is a short-term investments strategy where the trader opens a position and closes it after a few minutes or even seconds. Typically, scalpers use technical analysis strategies to study the charts using timeframes of 15 minutes or less. Since the trades are short, they utilize leverage and look out for brokers with minimum charges. Pips trading is crucial to scalpers because of the small price movements are measured in pips. Scalping can be done manually or automated using software robots.
Scalpers identify many trading opportunities and make several trades a day. In times of market reversals, the trader immediately closes the losing trade. One major problem with scalping is that the traders pay lots of commissions or spread charges as they open many trades in a short period of time.. This strategy is very risky as one bad trade can blow the trader’s account.
Position trading refers to the strategy of opening trade positions and maintaining it for long periods of time ranging from several weeks to years. The primary aim of position traders is to capture the long term price fluctuations of the currency pairs. So, the trader relies on both fundamental and technical analyses’ strategies to study the forex market and place his trades accordingly.
This strategy has a high-profit potential if done properly, otherwise can lead to high losses. It can be done on part-time basis since it does not take much time. Unlike scalping, position trading is not fast-paced and the trader is not much worried about daily market fluctuations.
But, position traders incur swap fees every market day for months. In order to maintain trades for so long, the stop loss value must be wide meaning that the trader must have huge trading capital. The trader must also be disciplined and not emotional.
Swing trading is the trading style where a forex trader holds open trade positions for days in an attempt to identify potential opportunities on price swings. Swing traders hold positions for periods ranging from more than a day to a few weeks. When compared to position trading, swing traders hold open positions for shorter periods of time; typically 5-10 days. Rather than wait for a big move, swing traders aim to speculate on small price movements.
However, swing trading requires an appreciable knowledge of technical analysis and trading experience. The traders are also exposed to market risks arising from false breakouts, market reversals, etc. Swap fees and weekend gapping equally affect swing traders.
This is a simple strategy used by traders across the financial markets. The trader explores the market directional momentum and attempts to place trades in line with the market direction. Basically, the trader uses indicators to identify and confirm new trends. Trend trading is grouped as one of the forex trading strategies that fully utilize technical analysis principles. The trader can use several timeframes for his analysis and the trades can range from medium to long term.
Trend traders normally identify several trading opportunities daily and if the principles are applied correctly, will be able to apply their trading moves by analysing historical trend and price movements. The strategy requires excellent knowledge of technical analysis, risk management principles and good exit strategies.
This strategy focuses on identifying the support and resistance in a ranging market. A market with low volatility and without clear trends is known as a ranging market. It is the opposite of a trending market. The support and resistance levels are identified as the highest and lowest points the price reaches before reversing. Range traders use the support and resistance levels to determine overbought and oversold areas and therefore to Buy or Sell accordingly. Technical indicators like the stochastic oscillator, Relative Strength Indicator (RSI) and other indicators are used in range trading.
Range trading has a favourable risk to reward ratio and presents good number of trading opportunities. However, this strategy is not applicable to all markets. It is one of the forex trading strategies that a trader can periodically deploy when the market is not trending. A strong appreciation of technical analysis is needed.
The forex market is a global marketplace that is affected by global economic activities, reports, comments and speeches. Experience has shown that there are economic events or central bank announcements that move the values of affected currencies. For example, exchange rates are affected by interest rate decisions, consumer survey and economic reports such as unemployment rates, inflation rates, nonfarm payroll, gross domestic product (GDP), etc. News traders wait for these news and then respond by placing their trades according to forecasted market reactions.
Most brokers make the ‘economic calendar’ available to its clients. This is an important tool in fundamental analysis. News trading is classified among the forex trading strategies that are based on fundamental analysis. Timing the response of traders is critical to a news trader. If his timing and prediction is correct, the returns can be huge but slow response or bad prediction can wipe out his trading capital. The strategy is demanding because the trader has to follow the daily news, economic calendar and other tools available to him.
Please note that there is no single strategy that guarantees returns under all trading conditions.
Forex trading strategies are an essential part of every trader’s decision. The trader keeps honing and modifying his strategies as he gains more experience in the financial markets. Trading education is critical to correct application of trading strategies. Automated strategies are computer programs customized by the trader that sets specific parameters for trade entries and exits to be executed electronically. Manual strategies describe the forex signal generating techniques including entry and exit rules as well as money management orders. There are several trading strategies such as scalping, day trading, position trading, news trading, etc.
101investing is a renowned broker that provides access on over 250 CFD assets for trading. 101investing is operated by FXBFI Broker Financial Invest Ltd, the company is regulated by the Cyprus Securities and Exchange commission (CySEC). There is no restriction of forex trading strategies as the brand allows all trading styles. Below are some advantages of trading with 101investing:
Forex trading strategies are deployed by traders according to knowledge, experience, preferences and market conditions. There is no best strategy for forex trading as it depends on the trader and his specifications as well as the market conditions. No single strategy guarantees returns under all trading conditions.
The internet is replete with several learning resources and forex trading strategies. You can learn an existing strategy, test it and customize it suit your preferences. You can also create your own strategy using the following steps:
Forex trading is not easy for any trader because no trader wins all his trades as the financial markets are generally unpredictable. But, it becomes very difficult for the unprepared trader who has not invested his time in acquiring trading knowledge, skills and trading experience. It becomes less difficult when enough time is spent in training, practicing, testing and perfecting strategies.
There is no best timeframe for forex trading. The timeframe used by a trader depends on his trading strategy. For example, most scalpers use the M1 –M15 timeframes by virtue of their strategy. But, position traders use weekly and monthly timeframes because they target long term market fluctuations.
Forex trades can be adjusted in different time limits. An open position can remain open as long as the margin requirements are met. Forex trades are flexible and it can last from a few seconds to years, depending on your preferences and trading style.
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