There are a lot of misconceptions around about forex trading. Most people hear mention of the word ‘trading, ’ and they assume that it must be very complex. In fact, you participate in the forex market every time that you convert money into a foreign currency for a holiday. The term is an abbreviation for the ‘foreign exchange’ market.
Consequently, it is something which has a direct impact on life whether you’re a day trader or a soccer mom. Forex is the gentle giant of the financial world. It isn’t as loud or lively as stocks and bonds, but it is substantially larger than all other capital markets. Despite operating on such a huge scale, the basic concepts are simple and accessible to any kind of investor.
The Purpose of Trading Strategies
Successful forex trading is all about discipline and patience. You have no personal control over financial conditions, but you can stay vigilant and learn how to spot the signs of a big opportunity. Trading strategies help to create this discipline because they form a series of guidelines which point investors in the right direction.
They also work to identify and formalize trading goals, which are very important. You need to know why you’re making a particular trade and, ideally, have the technical and fundamental analyses to back it up. The same applies to your choice of currency trading pair. Don’t forget that major trading pairs are usually more liquid and have narrower spreads than less common currency options.
There are all kinds of different methods to choose from, but the best forex trading strategy is one which enables you to carefully manage your funds. Most traders who like, to begin with, small steps and little risks. They build up to bigger trades over time, but generally stick to small-scale activities which deliver modest amounts, but on a regular basis. It is important to remember that no trading strategy is infallible.
If you’re not prepared to tolerate losses, you probably shouldn’t be trading at all, because this game is all about calculated risk. The secret to long-term success is to observe and learn from your early mistakes. Also, set realistic targets, particularly when you are just starting out. Before committing to any new trading action, identify target take profits and stop losses.
Five Common Forex Trading Strategies
Day Trading
Day trading is probably the most widely used forex trading strategy. It is sometimes called ‘spot trading’ or ‘active trading.’ It involves purchasing and offloading currencies within a very short window of time (as is suggested, within a day). Positions have to be taken and closed in the same twenty-four hour period. Positions cannot be carried over into a new trading day.
The strategy is highly effective, but it tends to be better suited to those with a little experience. On the other hand, technology is speeding up the process and making decisions much more straightforward. So, it could be argued that day trading is a good choice for amateurs who are working electronically. Keep in mind that you could be subject to a penalty charge if try to carry a trade over into the next day.
Scalping
Like day trading, scalping is a fast pace forex trading strategy. Investors hold their positions for brief windows, sometimes as small as a minute long. The aim is to focus on modest gains at a consistent, regular pace. It means that even though individual profits are lower, there is a lot of money to be made from how regularly they develop.
Scalpers try to avoid giving too much attention to any one position. Therefore, the downside to this strategy is that it requires a lot of time and effort. You’ve got to be fully dedicated to following the method through to completion. This involves keeping a very close watch on market fluctuations and price changes throughout the day. For this reason, it is not the optimal choice for part time traders.
Trend Following
This is another very popular method of forex trading, and it is remarkably simple. It has the potential to generate a lot of profit, but it should be limited to long-term activities. Trend following suits patient, disciplined personalities who prefer to be rigorously guided throughout purchasing decisions. Essentially, you’re watching the progress of a currency trend.
You must be able to identify this trend using your previous evaluation of currency patterns and price actions, in relation to changing economic conditions. Make good use of resources like entry and exit points, moving averages, bar charts, and candlestick patterns. Trend followers try to minimize short-term instability and prioritize long-term price undercurrents.
Range Trading
The range trading method is all about the notion that, no matter what direction a currency pair moves in, it will eventually come back to where it started. This allows traders to make decisions based on the probability of prices trading at the same levels on multiple occasions. The aim is to maximize the value of a trade by taking advantage of price fluctuations more than once.
The first stage of this forex trading strategy is calculating the resistance and support lines. Once identified, they can be used to pinpoint the best opportunities to make a profit. Range traders exploit scenarios in which currencies trade inside the resistance and support lines for an extended window. This is achieved by picking long positions at the bottom of the range and short ones at the top.
Swing Trading
Swing traders are, in many ways, the same as range traders. Certainly, the two strategies are closely connected. It involves exploiting levels of market indecision, but it also focuses on the resistance and support lines, as range trading does. The goal is to highlight brief patterns.
The trader then sticks with them right up until the point at which the move ends. The big benefit of swing trading is that it can be used in conjunction with trend following and day trading. However, to make it work, you must be able to accurately locate short term ranges and trends.
Selecting the Right Forex Trading Strategy
These are just a handful of the forex trading strategies used by both amateur and experienced investors. Ultimately, only you can determine which method works best. It will depend on your lifestyle, how many hours you want to spend monitoring currency activities, how much profit you are trying to make, and whether you’re willing to tolerate big risks. Don’t forget that you can combine different strategies to create a more personalized approach.