A strategy for Forex trading can help a trader to decide whether to sell or buy a currency pair. It is possible to use a number of trading strategies and each of them will demand a different level of the fundamental and technical analysis.
All strategies are in the form of a continuum: from intraminute to intraday, and to the long-term analysis of the prices dynamics tendencies. Traders can choose one strategy or unite several ones. However, all of them can help to improve the trading potential of Forex.
Selecting a Forex strategy
It is important for a currency trader to understand what moves the market volatility, and to be able to define the optimal time for buying or selling the currency pair. Trading strategies can be developed by using the technical and fundamental analysis or combining them.
Before starting to use a certain strategy, it is reasonable to define
- what type of trader you are;
- how much time you can spend for trading;
- what currency pairs you want to focus on;
- the size of your position, and which position you prefer: long or short.
The next strategies are used by traders for opening their positions and closing them, preferable with profits. The strategy you are going to select will comply with your type of trader.
Forex scalping strategy
The traders who prefer short-term trades that take several minutes or those who try to fix multiple movements of the price are sure to choose scalping. Forex scalping is based on accruing this small but frequent profit, as well as o the attempt to limit any losses. These short-term trades will include all price fluctuations for several points only. However, combined with a high leverage, the trader can still risk with small losses.
This strategy is usually suitable for those who can devote their time to the trade periods with a high volume, and can focus on these rapid trades. As a rule, liquid currency pairs are preferred, because they contain the narrowest spreads, which helps traders to go into and out of positions.
It is also necessary to take into account the fact that when using the scalping strategy, the trade can undergo the impact of slippage, especially when no risk management instruments like stop-loss are used.
Day Trading
If you wish to trade during shorter periods of time, but you dislike quick and multiple trades, you can choose day trading as an alternative strategy. Usually this is one trade per day that unlike swing trading cannot be carried out overnight. The profit or losses occur as a result of any intraday changes in prices of the relevant currency pair.
For this type of trading, you need enough time for monitoring the trade, as well understand well what impact the economy may have on the pair you are trading. If on this day there is important economic news, this may influence your position.
Swing trading
The traders who prefer mid-trade trading where positions can be maintained during several days can choose swing trading. It aims at earning the profit from the price changes by defining the maximum or minimum fluctuations in the tendencies.
It is necessary to analyze the prices movements thoroughly. It is done to define where to enter and go out of the trade. The economic stability of political environment can also be analyzed as an indicator where the price may be further moving.
The swing depicted by the fluctuations between one indicator and another is used for trading with the use of a chosen financial instrument. Some traders prefer maintaining the assets during several days, while other may prefer to base their swing on the intra-month price movements.
The selection of a pair with a more extended spread and lower liquidity can be more suitable if the swing trading strategy is used. Although this strategy means less time for fixing on the market than in case of the day trade, it makes you risk any gapping or disruption overnight.
Position Trading
Position trading can be chosen by the most patient traders. It is less concerned about short-term fluctuations of the market and instead is focused on a longer perspective maintaining the position during several weeks, months and even years. This strategy aims at increasing the cost of investments during this long-term period of time.
These are requirements to this type of Forex trading strategy:
- Large stop losses to prevent the early stop-out;
- Sufficient capital for you not to get margin calls;
- Possibility to stay on the same level if the price is not against you;
- Good understanding of the market basics.
This strategy is the most suitable for those who cannot devote hours for trading every day but understands well what this market does.
Hedging Forex
In order to protect oneself from undesirable moves of the currency pair, traders can take both short and long distance. This compensates your exposure to potential loss, but it also limits a profit.
Opening both a short and long position, you can get an idea about the direction of the market movement. Thus, you can potentially close your position and repeatedly enter at more profitable price.
In fact, you buy the time to see where the market is moving and provides an opportunity to improve the position.
The solution about taking a hedging Forex strategy depends on the size of your capital, because you will need to cover both positions, as well as on the time you have for monitoring the market. This is the strategy that is more suitable for the traders who are willing to hedge one of the most liquid basic currency pairs.
Hedging is useful for long-term traders who predict that their currency pair will behave unfavorable but then reverse, because it can decrease some short-term losses.
Price action
In order to trade Forex without studying external factors, such as economic news or production indicators, you can use the Price Action strategy. This includes reading candlestick and their use for determining potential trading opportunities based exclusively on the price movement. As a rule, this strategy should not be used separately, and instead of this it is necessary to use it along with other strategies like swing trading and day trading to help traders do the following steps.
The use of the Price Action strategy means that you see results online and do not wait for external factors or news. Nevertheless, the crucial factor for the Price Action strategy users is that it is subjective. That is why one trader can predict the rising tendency, and the other one can predict the potential turnaround for this certain currency pair or this period of time.
Look at this eight basic Forex candlestick models.
Conclusion
Certainly, when it goes about Forex trading strategies, neither strategy will be successful all the time. However, these strategies that come with the reasonable approach to risk management can help revealing trading opportunities in Forex markets.
The strategy you choose will depend on your trader’s type, as well as the time you can spend for trading. This will depend on the currency pair you want to trade. Swing trading can be more preferable when working with more volatile pairs, while position trading can be more suitable, for example, when trading less volatile pairs.
It does not matter which strategy you will choose, it is important to use the instruments for risk management, e.g., stop loss orders.
