Forex trading strategies are, acording to Investopedia: “a set of analyses that a forex trader uses to determine whether to buy or sell a currency pair at any given time”. There are a lot of different forex trading strategies that you can use. When you are new to trading, there are certain strategies that you need to know about.
We should first of all understand what is meant by “forex trading strategies” when the term is used. These strategies can be based on many factors such as technical analysis, chart analysis or fundamental, news-based events.
The following forex trading strategies will help you learn the basics of trading and become more confident in your trades.
1. Position Trading
The first forex trading strategy that you need to know about is position trading. This is a long-term trading strategy where you will hold onto a single trade for weeks or months. When calculating your trades, you will use daily and weekly timeframes to look at trends.
Fundamental analysis of the forex market is needed for this strategy. Technical analysis is also vital to ensure that you are picking the correct long-term position. With this strategy, you need to enter a long-term trend as close to the start as possible.
The benefit of this strategy is that you will not have to spend too much time trading because of the long-term nature of the trades. The stress and anxiety you face will also be lessened as you are not worried about short-term fluctuations. There is also a favourable risk to reward ratio with this strategy.
Of course, there are some drawbacks that you need to know about including the need to have a firm understanding of fundamental analysis. A larger capital base will also be required to ensure that you have a wide stop loss. The final drawback is that you will not see any profit for a prolonged period because your trade is not complete.
2. Swing Trading
Another forex trading strategy that you need to know about is swing trading. This is a medium-term strategy where you will hold onto your trade for days or weeks. With this trading strategy, you will never hold onto a trade for more than a few weeks. The timeframes used to determine trades will be the 1 and 4-hour ones.
When you use this trading strategy, you will be looking to capture a single movement in the market. This single movement will be known as a swing. In order to find these swing movements, you will need to know candlestick patterns, moving averages and support and resistance.
The primary benefit of using this trading strategy is the fact that you do not have to spend a lot of time trading. If you are going to start as a part-time trader, you can easily use this strategy. Another benefit is the fact that you will have more trading opportunities than position trading which could create a bigger profit.
The primary drawback of swing trading is the fact that you will have overnight risks. It is possible for the swing movement to change while you are off the market and this creates risk. You will also not be able to ride the bigger trends which could create a larger profit.
3. Day Trading
One of the forex trading strategies that many people have heard of is day trading. As the name suggests, this is a short-term trading strategy where you hold onto a trade for minutes or hours. With day trading, you will not actually hold onto the trade overnight. To complete these trades, you will need to use the 5 and 15-minute timeframes.
When using a day trading strategy, you are going to be looking for volatility in the market and the movements that this causes. This is why it is important that you know when you should be trading. There is no point in having a day trading strategy for a forex pair that is not volatile when you are trading.
As a day trader, you are not going to worry about fundamental analysis as long-term trends are irrelevant. You will need to focus on technical analysis and understanding of the forex charts. You also need to determine the bias for the day you are trading.
The primary benefit of this trading strategy is that you can many money most of the time if you know what you are doing. You also do not have to worry about overnight risks because you will not have any open trades.
The primary drawback is the fact that you constantly have to watch the markets while you are trading. You can also lose more than you anticipate when there is a big change in the markets.
New traders should always keep in mind about the importance of strategy and these examples provided will help them towards becoming a better forex trader.