2 Common Forex Trading Strategies
When it comes to Forex trading strategies, we need to understand that there are countless ways to trade. Each individual follows a certain trading style which suits him well and he adopts some trading strategies that work for his trading style. Among the countless strategies which are available, the two most common strategies are Range Trading and Trend Trading.
When a trader buys a currency expecting that the valuation will come back towards a longer-term average, then it is known as range trading. It is a very simple strategy and is also called as mean reversion.
There is a very important thing that you need to learn when you use this strategy. You need to be able to spot a price level where sellers are most likely to stop selling and buyers are probably going to buy. You will be using support and resistance levels to accomplish this. By doing a precise technical analysis using your favorite technical indicators and oscillators on a currency chart, you can very easily identify these support and resistance levels.
Trend trading is easier and simpler than range trading. For this reason, many newbies and experienced traders use this to quickly take advantage of a good trading opportunity. It is as simple as identifying the direction price has been moving for a while and placing the trade in the same direction.
If there is a strong uptrend that started recently, you will place a buy trade; If there is a strong recent downtrend, then you will sell. It is as simple as that. It is done on the expectation that the price is going to move in the same direction.
Range trading takes a long time to master but trend trading is simple enough to be able to identify an opportunity with a quick glance.
3 Easy Ways to Exit a Trade
People who just began to trade in Forex usually focus on the entry points. So, they devote most of their time in analyzing when to enter a trade. But if you ask a professional trader, he would say that knowing when to exit a trade is very important as well. This differentiates a professional trader from a newbie. So, let us discuss three important ways to exit a trade.
Using a Risk Reward ratio
Using a Risk Reward ratio is the simplest option to set stop loss and take profit levels. Many traders choose either 1:1 or 1:2 Risk reward ratio. If you choose 1:1 Risk Reward ratio, then the number of pips for stop loss and take profit will be the same. For a 1:2 ratio, the target limit will be double the number of pips for the stop. So, if you set 30 pips to stop loss, then you would set 60 pips target. Once you have set your stop and target, you can just leave the trade running. The trade would exit when it hits either the Take Profit or the Stop Loss.
Trading with multiple lots
The second way to exit a trade can be used when you trade multiple lots. Let us say you open a trade with 2 lots with a 60 pips target limit. Once the trade reaches a predetermined point towards the direction of the target, you can close one of the lots to take some profit and also move the Stop Loss to breakeven. This way you lock in the profit and avoid any losses. If the trade continues in your favor, you can also put a trailing stop to continue to lock in the profit. This is a very good strategy to maximize your gains and to minimize your losses.
Using support and resistance
You can also use support and resistance to find out the exit points. This way, you can close a trade when a bearish trade hits resistance or when a bullish trade hits the support. When the trade reaches these levels, you can choose to do any one of the following:
- Close all the lots and take profit.
- If you think that the trade will move through the support or resistance level, you can partially close the trade as mentioned in the previous strategy.
- If you can predict that the price is moving strongly in the desired direction then you can leave all the positions open but just tighten the stops. This way you can make some additional profit.
Trader styles and flavors
Each trader has a unique trading style and flavor. Once you get experienced, you will automatically choose a certain trading style that works well for you. So, it is important to know the various trading styles and flavors that are available to choose. That is what we are going to discuss here.
Technical vs fundamental
Technical analysis is based on the premise that the history tends to repeat itself. So, a technical analyst studies how a particular currency pair has behaved in the past and tries to predict the future movement of the pair based on the historical data that he has studied. Some traders study the charts based on the principles of price action whereas other traders also use technical indicators, oscillators and other tools to analyze the charts. Traders also use support and resistance levels to develop a trading strategy.
Fundamental analysis is all about the news. Fundamental analysts constantly check the economic news, learn the economic condition of a currency and make predictions according to that. So, they always have to keep an eye on economic calendar and Central Bank announcements. There is a whole list of news releases that they focus on to predict the movement of the market.
Short-Term vs. Medium-Term vs. Long-Term
Whether you want to be a short-term trader or a long-term trader depends upon how much time you can devote per day to trading. If you already have a job, then you cannot sit in front of your computer all day to monitor the market. In such cases, you can choose long-term trades because you don’t have to spend much time trading when you use longer time frames. On the other hand, if you can trade for many hours a day, you can certainly choose shorter time frames as well.
Short term trades are the trades which are opened and closed on the same day. It is also known as day trading. You can also trade very low time frames, such 1 minutes and 5 minutes time frames which allows you to close and open trades rapidly. Trading such smaller time frames are also known as scalping. If you are a scalper, you should have your eyes fixed on the charts, have the ability to make quick decisions, act quickly and have good concentration. So, short-term traders typically use the time frames like hourly, 30min, 15min, 5min, and 1min.
Medium-term trades, also known as swing trades may last a few hours or even few days. Medium term traders usually use hourly, 4-hour and daily charts.
Long-term trades can last for several days, weeks, months or even years. These trades do not require more time per day. So, if you are trading only part-time, long-term trades may be more suitable for you. These traders use daily and weekly charts to analyze the market.
Discretionary vs. Automated
Discretionary trades are made by trader’s own discretion. This involves developing a trading strategy using fundamental or technical analysis or both and manually executing the trades. This is the most common way of trading and it requires a lot of time. Since manual involvement is always required, the decision of the traders is always influenced by their emotions like fear, greed, etc. So, it is very important to learn how to manage emotions while trading.
Automated trades are carried out by computer software programs such as robots which are created using a specific trading strategy. So, manual involvement is only required in developing a trading strategy, but the trades are executed and closed automatically by the trading software. This saves a lot of time for traders. Also, since the trades are automated, there is no influence of trader’s own emotions that can affect the outcome of the trades in a negative way. An automated trading software runs 24 hours a day and five days a week and thus, uses all the possible opportunities in the market.