What is a Forex trading strategy?
A Forex trading strategy is a system of rules that a Forex trader follows to make entry and exit decisions. A Forex strategy, therefore, is a body of principles that a trader uses to decide when to buy or sell a currency pair.
There are many of those strategies. They include price action, range trading, trend following, and scalping. Indeed, there are quite many of them. However, basically, all of them are derived from the two major approaches of analyzing the Forex market: fundamental and technical analyses.
The importance of a trading strategy cannot be overemphasised. It gives the trader the ability to analyse forex signals in the market and to make informed decisions about it. However, being comfortable with the one you use will determine, to a large extent, your success.
Here is a discourse of 7 Forex trading strategies and their pros and cons.
Forex trading strategies and their pros and cons
1. Price Action Trading:
Price action is the analysis of price to determine what it will possibly do in the future. Hence, price action trading strategies are those strategies based on price action — the attempt to predict price movement by assessing its historical behaviour.
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Many price action traders use it as a stand-alone strategy; while some others incorporate indicators, too. However, this category of Forex traders rarely pay attention to fundamental details except in situations of high-impact news.
Price action can be used over different time frames. Also, it makes it easy to use varying strategies.
And within price action, there are range, trend, day, scalping, swing and position trading. These are different strategies with their own principles which will be discussed.
2. Range Trading Strategy:
Range Trading works on seeking to identify support and resistance levels. These levels are highly regarded by traders and are used as key levels for making vital trading decisions. Range trading works best when the market is consolidating: that is when the volatility is low and the trend is hard to detect.
Range traders are primarily technical traders and so, rarely carry out any fundamental analysis. It works under any time frame. However, it is important to manage risks as those key levels, as widely regarded as they are, are not foolproof. Sometimes, breakouts occur.
Range trading makes it easy to find opportunities when a market is ranging. This is important because this particular situation in the market can be really confusing.
Also, it provides a modest risk-reward ratio.
However, range trading requires lengthy periods for analysis. Also, a range trader must have a firm grasp of technical analysis.
3. Trend Trading:
Trend trading is one of the simplest trading strategies there is. It does not matter your level of experience; trend trading allows you to yield huge returns by just trading in the direction of the market.
Trend trading offers a high number of trading opportunities. The risk-reward ratio is high. And, it might qualify as the easiest of all.
However, it requires long periods for analysis. Also, it requires a strong understanding of technical analysis.
4. Position Trading:
Position trading is the closest to investing. Because it is long-term (weeks, months, and even years!), it uses mainly fundamental factors in analyzing the market. However, sometimes, it utilizes technical analysis, too. A position trader focuses on the long-term, broad movement of the market and is never swayed by its short-term fluctuations.
Position trading requires little attention and time. Also, it has the potential to yield a high return relative to the risk.
Position trading can make the trader lazy. Moreover, position traders may not be able to identify great short-term opportunities as they are focused on the long term.
5. Day Trading Strategy:
Day trading is the strategy that seeks to profit from the intraday movements of the price of financial instruments. Day traders open and close their positions on the same day; therefore, they do not keep positions overnight.
As a result, day traders can hold trades for just a few minutes or hours.
The most important advantage that day trading has is that the trader is able to capture many short-term market moves. He can also profit from them. Hence, he has a substantial number of trading opportunities.
Day trading requires time and efforts to devote to the market. A day trader always has to be on his toes to profit.
6. Forex Scalping Strategy:
Forex Scalping strategy is a strategy used by Forex traders to profit from small market moves. The aim is to generate frequent small profits from the Forex market. They achieve this by placing multiple trades at a time and closing them after a while.
This type of trading can be algorithmic or manual. However, Forex scalpers concentrate on the major currency pairs as they are the most liquid and they also carry the least transaction charges.
Forex scalpers have many trading opportunities every time.
However, they have to devote tremendous time and analysis to the market.
A sound knowledge of technical analysis is required. Also, the reward risk ratio is low.
7. Swing Trading:
Swing Trading is intermediate between day trading and position trading. Swing traders keep positions between a few hours and a few days; hence, it is considered as a medium-term strategy of trading.
Swing trading presents a few trading opportunities compared to day trading and scalping. However, it has a moderate risk-reward ratio.
It requires a strong understanding of technical analysis. Also, it takes more time than position trading.
There we have discussed the top 7 strategies for trading Forex. We have talked about price action, range trading, scalping, day trading, swing trading, position trading, and trend following. These strategies have been proven to work and you should consider adopting one of them.
However, no matter the strategy you adopt, you need a standard and reliable signal service and mentorship provider.
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