One of the best ways to cultivate success during trading is with the use of a strategy that you can trust. Since most traders who are starting out are most likely to begin their journey in Forex (FX) trading, we are going to use this blog to share four of the most competent strategies for the market.
However, it is key to note that what works for one person may not suit another. The best strategies will be suited to the individual who is using them, making sure that it is tailored for their personality and goals within the FX market. If you aren’t sure where to start, experimenting with the strategies below in a demo account will help you figure out what works best for you.
The three main forex trading styles
The first place to start is to identify what type of trader you are. How often and when you trade will indicate the strategies you will use. There are three main trading types that are commonly used – and these are
- Scalping – this type of trading involves very short-lived trades that are sometimes even held for as little as a minute. The trader, known as a scalper, aims to beat the bid or offer spread quickly and just take a few points off of the profit before the end of trade closing.
- Day trading – day trading is a way of exiting trades before the end of the day. This removes the risk of being affected by large moves overnight. With day trading, traders will use time frames from 5 minutes up to 4 hours.
- Swing trading – this strategy involves holding trades for several days, and sometimes even weeks or months. A trader using swing trading looks to profit from longer term price patterns and might be looking at their charts for only 30-60 mins each trading day. They can fit this around their other commitments – perhaps trading in the morning before work or in the evening.
Once you have determined what type of trader you are, then you can find a strategy suited to your personality and goals. The trading styles we’ve just mentioned can be managed and honed by the use of technical analysis. Trading College adopts technical analysis – and we teach this method – but others use the study of fundamentals. The most successful traders have perfected and honed their strategies, mastered technical analysis and have committed to a style of trading that suits their lifestyle.
Technical trading strategies
There are two styles of technical strategy which work alongside the trading styles mentioned above: trend following strategies and counter-trend trading. These both work towards profit by recognising and utilising price patterns.
Within these patterns, a trader must be aware of two concepts: support and resistance. These terms, in their simplest form, represent how the market bounces back from highs and lows. Support is the rise from a low, and resistance is the tendency of the market to fall after a previous high.
Traders capitalise on these points in different ways since they judge prices based on the previous lows and highs of the market. When the market dips low, buyers will be attracted to cheap prices. When the market rises, sellers will capitalise on the expensive, high prices.
One thing to note before we discuss the two technical styles further is that the concepts of support and resistance are not iron-clad – they are a common behaviour pattern of the trading market, and its participants, but should be taken as guidance only since they could change due to market performance.
Trend following forex strategies
Traders who rely on trend following strategies focus on the times when the market moves out of a range and establishes a new trend.
Establishing a new trend can happen in two different ways: either the market can move to new lows, causing buyers to hold off so they can see when it ends and sellers to sell in panic; or the market can soar to new highs, meaning more people may invest in the success and sellers will hold off selling until the highest point is reached.
Trend following forex strategy traders will exploit these changes by buying into markets once they have broken through the previous resistance and will sell those markets when they have fallen below the support levels. They will use indicators to identify where a new trend may have begun.
Trading with the trend is often a great place for beginners to start, and it has the potential to be the most successful FX trading strategy no matter what kind of trader you are. If the indicators that a trader uses can identify an improved chance of a trend forming, they can tilt the odds in their favour – a breakout. This can take a few days since a breakout relies on a price moving beyond the highest or below the lowest previous price for a number of days.
Counter-trend following strategies
Counter-trend following strategies have a high ratio for success but it’s often not wise to counter-trend trade until you are more experienced in trading. The traders using this strategy will rely on the fact that most breakouts don’t develop into the long-term trends that the trend following traders will be looking for.
It is important to remember that risk management skills of the trader must be high when counter-trend trading, which is why you should be more experienced in trading before attempting this strategy. This FX strategy relies on support and resistance levels maintaining their stability but there is a risk of downsides when the levels breakout.
This strategy will suit a trader who is more able to constantly monitor the market during the course of the day. The markets that benefit from this type of strategy are normally stable but volatile since they offer healthy price swings but in a constrained range.
If you’d like to learn more about the opportunities available in the forex trading market, and how to create your own successful market strategy, why not register for one of our Learn to Trade Live courses, and start succeeding today!
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