A trading strategy is essentially a series of rules that are followed when trading in the financial markets. For example, a forex trading strategy defines a set of rules for trading currencies that determine when to buy, sell and hold the position.
There are several different strategies available for traders eyeing the forex market, but we will focus on the most commonly used methods in this article. Here’s a list of the most popular strategies for trading in the forex market
Two main approaches support a trading strategy. They are:
Directional Trading
This trading approach uses predictive analysis to determine the direction of the market. It is accomplished by comparing current market conditions to a set of predetermined criteria. The direction that is specified is either a buy (long), sell (short), or hold (neutral) signal.
To trade in a directional market, a trader must identify the appropriate entry and exit points. A directional trading system is designed to determine when the market is trending. The data points used in this system identify significant support and resistance levels which are then leveraged to execute trades.
Non-Directional Trading
This approach is used when the trader is not sure whether the price of a currency pair will move higher or lower. Non-directional trading is designed to take advantage of markets that are moving sideways. To trade in a non-directional market, you must be able to identify periods of consolidation.
Now let’s look at some of the commonly used trading strategies:
Technical Analysis
Technical analysis is a strategy that looks at a currency’s price history to predict future price movements. The technical analyst will look at various charts and will attempt to identify patterns or trends in the price action.
Examples of technical indicators include Bollinger bands, moving averages, and the Relative Strength Index (RSI). Technical analysis can identify a potential support and resistance level based on the previous price action of a currency. Traders can use it to predict changes in the direction of the price based on identified patterns using basic charting tools such as trendlines.
Online trading resources such as FXLeaders offer free forex signals in case you want to identify opportunities in real time.
Fundamental Analysis
This is a trading strategy that analyzes economic news events. It is based on financial data, such as GDP, unemployment rate, and trade balance. Fundamental analysis can predict changes in the price level of a currency based on the economic condition of a country.
For example, if a country’s economy is weak, the government may have to increase interest rates to attract investors, which might lead to a decline in the currency’s price.
Forex Hedging
This strategy aims to eliminate the risk of trading. It involves buying currency pairs and using them as insurance to maintain the value of the portfolio. For example, if a trader has a long position on the EUR/USD, he can purchase the USD/JPY simultaneously to protect the long position in the EUR/USD. It will allow traders to take additional risks while maintaining an excellent risk to reward ratio.
Fibonacci Retracement
This tool can determine the levels of support and resistance based on the Fibonacci ratio. You can identify the prominent levels where the price will likely turn around. The ratio identifies support and resistance areas because it tends to appear in many naturally occurring patterns.
Scalping
This is a prevalent trading strategy that involves taking small profits on multiple trades. It is based on the premise that the price of a currency will move in waves. Scalping doesn’t involve holding positions overnight, so traders who employ this strategy execute hundreds of fast trades over a week, each of which has very low-profit potential. Scalpers are often able to profit from price swings that are minor in the grand scheme of things.
The key takeaway
Predicting the future is indeed tricky. However, with a good trading strategy, one can make the best use of time when trading in the market. One of the first things to consider when looking for the best strategy is determining your trading style.
Some strategies are more suited to short-term traders, while others work better for longer-term traders. So, you need to ask yourself how much time you are going to commit to trading and if you are going to trade manually or let a robot do the work for you.
You also need to consider the amount of risk you are willing to take and how much time you are eager to devote to your trading strategy. Also, some strategies will require you to watch currencies regularly, and some of them will be able to run on autopilot for several days without your intervention. So, before you choose one of the strategies described above, you need to consider your goals and experience and decide which strategy is best for you.