There are various trading strategies, which traders apply to make their trading profitable.
Let’s review the major of them.
Day trading strategies encompass all trading styles that involve closing out all trading positions before the end of the trading day.
Day traders usually have a very short term time horizon and take only intraday positions aiming for a fast profit.
Day trading allows Forex traders to avoid taking overnight risk where their portfolio is exposed to unmonitored exchange rate movements that occur when they are asleep or inattentive to the market.
Scalping is an example of a day trading strategy whereby a Forex trader might attempt to buy on or near the market bid and then quickly sell out the position at or near the offer side to gain a few pips.
News trading strategies involve trading Forex based on the release of important news events or economic data.
News trading is usually a very short term trading strategy where traders try to predict how the Forex market will react to the observed news event.
When the outcome differs substantially from the Forex market’s consensus expectations, the result is often a sharp exchange rate movement that can provide news traders with a quick profit.
Popular economic releases to trade include: employment, inflation, growth and retail sales data, as well as central bank interest rate decisions.
Remember that the observed impact of news can sometimes be counter-intuitive, depending on what outcome the market was expecting.
Swing trading strategies typically attempt to profit from both trends and counter- trend corrections by taking positions that follow the momentum of the market.
Swing trading can be performed in all time frames, although it is most commonly used
as a short to medium term trading strategy that may involve taking overnight positions.
Swing traders usually employ a combination of technical indicators that asses the market’s momentum and trend to help them trade and provide trading signals for taking and then reversing their trading positions.
Popular swing trading momentum indicators include the Relative Strength Index or RSI. Popular trend indicators include moving averages and Wilder’s Average Directional Movement Indicator (ADX).
Trend trading involves first identifying and then following an established directional market movement or trend.
Trend trading can be performed over any time frame, but it is typically a longer term trading strategy where traders routinely take overnight positions.
A trend trader will usually identify trending chart patterns like channels and/or employ one or more technical indicators to assess the strength of the market’s trend and provide trading signals for entering and exiting trend trading positions.
Popular trend indicators include moving averages and the MACD. Wilder’s Average Directional Movement Index (ADX) can also be used to gauge the strength of a trend.
A trend trader will look for a good time to buy in an up trend or to sell in a down trend. They will usually hold no position in a flat or ranging market.
Carry trading involves buying a higher interest rate currency and selling a lower interest rate currency to capture the interest rate differential existing between them.
Carry traders typically take leveraged positions that they hold over a long term time frame.
Ideally, a carry trader would expect the higher interest rate currency to appreciate relative to the lower interest rate currency over the trade’s projected time frame to generate even more profits.
An example of carry trading might involve buying the Australian Dollar and simultaneously selling the Japanese Yen for a period of six months or more in order to capture the positive interest rate differential.
Chart level trading
Chart level trading involves perusing exchange rate charts to identify significant levels of support and resistance.
Support and resistance levels are usually an indicator of underlying human psychology that prompts a significant market reversal at a particular exchange rate. They often occur near round numbers.
Chart level traders typically attempt to sell ahead of resistance and buy above support. They often place their stops just beyond the chart level in case it breaks.
Classic chart pattern trading
Classic chart pattern trading involves perusing exchange rate charts for chart patterns that have reliable outcomes and then trading the appropriate range or breakout signals as they arise.
Classic reversal chart patterns that indicate the market may be changing direction include Head and Shoulder Tops and Bottoms, Double and Triple Tops and Bottoms, and Saucer Tops and Bottoms.
Classic continuation chart patterns include Flags and Pennants, where the market pauses briefly after a substantial move before breaking out to make another move in the same direction.
Classic consolidation patterns include triangles, wedges and ranges where the market trades between established converging or flat parallel lines before breaking out.
The primary classic trending pattern is the Channel, which consists of a set of sloping parallel trend lines between which the market trades as it moves in either an upwards or downwards direction.
Technical indicator trading
Technical indicator trading involves computing one or more indicators that provide trading signals which can be used to forecast and profit from exchange rate movements.
Technical analysis offers traders a variety of indicators computed mathematically from market observables like price, volume and open interest that can be used alone or in combination to devise a technical indicator trading strategy.
Popular technical indicators used in trading strategies include moving averages, the Moving Average Convergence Divergence or MACD oscillator, Bollinger Bands, the Average Directional Movement Index or ADX, the Relative Strength Index or RSI, William’s Alligator indicator, Stochastic, and On Balance Volume.
Technical indicators provide traders with a more objective way to determine market direction and timing for entering and existing positions.
Proper training is important for achieving success as a Forex trader. Without the right preparation and expertise, it is certain that a trader’s possibilities of succeeding are substantially reduced.
This e-book, The Building Blocks for Succeeding with Forex Trading, was created by traders and for traders with the aim of equipping traders with the right skills of earning big returns from trading currencies.
It is important that you learn at your own pace and take time to familiarize yourself with the foreign exchange market. Only then should you consider entering trades in the market.
Whether you are an investor who want to learn Forex trading for the first time or someone who just wants to give Forex trading a try, then take the first steps with this easy-to-follow e-book.
Importantly, the lessons in this guide give new and experienced traders alike all the essential tools and resources to start buying and selling currencies in the Forex market.