So here’s the thing. There are so many forex trading strategies and systems out there that sometimes it can be a little overwhelming for you as a trader. Which strategy should you follow? Which strategy is actually suitable for you? What are the pros and cons of each different strategy?
There are a lot of questions in your head. To ease the process we have laid out for you 5 forex trading strategies that actually. Be sure to go through their pros and cons and choose one that suits you the best.
So without further ado, let’s get cracking.
1. Position Trading
This strategy is used when you’re up for longer-term trading. That is to say, you hold your trades for a week or even a month. This is contrary to weekly or daily trading.
This approach doesn’t need you to stay stuck to your screen the entire day to keep a check on fluctuations. When you’re a position trader short-term fluctuations do not bother you. You majorly rely on your study of the fundamental forces behind this system of trading. For example, a core knowledge or understanding of the GDP, NFP, Retail Sales and so on is a must where you’re opting for forex position trading. If you analyze these, you will have a clearer picture on whether you’re heading towards a bullish or bearish market.
If this sounds too much, you can always go for technical analysis to time your trading better.
Let’s set an example to make it easier for you.
Suppose you studied the fundamentals of USD and you’re determined that the forex trades are to go up in the recent future. And you don’t want to go long at the moment. So rather you wait for USD to come to your support before you take your step.
As a position trader it’s crucial to trade many markets so that you don’t get stuck in a few markets. Position trading is almost like riding a trend so the more markets you trade in, the better idea you’ll have regarding the trend.
If you have the correct analysis, you will be able to enter at the beginning of a new trend before the crowd.
Check out this picture to know what that means.
- Less amount of stress. Don’t have to be concerned with hourly or daily price fluctuations.
- Doesn’t interfere with your full-time job. You need to go with the trend or rely on the fundamentals. After that position trading doesn’t require much time.
- You have a 1 to 5 risk to reward ratio which is quite favorable for many forex traders.
- Not exactly a con but as a position trader you need a strong understanding of the market forces that drive this trading network. A lot depends on it.
- You need a large base. It’s important that you trade in many markets. A big capital base is also essential as your stop loss is wide.
- Lastly, you run a possibility of making lower profits or no profits a year because of lower number of trades.
A minor detail: The only difference between Position trading and Trend following is that the latter is purely based on a technical style with no reading of the fundamental driving forces.
2. Swing Trading
As a swing trader, what you try to do is capture one swing in the forex market. This is also referred to as the “single move” strategy because all you’re after is one move, a single swing.
As a swing trader you typically trade off within a 1-hour time frame or above, like 2 hours or even 4 hours.
This strategy is a medium-term strategy unlike the longer-term position strategy or short-term day trading strategy. You can hold off your trades for days or weeks.
Also since you’re trading off this higher time frame, you have more time to trade more markets if you wish because the swing comes every 4 hours or 2 hours, for instance.
To adopt this strategy as your forex trading strategy, you must remember one thing. You’ll need to be well-versed in a lot of technical concepts before you start off. Since you’ll be buying support, trading break-outs, pullbacks, selling resistance or even try trading the bounce of the Moving Average (MA), you might find several technical concepts handy.
So be sure to brush up your stats knowledge on Support and Resistance, MA (moving average) or even concepts like candlestick patterns.
Still confused as to what a swing is? The picture below will help you grasp a better understanding of swing trading.
- If you’re good at catching the swing, you can definitely make money on most quarters. Why do I say “most quarters”? It’s because in the case of swing trading too, you don’t get as many trading opportunities as in day trading.
- However, if the trading opportunities flow in consistently, you’ll make considerable profit.
- You don’t have to remain glued to the screen all the time because of the greater time frame. So it’s possible to continue with your job as well. Moreover, it’s not advisable as well.
- If you’re going for swing trading, remember, you won’t be able to ride huge trends.
- More risk. Forex trading is not without its risks, but in this case, you’ll run overnight risks. Since the time frame is 1-4 hours, a night-long gap might leave you with a lot of risk.
- A knowledge regarding the technical concepts is very crucial to be a swing trader. You just can’t leave it out.
3. Day Trading
If you wish to adopt this strategy, then your main goal will be to capture the intraday volatility. Sounds too complex? Let’s break it down. Each market has their different intraday volatility. So, as a day trader of those markets, your job is to pick up on their volatility of the day. That’s how you’ll make money in day trading.
The way to get the most volatile session is to get your bias on the timeframe of the day. It can be either high or low. But after you’ve got it, you can trade accordingly.
It’s similar to swing trading in a lot of ways but within a much shorter time frame. Capturing the swing is almost like capturing the intraday volatility of a market. But the pace is reduced from 4 hours to 5 minutes.
Long-term trade is not your concern any more. It’s totally different from position trading. Analyzing fundamentals that drive the forex trading system is not required in day trading.
Day trading is a short-term strategy and the time frame is 5- 15 minutes. In this strategy trading, you can hold off your trade for minutes or hours at the most.
Since you’re trading on a lower time frame, it will not be possible for you to trade on 40 or 50 markets at the same time. You’ll have to focus on a few markets ranging from 3-6 markets. Anything more than that becomes really difficult to handle considering the short time frame you have to work within.
To explain further, let’s use this chart as a reference.
It shows that today is a bearish market. The resistance is at 1.2900 and the price is not breaking above it.
After that, within a 15 minute time lapse, a shooting star evolves which is your cue to sell pressure. That is your potential exit from the trade with the most amount of profit.
- If you’re really good at making the cut, then this is your chance to make money.
- You can make a considerable profit in most months.
- As a day trader, you don’t run the risk of overnight loss. You can close your books by the end of the day.
- Stress. Day trading becomes too much to handle because you have to be glued to the screen.
- You run the risk of suffering considerable loss if you slip out, or miss the cut.
- You can’t continue a full-time job if you’re a day trader. It cancels out your chance to have a real job.
It’s not recommended for retail traders. The huge transaction cost will eat up profits that you make from the trade. Moreover, manual retailers trying to make the cut in opposite of machines is not such a good idea to be honest.
But if you’re here to learn, read on.
This forex trading strategy works with a very short time-frame where you can hold your trades for not more than seconds or minutes.
Your main weapon of profit is the Order Flow (a list of the buy-sell orders in the specific market). If you’re a scalper, you are only concerned with the current market and how you use it to your advantage.
This is an example of how scalping functions. Now moving on to pros and cons.
- You can make a big, fat income from this type of trading.
- There’s plenty of trading opportunities per day.
- It’s bad news for retail traders because you have to pay for software, connection, news feed etc. The transaction cost almost nullifies your profit.
- If you adopt this strategy you’ll have to sit with your eyes glued to the screen the whole day.
- It’s highly stressful.
You can join a trading firm which provides the essential tools if you want to practice this forex strategy.
5. Transition Trading
If you’ve never heard of this one before, let me break it down to you.
What exactly is transition trading?
The basic gist is to enter in the lows and if the market moves up, you can increase target profit or pursue your stop loss on the higher timeframe.
For example, consider the chart below showing a 1 hour time frame where the prices have just started moving in your favor.
Now notice the next chart. You noticed a 4 hour time frame next with regard to 20 MA. After looking at the flow you decide that it’ll be more profitable to you if you trailed your stop loss for the next big move.
The risk is not much because you can always exit when prices drop just below 20 MA.
But if the price favors you, then you can exit on the next high after earning an insane amount for a 1:10 risk to reward ratio.
- Risk to reward ratio is 1:10. So you can earn a lot within seconds.
- With a low entry, you have a lesser degree of risk.
- You will earn a monster amount but only if you’re very lucky. The odds of this happening remain low.
- Understanding time-frames is the key to using this forex strategy.
Now that the different forex trading strategies are in order, you just have to know which one’s made for you to get going into forex trading.
Which Forex Trading Strategy Suits You Best?
This is the part where most traders go wrong. A lot of information on the different trading strategies will not do you much good if you don’t figure out which one suits you best.
Here’s the drill. Ask yourself these 3 questions before going for forex trading.
- Do you want to grow your wealth or make an income from trading?
- How much time can you devote to trading?
- Which one would you prefer: a high win rate with low reward to risk or a low win rate with a high reward to risk?
Now that you know what your preferred choices are, simply go back to the strategies and check which approach suits you best?
If you’re a beginner in forex trading, don’t be overwhelmed with all the complex words and strategies.
Here’s a list of what you can start off with:
- You can start digging up knowledge on Support and Resistance and other such technical concepts.
- Take your time to decide how much time you can devote to trading.
- Once you know your time limit, you can choose from among the strategies listed out here and get going to the world of forex trading.
Check out the different forex trading strategies and let us know if you found yours.