Trading on the global forex market presents the opportunity for a quick profit turnaround for traders and offers significant potential. However, as the most liquid market in the world, it is both complex and highly competitive. This means that, in order to be successful, you need to have a solid trading strategy in place.Forex can be traded in numerous ways, so it is very important that you go with an approach that suits your experience level, budget, and trading goals. Having a proper understanding of the market you are entering into and the strategy that is needed can be the difference between trading success and failure.
Choosing a forex trading strategy is similar to buying a new car. There is a lot of choice, and they come in different shapes and sizes. It is also important that you test drive a new strategy via a demo account, before proceeding with it on the real-world markets.
What is a Forex Trading Strategy?
A forex trading strategy is a method that forex traders use to help them decide whether to buy or sell a currency pair at any given time. They involve the use of specific trading techniques, with the aim of generating profits from the purchase and sale of different currencies.There are many trading strategies in existence, and they can take the form of manual or automated trading signals. Modern trading strategies exist in the form of technical or fundamental analysis, or can be based on news events. Manual strategies involve a trader looking for trading signals themselves via manually searching on a computer.
Automated strategies are where an algorithm, developed by a trader, locates these signals and executes them automatically, without being aided by human input.An effective trading strategy is one that enables a trader to properly analyse the market and execute trades with confidence using sound risk management techniques.
Types of Forex Trading Strategy
There is no “one size fits all” approach when it comes to a trading strategy being suited to every trader. Different strategies will suit certain traders more than others. See below for a brief outline of some of the main types of strategy available.
- Trend Trading: This is one of the simplest forex trading strategies, and also a reliable choice. It principally involves the attempt to yield positive returns by exploiting the directional momentum of a market.
- Price Action Trading: This is where historical prices are studied as a way of formulating technical trading strategies and can be utilised as either on its own or with an indicator.
- Range Trading: A strategy that includes detecting support and resistance points, in which traders place trades around the key levels. Technical analysis is a primary feature of this strategy.
- Position Trading: This is more of a long-term trading strategy, compared to the other choices available. It focuses mainly on fundamental factors, but technical methods can also be used.
- Day Trading: A short-term strategy that is designed to trade financial instruments within the same trading day, which means that positions are closed before market closing.
- Swing Trading: This is a speculative strategy whereby traders look at the trending markets, as well as looking to take advantage of the range-bound by buying and selling at the support and resistance trendlines.
- Forex Scalping: Under this strategy, scalping is the process whereby a trader takes out small profits on a regular basis, which can be achieved by opening and closing multiple positions over the course of the day.
- Carry Trading: This involves the borrowing of one currency at a lower rate, before then investing in another currently at a much higher yielding rate.
Choose Your Strategy Wisely
As outlined above, there are many choices available to you, when it comes to selecting a forex trading strategy. When considering which trading strategy to go with, it is worth taking the time to analyse the risk-reward ratio. Also, figure out the amount of time investment is needed for each trading strategy, and select accordingly.Ultimately, each strategy will be suited to different traders, so it really does depend on your personal circumstances, how open or averse you are to risk, and the amount of time you dedicate to trading. The best piece of advice is to match your trading personality with the appropriate strategy, as this will help to set a solid foundation on which to build your trading activity.