The forex market is an incredibly active and highly volatile financial market accessed by millions of traders worldwide. With a daily trading volume exceeding US$6 trillion, the need for robust skills and expertise is vital to avoid significant losses. There are many ways to trade forex, each with its own set of techniques and form of market analysis. This is what we’ll be looking at in this article.
Forex trading techniques
Below are some common forex techniques that traders use to maximise potential profit:
- Price action trading. Traders who use price action strategy typically make trading decisions based on actual price movements of a currency pair rather than indicators or analysis. They will refer to tools and patterns in the price movements. This includes price bars, price bands, breakouts, and trendlines. They’ll also look at candlestick formations, channels, and support and resistance. Price action trading is popular among day traders who open and close their positions quickly. This strategy may be helpful for new traders looking to put their skills and knowledge to the test with smaller trades.
- Range trading. Range trading is a forex trading technique that sees traders buy during support periods and sell in resistance periods for a given security. A trading range occurs when a security trades between steady high and low prices over a particular period. Traders seek to maximise profit on range-bound trading by repeatedly buying at the support trendline and selling at the resistance trendline until the security breaks out from a price channel. Range trading is said to be an effective strategy when the forex market lacks direction, but is at its weakest during a trending market.
- Trend trading. A trend trader is one who looks at trends to identify trading opportunities. They use technical indicators to speculate the direction in which the market will turn. A trend trader will use this technique to identify a trend as quickly as possible and exit the market before the trend changes. Prices that rise usually indicate an uptrend. Declining prices typically suggest a downtrend. A market is said to be in a sideward trend when prices don’t move up or down (horizontal price movement).
- Position trading. A position trader doesn’t usually trade actively. Unlike day traders, they typically purchase an investment for the long term in anticipation that its value will rise. This type of trader will usually only consider short-term price fluctuations or news announcements if they feel their position will be impacted.
- Day trading. Unlike a position trader, a day trader looks to profit from short-term price movements of an instrument. They trade many times through the day using a variety of techniques, usually closing positions before the trading day ends. Day trading often depends on technical analysis to be successful. It requires a high degree of focus, time, and objectivity. While day trading offers the potential for large returns, it is also highly volatile with sudden moves incurring enormous losses.
- Forex scalping. Using this short-term trading technique, a trader seeks to make a series of quick profits off the opening and closing of multiple trades. Scalpers will usually hold positions for a few seconds or minutes. It is a form of day trading characterised by high levels of stress, so risk management is key to reducing the risk of loss. Forex scalping requires quick decision-making, increasing the possibility of errors. A solid understanding of the dynamics of the forex market is therefore key to mitigating mistakes or over-impulsiveness.
- Swing trading. A trader using a swing trading strategy tends to hold a position for a few hours or days (sometimes longer). They do this to profit from speculated price movements. A swing trader typically sells at ‘swing highs’ or buys at ‘swing lows’ (or vice versa). They usually make trading decisions using both technical and fundamental analysis. This forex trading technique can be impacted by sudden spikes in the market, so vigilance is vital to avoid large losses.
- Forex carry trading. A popular technique for trading, this strategy involves selling (or borrowing) a currency with a lower interest rate to buy a currency with a higher interest rate. Forex carries trading is based on the notion that the trader pays a low-interest rate on the currency being sold (or borrowed) while making a gain on the higher interest rate of the currency they bought. The difference between the two is called interest rate differential.
- Breakout trading. A breakout trader is an individual who seeks to enter a position as soon as a price moves beyond its range (or level). When the price moves beyond the level (or range), it is referred to as a breakout. Breakout traders regularly make use of technical analysis, executing trades when a price moves beyond a trendline or chart pattern. The types of breakout patterns that breakout traders look out for are chart patterns, technical indicators, or fundamental data. To manage risk, this type of trader may use buy-stop and sell-stop orders.
- Grid trading. This forex trading technique involves placing buy and sell orders at intervals above and below a set price. It is a technique that seeks to make a profit off price movements in the market (profit from trends and ranges). Grid trading doesn’t need much forecasting and it can also be automated. If not properly managed, however, it can incur large losses, particularly if stop-loss limits aren’t enabled or the grid becomes too large or complex. Risk management is key.
- News trading. News trading is a strategy in which the trader attempts to profit from a market fluctuation that has been sparked by a major news event. This includes anything from a breakout of war, environmental disaster, new monetary policy announcement, etc. Trading on the news is typically high risk as market volatility during these periods tends to intensify. Further, the spread of certain trading instruments may also widen substantially. The opening and exit of trades may also become more volatile due to unanticipated market spikes.
Testing forex trading techniques
One of the ways to test different forex trading techniques is through a demo trading account. Opening a demo account with a leading CFD forex broker like IronFX will give you the opportunity to test the techniques in a simulated trading environment, using virtual funds. You will be able to put your forex trading strategies to the test, and practice trading, boosting your skills.
