Your trading journey in forex trading hinges on the proper selection and application of trading tools so as to optimise your potential opportunities. Given the large selection of forex trading strategies available online, this should be a fairly straightforward task, right? Well, not exactly. Forex strategies have varying levels of complexity, which can be confusing or difficult to understand for those who are new to forex investing.
As such, not every forex strategy you come across will be suitable for you, as you may not have the knowledge and experience required to properly make use of them.
The key for beginners is to keep things simple with forex strategies that are easy to understand. To help you get started, here are six forex trading strategies ideal for beginners.
Price Breakout
Price Breakout is a beginner-friendly forex strategy that revolves around spotting price breakouts, which can signal the start of a new trend, informing you of a potential entry point. It’s important to understand that forex pairs sometimes spend a period of time ranging between levels of support (the “floor”) and resistance (the “ceiling”). This is known as consolidation. A breakout occurs when the price moves beyond the consolidation range. It can go in two directions: beyond the support level (“breaks to the downside”) or beyond the resistance level (“breaks to the upside”). Why we should pay attention to breakouts is because they can signal the start of a new trend which you can trade but this is not guaranteed.
- Pros of Price Breakout. One of the easier patterns to spot on a forex chart, as they come at the end of consolidations. Suited to both long- and short-term strategies.
- Cons of Price Breakout. Breakouts do not always go on to form a trend; jumping in too early or too late may have a negative impact. Proper use of stop-loss is necessary to make up for the shortcomings of this strategy.
Moving Average
In this strategy, we base our trading decisions on the interactions between two Simple Moving Averages (SMA) – a near-term SMA (such as a 25-day one) and a far-term SMA (such as a 200-day one). Now, a moving average is simply the average of all the data points in a series divided by the number of points. So, for instance, a 25-day SMA tells us the average price of a forex market over the past 25 days, and a 200-day SMA tells us the average price over the past 200 days.
SMAs are represented as lines on a chart, and the interesting thing is, when the 25-day SMA and the 200-day SMA crosses each other, it indicates a change in trend.
When the shorter-trend SMA goes above a longer-trend SMA, it means that newer prices are higher than older ones – i.e., a bullish trend. The opposite also applies; when a longer-trend SMA goes above a shorter-trend SMA, it means the newer prices are lower than the older ones – i.e., a bearish trend. Again, we should pay attention to changes in trends because that’s a signal where a trading opportunity is approaching.
- Pros of Moving Average. Reliable way to tune out market noise, making it easier to spot trends. Can be used as a confirmation in support of trading decisions
- Cons of Moving Average. Slower to respond to rapid price fluctuations, thus not suitable for those who trade within extremely short timeframes.
Carry Trade
A Carry Trade forex strategy aims to derive potential returns from the difference in yield between two currencies. To make this strategy work, you have to pair a currency with a high interest rate (the “base currency”) with another currency with a low interest rate (the “quote currency”). As long as the exchange rate between the two currencies remains the same, the trader stands to gain a steady stream of earning.
- Pros of Carry Trade. Works well with several popular currencies, including AUD/JPY, and NZD/JPY. Potential for higher returns with leverage.
- Cons of Carry Trade. Highly vulnerable to exchange rate fluctuations, which can quickly erase gains or even cause losses. Sensitive to market conditions, not suitable when markets are uncertain or fearful.
Range Trading
In a Range Trading strategy, the idea is to make several trades while the currency pair moves in a sideways pattern, bouncing between the level of support and the level of resistance over a protracted period of time. You can learn more about the basic of support and resistance here. You may recall that when the market moves sideways, it is said to be in a consolidation phase. This is also known as a “range-bound market” among forex traders using Range Trading. Range Trading is slightly more complex as it involves using both long and short positions. A trader buys as the price moves downwards towards the support level and sells as the price moves upwards towards the resistance level.
- Pros of Range Trading. Potentially useful when the market is showing no clear upward or downward trend.
- Cons of Range Trading. Requires understanding of long and short positions. Due to multiple trades involved, it may require a larger capital to properly execute.
Momentum Trading
While a Price Breakout strategy focuses on spotting trends, a Momentum Trading strategy goes a little deeper – it focuses on the strength of the trend as the basis for a trading decision. The gist of this strategy is that if a trend is strong enough, it tends to continue in the same direction (whether up or down). Similarly, if a trend is showing signs of weakening momentum, a reversal is to be expected.
Traders following this strategy would typically open their positions when a trend gains momentum. When it starts to slow down, an exit is made.
This strategy is a little more advanced as it requires skill to properly gauge whether a trend is weakening or strengthening. You will need to consider volume, volatility and timeframes when evaluating the momentum of a trend.
- Pros of Momentum Trading. Can potentially generate large returns if momentum is correctly assessed. Can be combined with Price Breakout strategy for further potential returns
- Cons of Momentum Trading. Requires use of tools such as momentum indicator, Relative Strength Index, Moving Averages, stochastic oscillator, etc. Can be highly dependent on market sentiment
News Trading
One more beginner-friendly forex strategy to know is News Trading. As its name implies, this strategy revolves around tracking news and headlines that have a high likelihood of causing a currency pair to spike or plunge and taking up trade positions accordingly. Some of these events include elections, monetary policy changes, interest rates announcements, inflation, retail sales, unemployment rates, consumer confidence surveys, etc. Bear in mind that important news or developments tend to increase volatility in the forex market, and you should not neglect proper risk management when trading on the news.
- Pros of News Trading. Relevant news can be used to further make informed trades
- Cons of News Trading. Effects from news can be short-lived, necessitating quick action to capitalise on the price movement
What else should forex beginners take note of?
- Develop a trading plan. To be successful in forex trading, beginners need to do more than simply picking the trading strategies that appeal to them. You should create a well-defined trading plan that outlines your trading goals, risk tolerance and preferred trading style, in addition to the strategies you will deploy. Be sure to stick to your trading plan to help you avoid impulsive decisions that could impact your results. Also, as you gain more experience, regularly review and adapt your plan to accommodate your new knowledge.
- Learn and implement risk management tactics. Effective risk management is essential, whether for beginners or experienced traders. Never risk more than you can afford to lose – your losses can easily exceed your capital if you’re careless with leverage. Consider using stop-loss orders to exit trades automatically if they reach a predetermined level. Additionally, diversify your trades and avoid putting all your capital into a single trade.
- Be patient and adaptable. Forex trading requires patience and discipline. This means you should avoid chasing quick profits or revenge trading after losses. Stick to your trading plan and strategy, and Remember that successful trading is a long-term endeavour. Stay open to learning new strategies, techniques, and market developments. Continuously improving your trading skills by attending webinars, reading books, following market experts, and networking with other traders.
Trade popular currency pairs at low cost with Vantage
Vantage is a leading regulated forex broker offering access to the world’s most popular currency pairs. With Vantage forex trading, traders can explore trading opportunities from price movements in all directions in the largest and most liquid financial market in the world.
