What is a Forex Trading Strategy?
A forex trading strategy is a trader’s system to check when to buy a currency pair and then sell that currency pair. The traders use various trading strategies, including technical and fundamental analysis. You can confidently analyze the market and execute your trade with sound risk management techniques through a good trading strategy.
Criteria that Traders Use to Compare the Suitability of Different Strategies
There are multiple factors to consider before formulating a functional trading strategy. Different traders use different strategies as everyone has unique goals and resources that play a key role in devising a suitable strategy. Therefore, traders use three main criteria to compare the suitability of different strategies.
- Time for a required resource
- Number of trading opportunities:
- Typical distance to approach:
The analysis of the strategies on these 3 criteria determines their Risk-Reward ratio. To increase your understanding of these trading strategies please visit http://reviewfx.com/
Price Action Trading Strategy:
It is a strategy that uses the data of past prices to devise technical trading strategies. You can take price action as a stand-alone technique or in conjunction with an indicator to formulate a strategy where trading fundamentals are rarely used.
You can use price action trading over varying periods, and this ability of price action trading to use multiple time frames for analysis is much liked by the traders.
Several methods are used to determine the entry and exit points;
- Fibonacci retracement
- Using candle wicks
- Trend identification:
Price action trading includes further trading strategies discussed below.
Range Trading Forex Strategy:
Range trading is a strategy that includes identifying key levels’ support and resistance points, and traders use them to place their trades. It has low volatility and uses technical analysis as a tool.
There are no limitations to setting a particular trade length as it works for any time frame. Risk management is key in this strategy.
Oscillators are the common timing tools used here. Among the oscillators, Relative Strength Index, Commodity Channel Index, and Stochastic are the popular oscillators.
Trend Forex Trading Strategy:
It is a simple strategy used by most traders of different experience levels. Trend trading exploits the market’s directional momentum to yield positive returns.
Trend trading is a strategy that occurs over the medium to long-term time horizon as trends keep changing in length. Here, multiple time frame analysis is used along with price action trading.
Usually, an oscillator designates the entry points, and a positive risk-reward ratio calculates the exit points. Traders can either equal that distance or go further to maintain a positive risk-reward ratio using stop-level distances.
Position Trading Strategy:
It is a long-term strategy mainly focusing on fundamental factors. However, you can use Elliot Wave Theory as a technical method. Smaller or minor fluctuations in the market do not affect the position trading strategy.
As it is a long-term strategy; thus, it is reserved for more conservative traders. Understanding how economic factors affect the markets is essential to forecast trade ideas.
Key levels mentioned on longer time frame charts contain important information for position traders. Technical analysis used for other strategies holds good for this strategy too.
Day Trading Strategy:
It is a trading strategy where financial instruments are traded on the same day, and all positions are closed before the market closes. There can be single or multiple trades throughout that day.
It is a trade that lasts for a very short time from the opening to the closing of the trade on the same day.
Traders in this trade will make their entry when the price breaks in the direction of the trend and will exit using a 1:1 risk-reward ratio.
Scalping Trading Strategy:
Scalping is a common term used in forex to frequently define the process of obtaining small profits. You can achieve this by opening and multiple closing positions per day. And you can do this manually or using an algorithm that operates on predetermined guidelines to enter or exit a position.
It is a short-term trading strategy with minimal returns and operates in shorter time frames.
Scalpers use indicators to verify the trends, and these trends help traders see the big picture in longer time frames. Traders can use oscillators for smaller time frames to perform scalping.
Swing Trading Strategy:
Traders use a speculative trading strategy to benefit range-bound and trending markets. Traders can join long and short positions by selecting ‘tops’ and ‘bottoms,’ respectively.
Swing trades are considered to be medium-term because positions are held anywhere between a few hours to a few days. Here, long-term trends are favored as you can capitalize on the trend at multiple points.
Here, oscillators and indicators are used to select entry and exit points and times. It applies to both trending and range-bound markets.
Carry Trading Strategy:
It is a strategy where you borrow one currency at a low price and invest it in another, giving a higher yield. It will result in a positive carry of trade.
Here, trade length depends on interest rate fluctuations between the associated currencies. It shows that it is a medium to a long-term trading strategy.
Here two things are considered, exchange rate risk and interest rate risk. The best time for opening a trade is at the beginning of a trend, as the interest rate will not change regardless of the trend.
Forex trading is a highly liquid marketplace that has become very popular over the last two decades. This article discusses some prominent strategies you can follow to become a reputable forex trader and earn a healthy living. If you have any questions, please let us know.