When looking for forex trading strategies, you need proper guidance and information to improve your skills. Our comprehensive guide will inform you all about forex trading strategies that work.
Forex is the largest traded market globally, and with this in mind, you must fully understand it to be able to face the markets and have an increased chance of earning profits.
There are various forex trading strategies or methods for beginners looking to venture into this market. But, before we get into these strategies, let’s first understand what forex trading means.
Meaning of Forex Trading
Foreign exchange (Forex), usually abbreviated as FX, is the buying and selling of currency pairs at a current or predetermined price. The foreign exchange market is an over-the-counter or decentralised market. This means that trading of currencies is done between two parties and there is no need for an exchange supervision.
The foreign exchange trading is based on exchange rate. This means you will be trading forex based on correlation of two currencies, known as currency pairs. The two currencies that make a pair are referred to as base and quote currencies.
The base currency is the first currency written on the left side of a currency pair, while the quote currency is written on the right side. For example USD/GBP is a currency pair.
Forex Trading Strategies
Trading forex requires discipline and with discipline comes a plan. For you to create a good plan to handle forex trading, you must understand all the different styles used to trade forex.
Learning forex trading strategies will provide you with an insight on how to handle forex trading. This includes knowing when to buy or sell currency pairs.
Note that there is no strategy that is better than the other when it comes to forex trading. It all depends on market conditions, which will require you to conduct extensive fundamental and technical analysis.
Simply put, the best forex trading strategy will depend on the type of trader you are and the strategies available. It is not easy to choose a forex trading strategy and have it work in a trade. However, several factors will help you determine a suitable forex trading strategy, including:
- The size of the forex position.
- Whether you are going long or going short on a forex trade.
- The type of currency pairs to trade.
- The duration of a forex trading position.
The trading strategies below are not just meant for forex trading, but you can also apply them to other financial markets. As mentioned above, the forex strategy to choose should depend on the type of trader you are. So let’s jump straight into the best forex trading strategies for beginners.
- Forex Day Trading Strategy
Day trading is a popular forex trading strategy that can also be applied when trading other financial assets. It is a strategy that involves opening and closing a forex position within the same day.
Regular traders planning to take advantage of small and volatile market movements, can apply this day trading strategy. Such traders do place multiple trades a day whereby a single trade only lasts for a few minutes to hours.
Volatile markets are unpredictable, and it’s not easy to manage a trade with this strategy. Therefore, you must be willing to conduct extensive market research and stay abreast with daily financial and economic trends in the foreign exchange markets.
The best thing about the day trading strategy is that it is not costly. Since opening and closing a position will only be conducted within the same day, you will not incur financing charges for the positions held overnight.
- Scalping Strategy
This forex trading strategy is a bit similar to the day trading strategy. The difference is that the scalping strategy is more fast-paced than the day trading strategy. This means that you can only hold an open position for seconds to minutes.
The scalping strategy allows you to accumulate small but frequent profits while trading forex. This is because of the small price movements that usually involve a few pips. You can still benefit from this strategy using leverage, even though it can bring about huge losses.
The scalping strategy brings a lot of opportunities to earn profits within a day. However, you must be willing to dedicate more time to trading forex by observing the currency markets’ behaviour and taking advantage of any opportunity as it arises.
Technical and fundamental analysis of the forex market is also important in managing forex trades. For this reason, we primarily recommend this strategy to traders with experience in the forex market.
- Forex Swing Trading Strategy
Swing trading strategy is another preferred forex trading strategy that is easy to master. In this strategy, open positions are kept for more extended periods, usually days to weeks.
For this reason, you must be willing to observe longer market trends so that you can come up with an excellent plan. Note that swing trading is more costly than day trading and scalping. Although your broker will charge trading fees, additional financing costs for positions held overnight will apply.
Using swing trading doesn’t mean that your trade won’t be at risks like those in day trading and scalping. Since positions are left overnight, your open positions will still be at risk in case of any disruption.
Generally, swing trading is an excellent choice for traders who are engaged in other activities during the day. You do not need to fully dedicate your time to trading forex, although you should be keen when analysing the financial and economic markets.
- Forex Position Strategy
Unlike other forex trading strategies focusing on short-term price movements, the forex position strategy is used for long-term trading positions. With this strategy, you can hold positions for more extended periods, including weeks, months, or years, depending on how frequent you are willing to trade forex.
You will use this strategy if you believe that a currency’s value will appreciate after a long period. However, this means that you will also be required to analyse the technical and fundamental markets before coming up with a plan.
Although this forex trading strategy is also an easy one to master, it is primarily recommended for forex traders who do not have much time to trade forex but have the essential fundamentals about the activity.
Forex Trading Strategy Modifiers
Other than the above major forex trading strategies for beginners, there are other methods that traders can use to adapt the main forex trading strategies. For example, by using the strategy modifiers below with your trading strategy, you can reduce the trading risks in a position. You can also use them to provide more information on a forex trade.
Let’s take a look at these forex trading strategy modifiers.
The hedging strategy is widespread globally, and it is used to protect traders from unexpected moves in a forex pair. In addition, you can hold both long-term and short-term positions simultaneously, limiting your potential for loss.
This strategy works by opening single or multiple positions moving against your existing trade. You do not have to close a current position to open another since hedging strategy will protect that trade from incurring huge losses.
Note that as much as the hedging strategy minimises losses, potential profits are also eliminated during the period when you are hedging. Therefore, it is best to use this strategy on an existing long-term position, ie. it’s a way to minimize risks, not maximize profits.
- Price Action Strategy
Forex trading strategy can be used based on price action. This strategy applies to individuals willing to trade forex without analysing the financial markets. Traders will use candlestick charts to identify trading opportunities that are only based on price fluctuations.
This strategy is primarily used together with the day trading or swing trading strategy. This is so that you can combine the price action with a broader strategy to come up with the best move to earn good profits.
The best thing about the price action forex trading strategy is that you get to witness real-time results instead of waiting for external market changes or news breaks.
This trading strategy is risky, considering that there is no economic and financial analysis. Since you only get to study candlestick charts to make your moves, ensure that you are well equipped with the fundamentals of forex trading.
The majority of new forex traders are lost for choice when it comes to choosing a forex trading strategy. By following the strategies above, you will find forex trading more fun and beneficial.
Remember to focus your research on economic and financial markets. This way, you can quickly identify entry and exit points that have a higher potential of bringing about good profits.