A complicated subject like foreign exchange (forex) requires the implementation of the right strategy or you may have to face a huge financial loss. It is important to maintain your discipline throughout the trading process.
However, how can you ensure that the discipline will be enforced in all your trades? One of the best ways to resolve this issue is by having the right strategies in place.
A forex trading strategy is a system used by a forex trader to determine the right time of buying or selling a currency pair. Forex traders apply various types of strategies including fundamental analysis or technical analysis. With a good forex strategy, a trader can execute the trades confidently by analysing the market.
Here are a few of the most popular forex strategies, that work for most traders:
1. Position Trading
Position trading is not often considered as active trading; Instead, some people consider it to be a buy-and-hold strategy. However, when this is done by an advanced trader, position trading can be a form of active trading. In this trading, long-term charts are used, the range can be anywhere between daily and monthly. These charts are combined with other methods and the trend of the current market direction is determined. Position trading can last for many days to many weeks and even longer sometimes, it depends on the trend.
The biggest advantage of position trading is that there is not much demand for the trader’s time. Once the trader initiates the trade and implements the safeguards, he only needs to wait for the desired outcome. Ignoring the minor fluctuations, however, can be risky as they can turn into trend reversals and have a negative effect on the trading accounts. You also need to consider the fact that the capital will be tied up for a long time, so, you must be prepared to avoid opportunity costs.
2. Swing trading
You can consider using swing trading when a trend breaks. At the end of the trend, some price volatility is observed as the new trend tries to be established. As the price volatility sets in, swing traders proceed to buy or sell. Swing trades are held for a shorter time than trend trades, but they are usually held for over a day. Based on the fundamental or technical analysis, a set of trading rules are created by swing traders. These rules or algorithms are designed for identifying the right time to buy or sell a security. This algorithm does not have to be accurate to predict the peak of a price move. It only needs a market that moves to a single direction. Sideways of range-bound markets are risky for swing trading.
3. Day trading
One of the most popular active trading styles, Day trading, as the name suggests, is the method of buying and selling securities within a day. Positions are not held overnight in this trading; instead, they are closed within the same day taken. Day trading is traditionally done by professional traders like market makers and specialists, but electronic trading has also provided novice traders with the opportunity of using this trading strategy.
One of the fastest strategies used by active traders, scalping includes exploiting several price gaps caused by order flows and bid-ask spreads. The strategy generally makes the spread or buy at the bid price and it sells at the ask price. Thus, the difference between the two price points is received. In scalping, traders try to hold their positions for short periods, and thus, they decrease the risks associated with this strategy.
In this strategy, you must never try moving high volumes or exploit large moves. Instead, it is better to try and take advantage of smaller volumes and smaller moves occurring frequently. The level of profits for each trade is small, so, scalping traders look for more liquid markets where they can increase the frequency of trades. Unlike swing traders, scalping traders prefer quiet markets where the possibilities of sudden price movements are low. Thus, the spread can be potentially made repeatedly on the same bid or ask price.
5. Carry trade
A carry trade trading strategy involves borrowing an asset at a low-interest rate that offers a high rate of return. It is typically based on borrowing low-interest rate currencies and converting the amount in other currencies. The proceeds are placed on deposit in the converted currencies if a higher rate of interest is offered by them. If not, then the proceeds are deployed into assets like bonds, stocks, real estate or stocks.
Carry trades depend on the fluctuations of interest rates between the associated currencies. Therefore, the ideal length of this trade is from medium to long term. It can be weeks, months or even years. The advantages of this trade are that it requires little time investment and there is a medium risk to reward ratio.
When you choose a forex trading strategy, keep in mind to consider the advantageous entry signals provided by it. You can also choose the right one by considering other vital points like position sizing, risk management and methods to exit a trade. After contemplating these points, you may choose one of the forex strategies mentioned above.