Trading discipline is a key aspect of successful Forex trading. Traders often ask: is there a method of consistently making good buy, hold, and sell decisions? Yes, there is one proven way of maintaining a disciplined trading behavior, and that is using one or several Forex trading strategies.
What is a Forex Trading Strategy?
Investopedia defines a Forex trading strategy as a technique for making buy or sell decisions on a currency pair at any given time. A strategy usually consists of trading signals, which are the triggers of buy/sell decisions.
Currency trading strategies can be either manual or automated. Manual trading involves monitoring currency pair movements by a human. The aim is to identify trading signals that inform on whether to sell or buy the currency pair you are monitoring. On the other hand, in automated trading the trader develops an algorithm that not only identifies trading signals but also executes trades.
Forex trading strategies can be based on fundamental analysis, technical analysis, or news-based events. Since different trading strategies work differently and are uniquely suited to different individuals, there is no strategy that can be termed as the best or the most profitable. However, most of the currency trading strategies used by traders today fall into any of the following 5 types:
Forex Trading Strategy Type #1: Day trading
As the name suggests, day trading strategies involve exiting trades before the end of the day. Price bar charts are usually set to one to two minutes and trades last only a few hours. The main advantage of day trading is that it reduces the risk of loss due to large overnight moves in the value of currency pairs. The strategy is ideal for beginners. A good example of a day trading strategy is the 50 pips a day strategy.
Forex Trading Strategy Type #2: Scalping
Scalping strategies involve holding trades for a few minutes, seeking to beat the bid/offer spread for a small profit. Scalping typically utilizes technical analysis charting tools, and trading is based on real-time analyses of currency pairs.
There are manual and automated forex scalping systems. In a manual system, the trader identifies signals by visual inspection and interprets them as either buy or sell opportunities. An automated scraping system uses software for technical analysis and interpretation of trading signals. Technical analysis is timely in nature and gives forex scalpers real-time charts for trading decisions. Forex scalping allows the trader to make as many trades as possible in a single day.
Forex Trading Strategy Type #3: Swing Trading
Swing trading is considered a medium-term forex trading strategy. The trader holds trade positions for several days aiming at making small profits from short-term shifts in price patterns of currency pairs. Intraday trading creates a lot of noise’ in currency movements. Swing traders try to set up trades in a way that their position is not affected by very short-term movements in the Forex market. In other words, swing trading filters out erratic price movements and allows traders to set up desired trades on “swings” to lows and highs over an extended period of time.
Forex Trading Strategy type #4: Trend Trading
As the name suggests, trend trading strategies follow the trend. Current currency trends can be used reliably as indicators of the direction of future currency prices. The trader uses the price direction indicated by the trend to choose trade entry and exit points.
It is noteworthy that the trend’s strength is of utmost importance when using trend trading strategies. Various tools are used to evaluate trends, including moving average indicator, relative strength indicators, stochastics or directional indices.
Forex Trading Strategy type #5: Position Trading
This type of forex trading strategies takes a long-term evaluation of currency pair movements. Position trading aims at maximizing profits due to major shifts in currency prices. The trader constantly analyzes end of day charts uses his knowledge of the market fundamentals to make trade decisions.
Since position trading strategies may play out even over years, a great deal of patience and discipline is required of the trader. They also involve following long-term macroeconomic trends for different economies. Therefore, position trading is more suitable for experienced traders.
There is no forex trading strategy type that is guaranteed to work all the time. A determined trader should familiarize himself with a wide variety of strategies to ensure that they have a collection of useful trading tools to face the challenges of the ever-changing market. It is also important to note that generalized market information should not be used as investment advice. Make a detailed evaluation of any forex trading strategy you intend to use before applying it in actual trading. Contacting a Forex trading consultant would also help you to make a good decision on the type of trading strategy to use.