The importance of forex trading strategies is indisputable, especially if you want it to turn out great. It doesn’t matter whether you are a novice or a professional forex trader. As long as you are venturing into it, it would be best to find a strategy that works best for you. When it comes to the experts, though, it is often not hard, given that they know their options. Unfortunately, that’s not the case when it comes to beginners. As a matter of fact, not all professional traders know all their choices. That’s where this article comes in. It discusses general and advanced forex trading strategies to help traders get the best out of their investment and effort. Check it out!
What is a Forex Trading Strategy?
As the name suggests, a forex trading strategy is a technique that a trader applies when deciding whether it would be best to sell or buy a particular currency pair. Do you then see just how important a strategy is? Equally important, it is important to choose wisely because it plays a huge role in determining the decision you make eventually. The right forex trading strategy will help you choose wisely and vice versa. To help you select the right one, let’s dive into the various strategies and discuss them in detail.
General Forex Trading Strategies
Going by the name, one can tell that these strategies are quite basic and common. They are often based on two variables, namely time and positions. They include:
- Carry Trading
It is an interesting forex trading strategy, especially if you are short of money for trading. It involves borrowing a currency pair with relatively low interest. You then use what you have borrowed to fund the purchase of another currency pair that has a pretty high interest. You will make a profit at the end of the day, but only if the difference between the borrowed currency pair and the purchased one is relatively huge.
It has several advantages, including its risk to reward ratio being average. Additionally, you don’t have to invest much time as a trader. Unfortunately, the infrequency of the available trading opportunities can be quite discouraging.
- Position Trading
As far as position trading is concerned, the strategy focuses on fundamental factors hence long-term. Therefore, it doesn’t pay many considerations to things such as small market fluctuations. It needs a lot of patience since the traders hold positions for a relatively long time. It could be a few weeks, months, or years. The traders don’t invest much time, and the risk to reward ratio is impressive. However, just like carry trading, the investment opportunities are also minimal.
- Swing Trading
It is a forex trading strategy that requires you to set positions for an average time, such as several days. It focuses on trends and often brings profits when there are swing lows or swing highs. You will invest some time in swing trading and not as much as in the case of other strategies. That said and done, expect several risks, including gapping and huge losses, especially if something disrupts the market overnight. As much as you get to invest much time, the trading opportunities are also quite substantial. Equally important, its risk to reward ratio is medium.
- Day Trading
Going by its name, one can get a rough idea of what day trading comprises. The trader will trade by considering the situation and trends of that particular day. Additionally, whether you gain profit or incur loss depends on how the price of the currency pair changes in the course of the day. It is a great strategy, given the many trading opportunities at your disposal. Its risk to reward ratio is also median.
However, you need to invest a lot of time into trading for the strategy to yield great results. A lot is required from the trader, including keeping track of the trends and researching extensively to ensure that you choose a great currency pair. Besides that, you also need to ensure that things turn out well whether you choose to buy or sell.
- Scalp Trading
Scalp trading is also one of the general forex trading strategies. It is one of the most short-term strategies. It involves trading while holding a certain position for several minutes or capturing various price movements simultaneously. Traders earn small profits, but the frequency at which they receive them is usually highway. Therefore, one can make huge losses at the end of the day.
As they strive to make profits, traders also have the responsibility of mitigating losses. After all, small losses can also lead to a significant cumulative loss in the end. The risk to reward ratio is the lowest, whereas the number of trading opportunities is the highest.
Advanced Foreign Exchange Strategies
Unlike the basic strategies, the advanced ones focus on different variables, namely support level and resistance area. They include:
- Breakout Trading
Before explaining this forex trading strategy, it would be best to define what breakout means in this industry. First of all, in forex trading, there exists resistant areas and support areas. The former is how high the price of a currency pair can go, whereas the latter is how low it can get based on patterns. However, a time comes when the price goes beyond the resistant area or support level. That’s what breakout is all about. You can choose to enter the market as soon as the breakout happens or wait a little longer. Regardless of when you choose to enter, there are high chances of making a huge profit if your prediction is right.
- Bounce Trading
What if history was to repeat itself? That probability is what the strategy focuses on. So, if the price of a certain currency pair dropped and then bounced back in the past, the probability of the same happening again isn’t 0. So, according to this strategy, if one notices such a change in currency pair price, they can base their prediction on history.
With the above forex trading strategies at your disposal, one can conclude that you are better positioned for the trade without fear of contradiction. All you have to do is choose the one that suits you best. For instance, how much time are you willing to invest in trading? The answer to that can help you choose the right strategy that matches your lifestyle. Remember that you can always change a strategy if it doesn’t work. Besides, you can apply two or more forex trading strategies simultaneously.