Forex trading is a risky type of investment asset that can lead to the loss of your hard-earned money. But it can also work the other way and give you sizeable profits. That is if you have the right tools and mindset. A forex trading strategy is one of the most vital tools to achieve this goal.
A forex trading strategy is a trading technique used to identify the best time to buy or sell a chosen currency pair. It outlines the conditions that the forex trader will have to keep on the watch. It will serve as a trigger to start buying a currency. It will also guide him on the best time to close a currency trade to gain profit or minimize losses.
Think of a forex strategy as a map that will help you navigate the world of currency exchange. It can guide you on the right path to achieve your financial goals. It eliminates randomness when you make trading decisions. Also, an effective forex trading system will keep in check the urge to guess when to buy and sell currency pairs. Most new traders fall into this trap and end up losing all their money in just a few trades.
Forex traders in the world use different forex strategies. They consider factors like currency movements, trends, world events, trading behavior, and the amount of capital. A few traders will develop their forex strategy or combine different types. Some brokers will even sell you their best forex trading strategy. Remember that no one trading strategy works for everyone. Each trader has a cap on resources and specific goals for himself. Let us find out the common forex trading strategies used today and see if it matches your objectives.
What are the components of a forex trading strategy?
There are several factors to consider in choosing the best trading strategy to use. The first is to identify whether a manual or automated trading strategy will work best for you. Using a manual forex trading system means sitting in front of the computer to spot a good opportunity to buy or sell. You will need a lot of motivation since using a manual system requires a lot of time. On the other hand, an automated system finds trading signals based on pre-set conditions. The computer then performs trading by itself. Computer systems do not require a lot of your time but lack the human element.
Next, you need a checklist of the components of a forex strategy. It includes market selection, position-sizing, entry and exit points, and trading tactics.
- Market selection. Since there are hundreds of currencies available in the market today, you must identify which currency pairs you want to trade. Pairings are available on major, minor, and exotic currencies. For example, choose the USD/Euro pair if this is particularly interesting to you. There is no limit to the number of currency pairs you can trade for at any given time. But you have to allocate time to monitor the trends for each currency pair you use. For new traders, start with a few currency pairings. You can easily add once you get comfortable and develop a trading system.
- Position sizing. It is also vital to identify your limit on each position. Some traders set 1% of their account value as their limit. It is equal to $250 for an account value of $25,000. Doing this will help you to manage losses and risks with every trade.
- Entry and exit points. Set clear guidelines on when to start and end a trading position in your chosen currency pairings. It can be a short, medium, or long-term position. It will also tell you when to sell out on a losing position to minimize losses.
- Trading tactics. It is where all the other factors come into play when trading currencies. It includes the execution system to use, timing, market forces, and others. The idea is to develop a set of rules that you will use to execute your trading strategy.
What is the best strategy for forex trading?
There are many forex strategies available to new and aspiring traders. Let us look at the five common forex trading strategies. We will identify the advantages and disadvantages of each approach. Study them carefully and find out the one that suits you best.
- Forex Scalping. It is a forex strategy where the trader takes small profits but more frequently. It happens when you open multiple trades. And each trade results in small monetary returns. As a result, this strategy offers the highest number of trading positions on this list. And it can give good income when the small profits are pooled together. It is a short-term trading strategy that happens within a few seconds or minutes. And because of this, traders need to react fast. It also requires many hours of screen time and increases your stress levels.
- Day Trading. As the name suggests, day trading is a strategy where all trading activities happen within any given day. It is another short-term trading strategy. In day trading, all positions in a single currency pair or multiple pairs are closed before the end of the trading day. There are no trading positions left open overnight in this forex trading system. So, the risk of losing money is limited. But this also requires constant attention. You will spend a lot of time continuously watching market trends and movements.
- Swing Trading. It is also known as momentum trading that captures more market movements (than forex scalping and day trading). It is a medium-term strategy that can hold trading positions for days or weeks. It is common for swing traders to hold overnight trading positions. It does not require constant attention that disrupts your 8-hours job and still be a swing trader. But since overnight trading positions are kept active, there is an increased risk of losing money. Also, you will not be able to react to huge trends in the market.
- Position Trading. It is a long-term strategy that can take weeks, months, or years to hold out. In this system, traders lookout for fundamental policy changes in economics like central bank interventions and policies. Political developments and regime changes are also part of the consideration set. The rule of thumb is that anything that affects the broad market scenario is a valid consideration. Minor fluctuations do not count in this type of trading strategy. The advantage of this system is that you don’t need to be glued to the computer screen since the trades happen over longer terms. And there will be lesser trades with potentially higher rewards. But, since there are fewer trade positions, profit opportunities are also fewer. You will also need a huge capital base. As a position trader, you will also need more patience and perseverance.
- Trend Trading. It is a popular trading system used by new and experienced traders. It is another long-term strategy that follows an existing market trend for a given currency pair. So, when you spot a huge and positive trend in the market, start trading in the same direction as the trend. You will need some technical analysis and training to gain profit in this strategy. But the risk to reward ratio is on the side of the trend trader.
Can you get rich by trading forex?
Yes, skilled traders can gain wealth through forex trading. They use their years of experience and lots of capital to achieve this goal. But for the average trader, the odds are against your hopes of getting rich in this investment instrument. Some data show that 66% of traders lose money when doing forex trading. In addition, all forex traders lose money on currency pair trading. Even experienced traders will have bad days where they lose money on trading certain currencies.
Forex trading is complex. It is affected by individual flaws and uncontrollable market forces. Among the personality traits that add to the risk of forex trading are a lack of discipline and insufficient knowledge on trading. It also includes the use of wrong strategies and impulsive decision-making. Having these traits is a sure-fire way to lose your investment fast.
Also, not everyone can participate in forex trading. If you belong to the low-income population or are underemployed and unemployed, trading is not for you. It is impossible to become a trader if you are unable to buy enough food for the family. To get started in forex trading, you will need to have savings. And not just any savings but the money that you can afford to lose at any time. It is common knowledge that a minimum investment of $10,000 is needed to start trading on forex.
Another vital point is that forex trading is not to be mistaken for gambling. It is a serious business that requires skills to succeed. Those looking to get rich fast in forex trading will only be disappointed. To be a good forex trader, you will need hours and hours of training and lectures. You will need to study different trading strategies, create your own and test them. Also, you will need to get your hands dirty and start trading. After all, experience is the best teacher. If you have what it takes to succeed in forex trading, enroll in a free demo account from one of the big stockbrokers.
What is the easiest forex strategy?
For beginners in forex trading, the breakout strategy is the most simple and easiest to do. It will help you to get immersed in the world of forex trading, fast. It will also build your confidence in yourself and your trading skills. And will be a good foundation should you decide to progress to more advanced trading techniques later.
A breakout is any point that moves outside a predefined limit. In forex trading, a breakout happens when the currency pair trading moves beyond a specific support or resistance level. You will hear the term bullish and bearish in breakout forex strategies. A bullish breakout happens when prices go up and beyond resistance levels. In contrast, a bearish breakout happens when prices go down and pass the support areas. These are important milestones since any of these events signal the start of market volatility.
When you use this forex trading strategy, you identify a breakout as a trigger to enter the market. You will have to continue to hold this position until the breakout returns to normal levels. On the flip side, you can also use a breakout as an exit point to avoid bigger losses if you are trading for the opposite and losing currency.
Experienced traders have different opinions on when exactly to start trading during breakouts. Some say that you must enter the moment you see a break in a support or resistance level. Others will advise you to hold on for a few minutes to see if the trend is a true uptrend or downtrend and not a simple data fluctuation. Test and see which one will be best for the market you chose and your trading style.
During breakouts, you will notice that the trading volume begins to rise. It only shows that a lot of forex traders are also interested and placing their trades. In this case, a true breakout just happened. A breakout may be short-lived, only to rise again after a few minutes. This is normal as some traders will sell immediately to get quick profits. But this will begin to trend up again in the breakout direction.
But there are also disadvantages to a breakout forex trading strategy. First, there is a thing called a failed breakout. This happens when the price moves up or down the resistance and support levels but bounces back to normal and does not return to breakout levels. This can happen a few times and cause frustration to a lot of breakout traders. Also, there are no set threshold levels for resistance and support. One trader may have lower or higher levels and will not react to a perceived breakout. If you don’t see an increase in trading volume during a breakout, the bigger traders may not see this as a true breakout level.
Is there a forex strategy?
As with any other business, you will need a carefully created and well-thought plan to increase your chances of success in forex trading. This plan of action is called a forex strategy. There are different types of forex trading strategies available for new traders. You can also get the help of a broker or a brokerage firm who will be happy to customize a trading strategy for you. For advanced traders, you can even create your forex strategy.
To ensure profitable trading, you will need to know the basics of forex. You need to be familiar with terms such as entry and exit points, currency pairs, spreads, pips, and others. Fortunately, there are tons of information available online for beginners. Also, most brokerage firms have their education and training programs designed for different levels of traders. Whether you are just starting, intermediate, or advanced traders, there is always room to learn more.
Afterward, it is time to create your forex strategy. You don’t have to do this from scratch. There are lots of available forex strategies that you can use. These are tried and tested strategies that helped other traders get profit from forex. But not all strategies are the same. And one strategy can work for one person and fail for another. So, you must carefully consider your financial goals, and the amount of time and effort you are willing to spend on trading. Also, remember to factor in the amount of your investment. This is money you can afford to lose since forex is a risky trading instrument.
Once you have your forex trading strategy, it’s time to put it to the test. Take advantage of the free demo accounts offered by most trading companies. It will give you exposure to actual market scenarios without the risk of losing your hard-earned cash. Do backtracking to test how your strategy will work in your chosen market and currency pairings. Take your time and test our different scenarios. If your chosen forex strategy is not delivering profits, change it to another strategy that may work better. This is a good staging point to test and learn. If possible, talk to seasoned traders and peers to improve your forex strategy. Some trading platforms have interactive features that will allow you to exchange ideas and POVs with other traders.
When is it time to change strategies?
If you are using a forex trading strategy for the first time, you should give it some time to work things out. After all, you have done due diligence before you selected or developed that strategy. You have researched it and seen other traders use it successfully. And you have used it in one of the demo accounts and yielded profits. Try to see if that strategy matches your personality and trading style. For example, if you use a forex scalping strategy but do not give enough time to analyze trends in several currency pairs, then there is a mismatch. If this is true with you, then you can decide to change your strategy. Or change your attitude or trading style. Decide which one will be easier to do. And choose the option that will be more sustainable. You must make an honest assessment of yourself.
If you are using a strategy that worked previously but has resulted in the repeated loss of money recently, then you may need to make changes. But before doing so, carefully analyze your situation. Were there new developments that affected your market? Did some governments change monetary policies that impacted the market? Changes in market forces may have resulted in your trading strategy failing. So, you must be updated so you can react better. And do some self-reflection. A good strategy can only be as good as the trader who uses it.
Here are three factors that will help you assess your forex trading strategy. Remember that no one trading strategy will work all the time. And no forex strategy that will work for every single trader.
- Match your trading style with the forex trading strategy. We cannot overemphasize the need to match your trading style and habits with your chosen forex strategy. If you want fast returns over the short-term but cannot commit to long hours of market analysis and trendspotting across different currency pairs, then you have a mismatch.
- Market conditions change over time. Risk comes naturally with forex trading. And certain market forces and events can have a lasting impact on trading. To succeed, a trader needs to react fast and have discipline. Changes to your forex trading strategy need not be dramatic. It can be some minor tweaks to entry and exit guidelines. Or modifications on your position size or market selection.
- Understand the ins and outs of your trading strategy. This is especially true for new or intermediate traders who copied an existing forex trading strategy. Make sure that you understand how the strategy you chose works. Do you know what triggers to look out for? At what point do you exit a trade to cut your losses? What do I do if there is a power failure, and my trade is active? What about an error in the trading platform? Do I need to diversify my trading portfolio? These are some questions that will test your understanding of your preferred forex trading strategy.
Changing a forex strategy is a serious matter. Why? Because it involves a lot of time and money too. While it is true that change is good at times, be careful not to overdo it. Changing forex trading strategies very often will result in more losses. So, before you decide which trading strategy to use, test, test, and test it some more. Take advantage of the demo accounts from different stockbrokers. Do not be afraid to get your hands dirty. Only through hard work and discipline can you be successful in the forex trading industry.