COMMON STRATEGIES FOR FOREX TRADING
There is much information floating around in cyberspace about “choosing your trading strategy”, but how do you know which trading strategies will suit your temperament and trading style? What are the different trading strategies?
Well, there are dozens of different trading strategies out there. Some are simple and straight-forward, while others are deeply complex and combine several different strategies into a whole.
They all require analysis to make sense of the market data available.
So, the analysis is what we will look at first. There are essentially two types of market analysis that will help traders execute profitable trades, Fundamental Analysis and Technical Analysis. Traders can even adopt them as trading strategies by themselves.
Fundamental Analysis – This analyses the relative strength of an economy, while factoring in political, social, and financial events. Several factors can affect a country’s currency value, from Gross Domestic Product (GDP) to Unemployment figures, Non-Farm Payroll to government elections. It’s not only the financial announcements that can have an effect on currency strength.
Fundamental analysis cannot predict a specific value of a currency. However, it can make a reasonably accurate prediction of a currency heading toward a rise or fall in value, by aggregating the combined effect of several socio-economic and political events.
Technical Analysis – Uses the technology available to analyse the historical and current data in a multitude of different ways. The most popular and commonly used trading platforms and portals even have many of the well-known analysis tools built-in so they can be applied as needed to each trading chart.
Technical analysis uses mathematical and statistical formulae to create tools such as moving averages, momentum charts, and range indicators. You may have heard about Bollinger Bands, MACD, RSI, and Stochastic Momentum Index. There are many more.
So, that’s the analysis of the markets covered, but how will traders employ the information they receive from that analysis?
Continuing on, we have the commonly used trading strategies to suit the short, medium and long term trader as well as the most appropriate analysis. The vast majority of all the dozens more trading strategies are derived from or combine these.
Range Trading – A simple strategy, which assumes that currency price will (almost) always revert back to a long-term average point. The key to this strategy is identifying the price points at which the trends tend to correct back toward that mean. These price points will define the range and give the range trader key points at which to sell and to buy.
# Technical analysis is the key to trading with this strategy, and the RSI indicator is one of the appropriate tools for defining the range.
Trend Trading – A trading strategy that all traders follow at some point in their trading history. Newcomers and experienced traders include a form of Trend Trading in their list of viable strategies. Trend trading can be short, medium or long term depending on the data used to identify a trend.
# The primary key for this strategy is technical analysis. Traders are analysing trends and they’ll use current and historical data charts to track those trends
News Trading – Exactly as you would think, this strategy relies on the volatility surrounding news announcements concerning a country’s economy. In one of two ways, buying or selling prior to the news announcement and riding the volatile waves created or buying or selling immediately after the announcement, taking into account whether market expectations were met, exceeded or unachieved. This tends to be a short term trading strategy. Frequently, news traders will hedge their trades to take advantage of price action movement in both directions.
# Traders definitely need to be on top of their fundamental analysis with this trading strategy, with some underpinning knowledge of historical market movement in conjunction with similar news events.
Scalping – Another short-term trade type that uses volatility to create profitable trades. However, the volatility isn’t necessarily linked to any external news. The volatility could be in relation to another currency gaining or losing value. Scalping is a specifically short-term strategy with traders making very fast entry and exit trades. Due to the very short-term nature of these trades, traders will ordinarily trade with high leverage and only in high liquidity currencies, in order to accrue larger profits.
# In order to really get this one to work a trader needs solid short term technical analysis skills.
Carry trading – A unique and short-medium term strategy, in which traders combine trend trading with interest rate differential, to augment their gains. These trades carry over to the next day to take advantage of interest payments that are applied to overnight trades. Usually, these occur between currencies with massively differing interest rates
# In order to know the interest rates, traders must do their fundamental analysis, but they’ll also need a good amount of technical analysis to be able to profit from the trend.
Position Trading – Sometimes referred to as “buy and hold” trading, this is a long-term strategy that requires patience. Patient, position traders will tend to use low volumes and low leverages, to mitigate risk, but will gain profit from the long-term, greater price movements. The position trader is unlikely to panic buy or sell because the focus is on the long game.
# Both technical and fundamental analyses are important for position trading. The skill to analyse historical trends and the knowledge to know how the currency is likely to behave over a long period.
Try them all, combine them, and play with them on a demo account to find which strategies really suit you. Use as many of the technical analysis tools as you can to analyse trends. Keep abreast of geopolitical and economic events so that you don’t get caught sleeping. However, find the best methodologies for you and your trading style.