Becoming successful and being in a position to make profits is the goal of every forex trader. In forex trading, some strategies can be applied to help the trader determine when it is more appropriate for him to sell or buy a currency pair. These forex trading strategies can either be fundamental or technical analysis tools.
As such, a good forex trading strategy should be in a position to help the trader analyze and execute trades confidently without any fear of incurring massive losses. However, for any of the forex trading strategies to work, a trader needs to understand and be comfortable with a particular system. There are three criteria that traders can use to determine which forex trading strategy best works for them such as;
- How frequent he gets trading opportunities
- Time and resources required
- The typical distance to a target.
This article will look at some of the most commonly used forex trading strategies to help you determine which one best suit you.
1. Position Trading
Position trading strategy can be applied on all markets, including forex and stock.
A position trader relies on fundamental analysis in his trading. The trade is usually on a long-term basis and can be held for weeks or even longer.
A trader needs to be perseverant when it comes to position trading. As mentioned earlier, this type of trading strategy can last for long periods.
Pros
- The favorable risk-to-reward ratio on the trades
- The minimum time investment required since the trades are long-term
Cons
- It offers very few trading opportunities
- It involves a lot of both technical and fundamental analyses.
- Requires vast capital base because of the broad stop loss.
2. Swing Trading
In this type of strategy, traders take advantage of the trending markets and the range-bound. It is a speculative strategy as traders can enter long and short positions by simply picking ‘tops’ and ‘bottoms’ accordingly.
The length of swing trades is usually medium-term since positions are held generally between a couple of hours to a few days. A trader should be conversant with technical concepts such as moving average, support and analysis, and candlestick patterns to implement the swing trade strategy fully.
Remember, in swing trade, a trader’s only concern is to capture a single move in the market, which will enable him to either buy support, trade breakouts, sell resistance, trade pullbacks, or trade the moving average bounce.
Pros
- You can be a swing trader even if you are in full-time employment
- Due to more trading opportunities, you can make profits throughout the year.
- The medium risk-to-reward ratio on the trades
Cons
- Swing traders usually have high overnight risks
- It also requires varied time management
- It involves a robust appreciation of technical analysis
3. Trend Trading
Traders apply the trend trading strategy in an attempt to yield positive returns by market directional momentum exploitation. Trend trading is a simple forex strategy and is used by many traders, both experienced and novice.
In trend trading, trades usually take place over medium to long-term time limits. This is because trends do fluctuate in length. In order to determine price action in trend trading, multiple time frame analyses are used.
Pros
- Trend trading allows the trader a substantial number of trading opportunities
- There is a favorable risk-to-reward ratio on the trades.
Cons
- Trend trading also relies on high technical analysis tools.
- It requires long periods to make investments.
4. Day Trading
Day trading refers to the short-term trading strategy where a trade takes place for just a few hours or even minutes. Although day trading is similar to swing trade, transactions in day trading occur at a faster pace.
Due to its short-term trading window, traders are continually looking to capture the intraday volatility. The intraday volatility means that a trader must trade the most volatile session of his instrument to make money.
Pros
- Depending on how good one is, a trader can make money in almost all months.
- Day trading doesn’t have overnight risks as trade positions are closed at the end of the day.
Cons
- Day trading can be stressful as a trader is required to keep his eyes on the market constantly.
- If a trader suffers from massive slippage, he can end up losing more than they intended.
- Day trading doesn’t allow a trader to hold any other full-time job as his days are spent watching the market.
Conclusion
Whether you desire to be a day trader, position trader, swing trader, or scalper, it is essential to know how each forex trading strategy works, to be well guided. You will find that some traders usually use a combination of different forex trading strategies to give them an edge in the forex trading market.