A forex trading strategy can be defined as a usable trading system that a trader can use to inform their buy and sell position for currency pairs. Numerous strategies can be used for trading forex, including fundamental and technical analysis. The best strategy should allow you to analyze the market and execute trades confidently and efficiently.
The best forex trading strategies
A forex trading strategy comprises of different factors put together to make trading work. There are hundreds of strategies available to suit different trading styles. To choose the right one for your needs, you need to consider your trading goals and your resources.
Here is a list of the best trading strategies you can choose from.
Range trading
Range trading is a market trading strategy that involves identifying resistance and support positions to open trading positions. Range trading strategy works best in low volatility and non-discernible markets. The main tool used in range trading is technical analysis.
There is no set length of time you can spend on a trade in range trading, making it ideal for different trading time frames. The ability to manage risk is an important part of range trading since breakouts occur at any time. If you read a possible breakout, you need to close current range-bound positions to avoid losses.
In range trading, different oscillators can be used as timing tools. These include stochastics, commodity channel index, and relative strength index.
Pros
- Availability of numerous trading opportunities
- High risk to reward ratio
Cons
- Requires prolonged investment periods
- It relies heavily on technical analysis
Trend trading
This is a forex trading strategy used by novice and experienced forex traders for its simplicity. In trend trading, traders attempt to make profits by taking advantage of market direction momentum.
For trend trading to work, it is best for medium-term or long-term trading positions where trades fluctuate in length. It is also possible to adopt multiple time frame analysis for trend trading.
You can determine market entry positions using different oscillators like CCI and RSI, while exit positions can be determined using a positive risk-reward ratio.
Pros
- A significant number of trading opportunities
- Good risk-to-reward ratio
Cons
- Needs long periods investment
- Involves strong appreciation of technical analysis
Position trading
This long-term forex trading strategy focuses on fundamental analysis even though technical analysis can sometimes be used. Small or minor market changes are not considered in this strategy since they do not affect the bigger market picture. Position trading is ideal for forex and the stock market.
The trader should be willing to hold a trading position for months or even years in position trading, making the strategy ideal for patient investors. A trader needs to have a deep understanding of how different emerging financial factors affect the market to be able to forecast trade ideas.
Entry and exit points in position trading can be determined using technical analysis.
Pros
- Requires minimal time investment
- Highly positive risk-to-reward ratio
Cons
- Presents very few trading opportunities
- Requires deep understanding of technical and fundamental analysis
Day trading
This trading strategy requires a trader to buy and sell their currency pairs on the same trading day. This means that all open position requires to be closed before market close. A trader can hold a single position or several positions throughout the day.
In day trading, trading time ranges from very short-term trades that can be as short as a few minutes to short-term trading times, not more than a few hours since all trades must close before market close.
Day traders look for entry points in dips and exit points in a 1:1 risk-reward ratio.
Pros
- Presents numerous trading opportunities
- Median risk-to-reward ratio
Cons
- Requires a lot of time investment
- Entails strong appreciation of technical analysis
Swing trading
This is a type of speculative trading where traders take advantage of trend markets and rang bound markets. Traders can enter long and short-term positions by choosing tops and bottoms. All swing traders are mostly medium-term traders since they can hold a position for hours or days. Generally, swing trading favors longer-term positions since a trader can capitalize on a trend at different points of the trend.
In swing trading, traders use indicators and oscillators are used to determine the best entry and exit positions.
Pros
- A substantial number of trading opportunities
- Median risk-to-reward ratio
Cons
- Requires high understanding of technical analysis
- Still requires an extensive time investment
Conclusion
When determining the best trading strategy to use, it is advisable to compare your trading needs, goals, and the time you have for trading. With any of the highlighted strategies, you can take your trading to the next level.