Forex trading strategies, short for foreign exchange trading, is a very popular way of earning money. It works by taking advantage of the value fluctuation of one currency in comparison to another. Foreign traders have to account for many economical and technical factors to speculate the price fluctuation of forex pairs and, with timely decisions and strategies, they can make a profit.
It may sound easy, but it’s actually very complicated. Forex traders have developed many strategies over the years with their experience. Some of them are for the short term and some of them for long term uses. Long-term strategies require your planning and a contingency/ backup plan for unpredicted outcomes. Short-term strategies require your onboard knowledge. These strategies are proven to be very useful, and now they are common knowledge among forex traders. Newcomers in the forex market can easily learn and utilize these strategies to make financial gains.
So, let’s take a look at some of these forex trading strategies.
Forex trading strategies
There are many different kinds of forex trading strategies that come in handy for different situations. Here are the most popular forex trading strategies:
Forex scalping is a popular day trading strategy. Day trading means completing your trade on the same day of opening it. Forex Scalping is often compared to the scenario of picking up pennies from the ground in front of a running steamroller. It’s very dangerous, but if done with caution, you may end up with a lot of money at the end of the day.
In forex scalping, you take into account a few technical factors. It is a short-term strategy. So, you should analyze them for a very short period of data; for example, 1 hour or less. But some of the traders use their instincts for it.
You can take advantage of the price noises. When the price falls, you may buy that forex pair and hold it for 5 to 10 minutes or more. When the price goes up, you can sell it. That’s all there is to forex scalping.
If you have been in forex trading for some time, you may have heard traders saying that the trend is your true friend in the forex market. The trend is basically the average price movement of forex pairs over time. Based on trend direction, you have two types of forex markets: A bull market (price going upwards) and a bear market (Price going downward).
Trend traders speculate recent trend data to spot the starting and ending point of the next trend. They use tools like moving average and MACD. They use them to set a nice entry point at the beginning of an upward trend and an exit point at the peak of the upward trend. It can last a day or a week; it all depends on your planning.
Momentum trading is done by looking at the candlestick chart. If you are familiar with the candlestick chart, then you might know that the shape of candlesticks can tell the strength of both parties in the market. In the forex market, the seller wants to push the price up and the buyer wants to pull the price down.
Candlestick charts tell you which one is stronger, and the stronger party decides the movement of the price. Momentum traders use that information from the candlestick chart to plan their entry and exit points. It is very similar to trend trading strategies.
Range trading is ideal for those forex pairs that have neutral economies. These economies are not vulnerable to surprise news events like terrorist attacks or nukes. The idea of range trading is that the price of the currency pairs will stay in a predictable spot for a given period.
The price movement in range trading is predictable. It has steady support and resistance barrier, and it stays predictable for multiple trading sessions. The idea is almost the same as the trend strategies. Range traders also use the same tools and indicators as trend traders.
Since it deals with stable economies, there isn’t much risk of surprise price shifting. On the downside, this strategy is not ideal for dynamic economies that get affected by news and events.
Swing trading involves good planning and observation of the forex market. It is a mid-range plan for one day to one week. You can select your currency pair and set your profit margin. Identify the perfect entry point, which is often the start of an upward trend. After purchasing, you need to hold onto it for as much as the time needed for the price to reach your targeted profit.
In this case, you must set a realistic profit. The time needed to reach your goal mostly depends on your targeted profit. If the profit margin is less, it will take less time, but if it’s high, it will take more time.
Reversal trading strategy is based on the fact that the driving force of the forex market will change parties and it will reverse the price movement of forex pairs. It is quite similar to momentum trading strategy.
It is the most difficult strategy as the true reversal is very difficult to spot. But if done right, it is the most rewarding strategy. Traders use various tools like candlestick charts, moving average, MACD, and triple tops and bottom patterns to identify the correct reversal. They use it for selecting the best entry and exit points in the market.
Position trading is a long-term forex trading strategy. It can last for a few weeks to years. Usually, traders plan to use this strategy with no leverage investments and they keep it as a passive investment. It is a long-term strategy, so the economy may completely change in this period. To stay safe, traders make small investments in such strategies. Their logic is that, if things go as planned, they will earn huge profits, but if things go south, the loss will be bearable.
Conclusion about the different types of forex trading
So, these are some of the most popular forex trading strategies. They are proven to work and have been used by traders for a long time. You can practice forex trading with them and may end up developing your own strategy for forex trading.