Identifying a successful Forex trading strategy is one of the most important aspects of currency trading. In general, there are numerous trading strategies designed by different types of traders to help you make a profit in the market. However, an individual trader needs to find the best Forex trading strategy that suits their trading style, as well as their risk tolerance. Here are some strategies and tips that you must consider.
Forex scalping is a popular trading strategy that is focused on smaller market movements. This strategy involves opening a large number of trades in a bid to bring small profits per each. Scalping is very popular in Forex due to its liquidity and volatility. Investors are looking for markets where the price action is moving constantly to capitalise on fluctuations in small increments.
This type of trader tends to focus on profits that are around 5 pips per trade. However, they are hoping that a large number of trades will be successful as profits are constant, stable, and easy to achieve. A clear downside to scalping is that you cannot afford to stay in the trade too long. Additionally, scalping requires a lot of time and attention, as you have to constantly analyse charts to find new trading opportunities.
● Day Trading
Day trading refers to the process of trading currencies in one trading day. Although applicable in all markets, the day trading strategy is mostly used in Forex. This trading approach advises you to open and close all trades within a single day. No position should stay open overnight to minimise the risk. Unlike scalpers, who are looking to stay in markets for a few minutes, day traders usually stay active over the day monitoring and managing open trades.
Day traders are mostly using 30-minute and 1-hour time frames to generate trading ideas. Many day traders tend to base their trading strategies on news. Scheduled events e.g. economic statistics, interest rates, GDPs, elections, etc., tend to have a strong impact on the market.
● Position Trading
Position trading is a long-term strategy. Unlike scalping and day trading, this trading strategy is primarily focused on fundamental factors. Minor market fluctuations are not considered in this strategy as they don’t affect the broader market picture. Position traders are likely to monitor central bank monetary policies, political developments, and other fundamental factors to identify cyclical trends.
Successful position traders may open just a few trades over the entire year. However, profit targets in these trades are likely to be at least a couple of hundred pips per trade. This trading strategy is reserved for more patient traders as their position may take weeks, months, or even years to play out. You can observe the dollar index (DXY) reversing its trend direction on a weekly chart.
Tips to Follow
● Always Use a Trading Plan
A trading plan is a set of rules that specifies a trader’s entry, exit, and money management criteria for every purchase. With today’s technology, test a trading idea before risking real money. Known as backtesting, this practice allows you to apply your trading idea using historical data and determine if it is viable. Once a plan has been developed and backtesting shows good results, the plan can be used in real trading. Sometimes your trading plan won’t work. Bail out of it and start over. The key here is to stick to the plan. Taking trades outside of the trading plan, even if they turn out to be winners, is considered a poor strategy.
● Use Technology to Your Advantage
Trading is a competitive business. It’s safe to assume that the person on the other side of a trade is taking full advantage of all the available technology. Charting platforms give traders infinite ways to view and analyse markets. Backtesting an idea using historical data prevents costly missteps.
Getting market updates via smartphone allows us to monitor trades anywhere. Technology that we take for granted, like a high-speed internet connection, can increase trading performance. Using technology to your advantage, and keeping current with new products, can be fun and rewarding in trading.
● Protect Your Trading Capital
Saving enough money to fund a trading account takes time and effort. It can be even more difficult if you have to do it twice. It is important to note that protecting your trading capital is not synonymous with never experiencing a losing trade. All traders have losing trades. Protecting capital entails not taking unnecessary risks and doing everything you can to preserve your trading business.
Most of the strategies and tips given above have one thing in common: attention to risk or losing money. That’s because you’re in the business of making money in the markets. Losses will inevitably occur. The trick is to keep the losses small enough to keep trading until you find more winning trades. Experienced traders know when it’s time to take a loss and have incorporated that into their trading strategy. Traders also know when it’s time to take profit, so they may move their stop loss in the direction of the trade to lock in some profit or take profit at the current market price. Either way, there will always be another trade setup down the road.