Effective Forex Trading Strategies you Should Know
Engaging in forex trading provides people with the unique opportunity of taking part in a global marketplace that’s known for its significant potential. Forex is immensely popular amongst day traders, due to which it has developed a reputation for delivering quick profits. The reality is that it is just as competitive and complex as the rest of the marketplaces out there and you have to have a strong understanding, along with a well-honed trading strategy in order to succeed and do it consistently.
There are a variety of forex trading strategies that exist, so it is essential for you to choose an approach that suits your goals, experience level and the context. If you are in search of an effective strategy, you can check out some prominent options below:
- Trend Trading
One of the most reliable and simplest strategies for forex trading is called trend trading. As the name indicates, this strategy focuses on trading in the direction of the current price trend. Traders can do this effectively by identifying the overarching trend strength, duration and direction. These factors will indicate just how strong the trend is and when there may be a reversal in the market. When you adopt this particular strategy, you don’t need to know the exact timing or direction of the reversal; the only thing you need to know is when to exist your existing position for limiting losses and locking in profits.
Bear in mind that even in a trending market, there can be small price fluctuations going against the current trend direction. Therefore, trend trading is preferable if you are taking a long-term approach called position trading. When you invest in a strong trend, you need to be ready to withstand small losses, knowing the profits will ultimately surpass them.
- Position Trading
This particular strategy is one where forex traders hold their positions over an extended period of time, which can be a couple of weeks to a couple of years. This approach is also one that should be used in the long-term and it requires traders to have a macro view of the market and deal with smaller fluctuations in the market that can counter their position. Analytical data can be helpful for traders with this strategy, such as slow moving averages.
- Range Trading
The concept of resistance and support are the main focus in range trading. If you take a look at the price action graph, the lowest and highest point the price hits before moving in the opposite direction can be identified as resistance and support levels and these create a bracketed range together. The price will continue to move past older resistance levels in a trending market, which means it will reach lower lows in a downtrend and reach higher highs in uptrend. This creates a stair-like resistance and support pattern.
However, price tends to move sideways in a ranging market and will remain bracketed between established resistance and support thresholds. You can buy a currency pair when price reaches the oversold (support) level and it is a sell signal when price approaches the overbought (resistance) level. If the price manages to break through this range, it is considered an indicator of a new trend. Those who use range trading are more concerned about markets oscillating between support and resistance levels, rather than anticipating breakouts.
- News Trading
Forex is a multinational marketplace, which means that global economic events influence it heavily. Therefore, it is a must for forex traders to understand the economic news events that take place, along with the impact they have on currency pairs. This can be helpful in anticipating short-term i.e. multiday or intraday breakouts or market movements. These news events include interest rate decisions by central banks, business and consumer confidence surveys and economic reports on inflation rates, unemployment rates, national trade balances and gross domestic product (GDP). Bear in mind that unscheduled, singular events can also affect the forex market, such as political changes or natural disasters.