What is a Forex Trading Strategy?
A forex trading strategy is a trader's system to check when to buy a currency pair and then sell that currency pair. The traders use various trading strategies, including technical and fundamental analysis. You can confidently analyze the market and execute your trade with sound risk management techniques through a good trading strategy.
Criteria that Traders Use to Compare the Suitability of Different Strategies
There are multiple factors to consider before formulating a functional trading strategy. Different traders use different strategies as everyone has unique goals and resources that play a key role in devising a suitable strategy. Therefore, traders use three main criteria to compare the suitability of different strategies:
- Time for a required resource
- Number of trading opportunities
- Typical distance to approach
The analysis of the strategies on these 3 criteria determines their Risk-Reward ratio. To increase your understanding of these trading strategies please visit http://reviewfx.com
Price Action Trading Strategy
It is a strategy that uses the data of past prices to devise technical trading strategies. You can take price action as a stand-alone technique or in conjunction with an indicator to formulate a strategy where trading fundamentals are rarely used.
- Duration of Trade
You can use price action trading over varying periods, and this ability of price action trading to use multiple time frames for analysis is much liked by the traders.
- Entry and Exit Points
Several methods are used to determine the entry and exit points;
- Fibonacci retracement
- Using candle wicks
- Trend identification
- Oscillators
Price action trading includes further trading strategies discussed below.
Range Trading Forex Strategy
Range trading is a strategy that includes identifying key levels' support and resistance points, and traders use them to place their trades. It has low volatility and uses technical analysis as a tool.
- Duration of Trade
There are no limitations to setting a particular trade length as it works for any time frame. Risk management is key in this strategy.
- Entry and Exit Points
Oscillators are the common timing tools used here. Among the oscillators, Relative Strength Index, Commodity Channel Index, and Stochastic are the popular oscillators.
Trend Forex Trading Strategy
It is a simple strategy used by most traders of different experience levels. Trend trading exploits the market's directional momentum to yield positive returns.
- Duration of Trade
Trend trading is a strategy that occurs over the medium to long-term time horizon as trends keep changing in length. Here, multiple time frame analysis is used along with price action trading.
- Entry and Exit Points
Usually, an oscillator designates the entry points, and a positive risk-reward ratio calculates the exit points. Traders can either equal that distance or go further to maintain a positive risk-reward ratio using stop-level distances.
Position Trading Strategy
It is a long-term strategy mainly focusing on fundamental factors. However, you can use Elliot Wave Theory as a technical method. Smaller or minor fluctuations in the market don't affect the position trading strategy.
- Duration of Trade
As it is a long-term strategy; thus, it is reserved for more preserving traders. Understanding how economic factors affect the markets is essential to forecast trade ideas is essential.
- Entry and Exit Points
Key levels mentioned on longer time frame charts contain important information for position traders. Technical analysis used for other strategies holds good for this strategy too.
Day Trading Strategy
It is a trading strategy where financial instruments are traded on the same day, and all positions are closed before the market closes. There can be single or multiple trades throughout that day.
- Duration of Trade
It is a trade that lasts for a very short time from the opening to the closing of trade on the same day.
- Entry and Exit Points
Traders in this trade will make their entry when the price breaks in the direction of the trend and will exit using a 1:1 risk-reward ratio.
Scalping Trading Strategy
Scalping is a common term used in forex to frequently define the process of obtaining little profits. You can achieve this by opening and multiple closing positions per day. And you can do this manually or using an algorithm that operates on predetermined guidelines to enter or exit a position.
- Duration of Trade
It is a short-term trading strategy with minimal returns and operates in shorter time frames.
- Entry and Exit Points
Scalpers use indicators to verify the trends, and these trends help traders to the big picture in longer time frames. Traders can use oscillators for smaller time frames to perform scalping.
Swing Trading Strategy
Traders use a speculative trading strategy to benefit range-bound and trending markets. Traders can join long and short positions by selecting 'tops' and 'bottoms,' respectively.
- Duration of Trade
Swing trades are thought to be medium-term because positions are held anywhere between a few hours to a few days. Here, long-term trends are favored as you can capitalize on the trend at multiple points.
- Entry and Exit Points
Here, oscillators and indicators are used to select entry and exit points and times. It applies to both trending and range-bound markets.
Carry Trading Strategy
It is a strategy where you borrow one currency at a low price and invest it in another, giving a higher yield. It will result in a positive carry of trade.
- Duration of Trade
Here, trade length depends on interest rate fluctuations between the associated currencies. It shows that it is a medium to a long-term trading strategy.
- Entry and Exit Points
Here two things are considered, exchange rate risk and interest rate risk. The best time for opening a trade is at the start of a trend, as the interest rate will not change regardless of the trend.
Conclusion
Forex trading is a highly liquid marketplace that has become very popular over the last two decades. This article discusses some prominent strategies you can follow to become a reputable forex trader and earn a healthy living. If you have any queries, please let us know.
