Forex Trading Strategy is a technique to make a considerable profit even from the worst trading situations. They help you manage the balance between risk and profit and help you manage hurdles that come on your path while doing trading. A forex market is a place where investors trade worldwide currency in pairs to make a profit.
Some people think a forex market is risky due to its decentralization, but it is not entirely true. These currencies trading in the forex market are centralized in different nations, which makes this market safe. Here you only need to manage risks of losing money that take place due to the use of high leverage.
Here we are discussing some forex trading strategies which help you to manage risks properly during live trading. But before that, if you are a beginner, you need to understand how forex trading works and how to use Forex trading strategy in the proper manner.
What is Forex trading?
Forex or foreign currency exchange is a place where investors buy and sell currencies among each other at an agreed price. It is the median through which companies, individuals and central banks convert specifically to another currency. The best example of the forex exchange is While travelling abroad and you spend money there, then it is said you have done a forex transaction. FX trading strategy helps traders to make proper moves for earning returns.
When multiple foreign exchanges are made for a specific purpose, the huge majority of currency conversion takes place with the target of generating good returns due to the huge number of currencies converted every day, which create price fluctuation of some currencies highly volatile. The volatility is the factor that makes the forex market extremely attractive for traders. Due to this factor, various opportunities will rise in the market for traders to earn high profits, but it may also enhance risk factors.
Forex trading strategy Explained.
An FX trading strategy refers to the system that forex investors use to calculate the right time to buy and sell a currency pair. There are multiple forex trading strategies available in the market that traders use for fundamental analysis and technical analysis. An excellent trading strategy will help traders to analyze the market thoroughly and build confidence in traders to execute trades with protective risk management techniques.
Forex trading strategies Overview
Forex trading strategies are split into a clearly organized structure that helps traders in placing the most suitable strategy. The Venn diagram given below will help you to understand how each strategy appears in the entire structure and the relation between various forex trading strategies.
How to pick the best forex trading strategy for balancing risk & profit?
Before understanding how forex strategies work, we need to understand the criteria for pricking the best FX trading strategies. Here we explain three major factors that you need to keep in mind while selecting suitable FX strategies for your trade.
Selection of the time frame according to your trading method is essential. For investors, there is a wide difference between trading on a weekly chart and a 15 minutes chart. However, suppose you are seeking more about the process of becoming a scalper, investors that target to earn profit from fewer market fluctuation. Then you need to pay attention to the lower time frames, such as from 1 minutes charts to 15 minutes charts.
Alternatively, Swing traders gave preference to the 4-hour charts along with the daily chart for searching efficient reading opportunities. Therefore, before picking your suitable forex trading strategy, you must ask yourself how long you want to stay in a trade? Various FX trading strategies are available as per time frames ( short, medium, and long term). Only you need to make sure you select smartly.
Multiple Trading opportunities
While picking your trading strategy, you need to ask yourself, “ how often do I want to enter a market?” If you are going to open a more position, then a scalping trading strategy is the best choice for you.
Alternatively, suppose you are looking to spend more time and traders who trade on the basis of analysis. In that case, macroeconomic reports and fundamental factors need not spend more time in front of charts. However, they need to pick their FX trading strategy based on bigger positions and higher time frames.
A proper calculator of trade size is an essential thing. An excellent forex trading strategy needs you to understand your risk sentiments. Bearing risks more than you can handle will become problematic for you, and sometimes it leads you towards exterminating losses. Good traders always set a risk limit for their every trade. For example, traders need to set a 1% limit on their trade which means they will not take risks of more than 1% of funds available in their account on a particular trade.
Top Forex Trading Strategy for Creating a balance between Profit & Risk
Forex trading needs to keep various factors together for developing an efficient Forex trading strategy that suits your trading style. There are multiple strategies available in the market but the number doesn’t matter; you need to make yourself comfortable and understand how those strategies work is an important thing. All traders consist of different targets and resources, which you need to consider while picking a suitable Forex trading strategy. Some leading brokers who provide online forex trading are ROinvesting.
Here we classified traders into three different categories based on their requirements which we use to compare multiple FX strategies.
- Time resources required
- Specific distance to the target
- Frequency of trading opportunities
We present a Venn diagram (bubble chart) to compare forex strategies based on these three categories. The horizontal line represents “time investment”, which shows how much time needs to be spent for properly monitoring the trade. And the vertical line consists of the Risk-Reward Ratio, which shows the number of risks each Forex trading strategy consists of and has the capacity to generate remarkable profit. Position trading strategy consists of the highest risk-reward ratio, and Scalping trading strategy requires more time for execution.
Range Trading Strategy
Range strategy is a forex trading strategy used to identify resistance and support points through which investors can place trades all over these key levels. This Forex trading strategy performs efficiently in the market without the presence of crucial volatility and does not perform according to trend. The major tool which is used along with this trading strategy is Technical analysis.
Length of trade
There is no specific range set for trade because length restricts strategies able to do work at any time frame. Handling risks is an essential requirement of the strategy because breakout can take place anytime. Therefore, a range trade should be close at any current range-bound positions.
Exit / Entry points:
Oscillators are one of the most popular timing tools. Some other good performing timing tools are Commodity Channel Index (CCI), Relative Strength Index (RSI), and Stochastics. Sometimes we use price action for conjunction along with oscillators for the other predicted range-bound breakouts and signals.
To understand this thing properly, take an example of USD/JPY Range Trading.
USD/JPY has shown a highly extended range-bound costs level of the previous years. The chart available here shows a clear resistance and support band that traders considered for entry and exit points being marked by the red and blue boxes. Blue shows overbought, and red indicates oversold.
Rang traders provide successful risk-reward ratios as a result, although this forex trading strategy often applies with the long term investment on each trade. Check here advantages and disadvantages to determine either this strategy will work for you or not.
- A considerable number of trading opportunities
- Favourable risk-to-reward ratio
- Need lengthy period of time investment
- Required strong knowledge of technical analysis.
Trend Trading Strategy
Trend trading is the most straightforward forex trading strategy that experienced traders use. This forex trading strategy tries to submit potential returns by utilizing directional market momentum.
Length of Trade:
Trend trading usually appears above the moderate to the extended time horizon as trends automatically fluctuate in size. Same as price action, various time frame analyses should be applied in trend trading.
Entry points are generally determined by the oscillators such as Commodity Channel Index (CCI) and Relative Strength Index (RSI), and exit points are estimated on the basis of a positive risk ratio. With the help of stop level distance, investors can easily uniform the length, and traders can also use this for extending distance for handling a positive risk-reward ratio like supposing the stop loss was kept at 30 pips away, the take profit level will be placed at 30 pips and far away from the entry point.
Example of trend trading: Search for the trend
In the above-given example, EUR/USD displays an upwards trend verified from higher low and higher highs, and vice versa is valid for a downwards trend.
Trading the Trend: EUR/USD
While you observe a strong trend appearing in the market, you must perform trade towards the trend direction. For instance, the tough uptrend in EUR/USD appearing in the above chart.
Time entries are determined by the CCI tools, must observe how certain time CCI drop down? In the chart above, CCI dips are shown by the blue area, which is 100, and prices react with improvement. But must note that not all trade provides results in this manner due to trade should be followed. Because each dip attracts more buyers towards the market, and the price will go up. Now we understand from this identifying a strong trend is necessary for a successful forex trading strategy.
Check here advantages and disadvantages to determine whether it is suitable for your trading style or not.
- Significant reading opportunities
- Beneficial risk-to-reward ratio
- A lengthy period of time investment required
- Technical analysis awareness required
This forex trading strategy is used for trading assets within the same day which means all trades will perform the same day before market close. It does not matter whether you perform a single trade or multiple trades throughout a day.
Length of trade:
Trade took place for a short time interval, such as for minutes or an hour. Trade should be considered day trading when a trade opens and closes within a single day.
Entry position should be determined on the basis of price break will appear in the direction of the trend, and exit point should be calculated based on 1:1 risk-reward ratio.
Check here the advantages and disadvantages of using this forex trading strategy.
- A good number of trading moments
- Moderate risk-to-reward ratio
- Need extended interval of time investment
- Technical Analysis knowledge is essential.
Example of Day trading: EUR/USD
The above chart consists of an illustration of day trading layout through MA (moving average) for determining the trend which is represent extended in the graph because the price is above the moving average line. A line is represented by the black and red line, whereas the entry point is shown by the blue line along with the stop levels kept at the past price break. The stop distance level helps traders to determine the profit level toward the trend direction.
Scalping Forex Trading Strategy
Scalping is very popular in forex trading because through this strategy, traders can easily make small profits on a frequent basis. This happens due to multiple opening and closing of positions that will take place within the entire day. Traders can do this on their own or with the help of a robot that works based on the predefined instruction for taking entry and exit positions. Using this strategy often picks currency pairs that consist of highly liquid and because spreads are usually tighter for these pairs.
Length of trade
Scalping strategy trade should take place in a short time period. Traders using this forex trading strategy give preference to the 1 minutes to 30 minutes charts.
Same as the other Forex trading strategy, it also uses MA to determine the trend. The key level of the trend over extended time intervals provides traders with a huge picture Support and resistance are created by these levels. Scalping, which takes place in this band, researches a smaller time frame by using RSI. Stops are kept at a few pips far for ignoring huge movements against the trade. Traders can also use MACD indicators for determining the entry and exit points.
Advantages & Disadvantages of Scalping Trading strategy
- Provide a huge number of trading opportunities for various forex pairs
- A required extended period of time investment
- Technical analysis knowledge required
- Fewer risk to reward ratio
Forex trading strategy helps you to perform your trade successfully. Here we explain some forex trading strategies in detail which perform efficiently in forex trading. These strategies may also help you in balancing risks and profit. Check here the fundamental details of forex trading and FX trading strategies. For more information, read the above article carefully.