Forex trading strategies – Explained

Strategies are a set of tools and rules used by traders to help them make the right call. The goal of the tools is to analyse the available information so the traders can make an informed decision.

A good strategy is fundamental for performance and makes better decisions in the long term.

Which is the best strategy?

There is no single best strategy to operate in the forex market. Every trader develops his own ways of doing things. Of course, a trader can use some general rules and indicators to trade, but he must choose a strategy that matches the trader's traits and style. Traders choose different paths based on many factors, but an important one is how much risk a trader is willing to take.

To develop his own strategy, a trader must experiment a lot. In the process, he will notice which techniques work better for him. A strategy useful for one trader may be a disaster for another.

Basic principles of a good strategy

Knowledge: Before making any movement, you have to know the basics of trading. Today, there are many good free courses online. A good trader must understand the basic concepts used in trading. Trying to invest without preparing yourself is a recipe for disaster.

One of the first things you'll learn while preparing yourself to trade will be recognising trends in the charts. If you can do this, your chances of making the right prediction will increase your chances of making a profit.

Don't rush into it: While you study, you'll find different strategies, and as soon as you see them, you may want to apply them right away, but it is not that simple. You need to understand each and apply them one by one proving which ones work best for you. You also need to give them time. Once you apply a new strategy, it may not work immediately. You need to make low-risk movements to see if the strategy works for you in the long term.

Emotions: Successful traders are capable of controlling their emotions. You need to make decisions based on cold calculations and away from greed or anxiety. Your methods have to be realistic, and your goals should be set for the long term. If you find the right strategy, even if your move gives you some losses, you'll see the results in the long run if you can control your emotions.

Basic indicators: These include moving average into account. Simple moving average (SMA) and exponential moving average (EMA) will show signals to sell and buy. Also, Oscillators are a very useful indicator. Especially the relative strength index (RSI). Finally, no strategy can work without identifying resistance and support levels. Clarity about the lowest and highest point of a trend is necessary for entering a position.

Strategy tools

In trading, there are basically two types of tools: technical tools and fundamental tools.

Technical tools

The technical analysis depends on the chart. Any factor affecting the supply and demand will affect the price and be represented in the chart. The movements in the price are there to be interpreted. This is the key to all trading strategies.

One of the tools based on the prices is candlestick patterns. These are very simple to understand and apply to many markets and time frames.

Setting support and resistance levels is another very important technical tool. These levels are not exact, your estimation can be a few pips above or below the actual price, but a good estimation is essential to predict how the price will behave. Other technical tools are trend channels, triangles, and Fibonacci retracement.

We really want to know not where the price is but where it will be. That's why the important thing is to be able to predict the trend. Some traders are called trend traders because their strategies are based mostly on trends behaviour. They don't try to find out where the resistance and support levels are because they want to take advantage of a trend once it has begun. Because of this, they enter their position a little later than other traders. So they need to confirm that the trend is there before they enter.

Fundamental tools

Fundamental analysis is about the real forces that move the economy and have impacts on supply and demand. Fundamental analysis was developed to study the stock market. This is why fundamental analysis is not as effective as technical tools in forex trading. Currencies are not the same as stocks. The financial situation is necessarily reflected in the stocks, while this doesn't always happen with countries and currencies.

Most popular trading strategies

Trend trading

Here traders buy once the price gets above an established resistance level and sell when the price drops below the support levels. But, again, trends can be short and long-term.

Due to the magnitude of the movements, this type of trading strategy can generate greater profits. Traders use indicators to try to find out when a trend is going to start, but there is no way to know for sure.

Sideways trading

This is based on support on resistance levels. These levels create a range in which traders can operate. For example, in a sideways market, the price will move between the two levels. When the price goes up and reaches the resistance level, traders anticipate that the next movement will be downwards and make their move accordingly.

In this strategy, the trader tries to take advantage of a previous trend establishing maximum and minimum levels. In theory, this strategy is the best for new traders to get some confidence because of its high success rate.

Sideway trading

Swing trading

This is a type of trend strategy that tries to take advantage of the sudden price increases. It works with small ups and downs in the trend, whether against the main trend. It requires a fast reaction to the changes in the market, so it is very used by day traders.

Manage Risk With A Good Strategy

There are many ways to manage your trades. The important thing to know is that every move must be part of a systematic strategy. No strategy is better than another. The strategy you choose depends on your preferences, personality, psychological character, and the markets in which you trade.

Second, every tool included in your strategy must be proved for a time before you put big amounts of money on the line. Technical tools have proved they are the more reliable tools in comparison to fundamental tools.

These last ones were developed to trade with stocks and not with currencies. Finally, no successful trader trades without a strategy. There are many more than the mentioned in this article, but these are the more popular ones. The ones you decide to include in your strategy depends entirely on you