What is a forex trading strategy?
A successful forex trading strategy refers to a strategy to buy and sell currencies effectively. The currency trading strategy is a plan or a technique used by a forex trader to determine the right time for buying or selling a currency pair. In other words, a currency trading strategy is a system of guidelines that help a trader consistently analyze the market behavior in order to identify whether there is a high chance to buy or sell a currency pair.
Formation of Forex Trading Strategy
The currency strategies are formulated on the basis of technical tools like previous data analysis and algorithms or on the basis of fundamental tools like news events, crises, etc.
These strategies are usually made up of trading signals or indicators that affect the buying and selling of a currency pair. These trading signals are generated by manual and automated tools.
A quick glance
In forex trading, a forex trading strategy is used to determine whether a certain currency pair should be bought or sold.
Fundamental or technical analysis can be used to develop Forex trading strategies. A currency trader’s strategy is usually based on trading signals.
- Identify your risk
- Determine the entry and exit point
- Formulation of a strategy
- Price trading forex strategy
- Position trading strategies
- Scalping strategy
- Trend trading strategies
- Hedging forex trading strategies
- The bounce or break forex strategy
- Range trading strategy
How to make an effective trading strategy
You need to make an effective currency trading strategy based on a well-reasoned analysis of the market. It is very important for a trader to use a high-quality Forex trading system that works for him in order to get the desired result. It is possible only by effective formulation and implementation of Currency trading strategies. Here is a step-by-step procedure to formulate an effective forex trading strategy.
Selection of a currency pair: The first step for making an effective trading strategy is to select the currency pair which a trader wants to buy or sell in the future. A trade needs to reads the trends and signals of that pair first to formulate an effective strategy.
Identify your risk: For making a proper currency trading strategy, it is important to determine your risk factor. A trader needs to define how much he is willing to lose on each trade. The amount a person is willing to lose is different for each person. It will help you with proper money management.
Determine exit and entry points: A trader needs to find out his entry or exit position in a trade in order to get maximum profit. Traders need to develop rules regarding the buy or sell position of a given currency pair. These guidelines will help them to find out about their long or short position.
Formulation of Strategy: After determining all these factors now, a trader needs to develop some rules for buying and selling currency pairs. A trader needs to identify the right technologies and platforms to execute their trade. For making an effective currency strategy, a trader needs to analyze platforms like MetaTrader. This will enable a trader to compare strategies and have a look at past performance.
Currency Trading Strategies
Price Trading Forex Strategy: The price action approach is a trading forex strategy that is formulated on the basis of price predictions and speculations used by Forex Brokers or dealers. These strategies can be used as a stand-alone technique with a forex indicator to identify a price position. Under this strategy, on the basis of historical data, past price movements, and order price-related information, a strategy is formulated by using different technical tools like charts, trend lines, bars, price bands, etc. Under this strategy, the predictions are determined on the basis of timeframes. A trader uses the time frame strategies and makes the decision to either sell or buy the currency pair. Price Action strategies can be used for long-term, short-term, or mid-term currency transactions.
Position Trading Strategies: Position Trading strategies are the strategies for long-term forex trading. These strategies offer high returns and positive results These position trading strategies are formulated on the basis of technical and fundamental analysis of position charts.
These are formulated by keeping the economic and social factors in mind that directly or indirectly affect the forex market. One can use these strategies not only in forex but also in all financial markets like stock and crypto.
Scalping Strategy: Scalping Trading Strategy is formulated in order to earn profit from small price changes. It is generally for beginners. Under this strategy, the number of trades is comparatively large, and the gain to the individual is very small. A small profit is generated by opening and closing multiple positions in a day. The main aim of scalping is to make a large number of winners with small profits and not a few successful trades with large winning profits. The formulation of scalping strategies is based on the idea of lower exposure risk, large numbers of winners, and a small amount of profit.
Trend trading strategies: With the name, it is clear that these are the strategies that are formulated on the basis of the ongoing trends in the market. In other words, these strategies enable an FX trader to identify the movements or trends in the market and take advantage of these movements. These strategies are formulated on the basis of technical and fundamental indicator that gives a trader the right idea of buying or selling a currency pair due to change in market trends. A trader analyzes the historical and market movements to predict the future of a currency pair. For example, the price of company stock first increases by 50p, then decreases by 25 p, increases again by 100 p, and then decreases by 50p. So a trader can predict that the price of the currency will increase in the future.
Hedging Forex Trading Strategies: It is a process of opening additional positions to protect oneself against adverse movements in the FX market. In other words, hedging forex offsets the risk of changes in price in order to reduce exposure to currencies from other positions. Traders use hedging forex strategies in order to safeguard their interests against changes in the exchange rate. Hedging strategies are the risk management strategies frequently used by forex traders to reduce the possibility of loss. Under this, a trader selects two correlated currency pairs. For example, EUR/USD and GBP/USD trade in opposite directions. In this case, if a trade occurs loss from the first, he can settle it with the profit from the second currency pair or vice versa.
Bounce or Break spot Trading Forex Strategy: When a forex trader takes reference from the past for future forex trading is Bounce or Break spot strategy. When a forex trader believes that the levels that were important in the past could be important in the future, then he will place the order according to past experience. If a trader believes that a market has dropped to a level, then it will be bounced back and feels that it is a great time to buy the pair. The strategy is called as Bounce or break spot strategy.
Range Trading Strategy: Under this trading strategy, a forex trader can identify the ranging position in order to trade more effectively. A trader identifies the support and resistance points of the market and places trade accordingly. The range position or points are identified on the basis of Technical analysis tools. These positions can be used in prediction with the Price Action trading strategies to predict better. These strategies are best to reduce the risk and identify various trading opportunities. However, rapid decision-making ability is required for placing the order at the right time on the basis of range positions.
Swing trading: It refers to the strategy that takes oscillations into consideration for the generation of profit. The traders will seek opportunities within a time frame. Under this strategy, a trader aims to earn profit from a small part of a longer trend within. It is a medium-term trading style; a trader tries to earn profit from price swings. Under this process, a trader has to hold a trade for several days at a time. Swing trading can be done in two ways day trading and position trading.
Day Trading Forex Strategies: A Day trading forex strategy refers to the process of buying or selling position within the trading day. Under this process, a trader opens or sells a position within a single day’s trading on the basis of small price movements. A trader only takes a day to open a position and close it when the day is over. It is the best strategy for those traders who have enough time throughout the day to monitor, analyze and execute a trade within a day.
Counter trend Trading strategy: With the name, it is clear that under these trading strategies, a trader trades in the opposite direction. Under counter trading, a trader determines the overall trend and trades in the opposite direction of the trend. It is a risky strategy as it is based on the idea of finding out the trend and waiting for the trend to reverse before placing your order.
There are various currency trading strategies for a trader to select in the forex market. The best strategy in Forex trading depends on the requirement of the individual, like time frame, decisive nature, etc. Even the best forex trading strategy cannot give a trader full-proof results. There are chances of losses even after the effective implementation of the currency strategy. However, a trader can reduce the chances of loss by using a proper plan for trading a currency pair.