The Best Forex Trading Strategies to Start Trading With
Anyone who starts trading the foreign exchange market (FOREX), without a solid trading strategy to follow is heading down the wrong path. The forex market is very attractive because it is open for trading 24 hours a day. It is an extremely volatile market and as most traders would tell you, the need to prove yourself followed with an eagerness to make money could send you on a downward spiral. That doesn’t mean that you cannot still make money, not everyone loses in the trading world. Those who follow a direct strategy are the ones who are careful enough to not let their ego consume their trading and judgment abilities.
Proper trading discipline, willpower and the right psychological mind frame can be achieved through experience.
As stated earlier, to gain success in the forex world a proper strategy would need to be followed as it addresses
- How much you would be risking per trade
- What your stop loss is
- What times you should trade, depending on the news release
- Identify your strengths and document your weaknesses.
- What your profit target is
- What currency pair to trade on and if you are buying or selling
A reason for trading that spells out disaster is when you decide to make a trade(s) for the fun of it. Each trade you make should be solely based on a position that has been pointed in your strategy, it could either be fundamental or technical but it is always wise to follow than deviate from your strategy.
Having a strategy you can rely on is always the right way to go, but a strategy is only one part of a broader trading plan as it only grants you advantage on when to enter a trade, it is advisable to also consider;
- Your style of trading
- How you can exit a trade
- How to manage your risks
A very necessary aspect to consider before you pick a strategy to use is to know what kind of trading style works for you. Here are some trading styles that are used widely and range from long to short time frames.
- Day Trading: if you intend on executing trades during the day as you would be preoccupied at night, then this style would suit you. The trades all exited before the day ends and eradicates any chance of being affected by large moves that may occur overnight. The trades would probably last for a couple of hours and the prices on the charts might be set to a minute or two.
- Scalping: These are more short lived trades and usually get held for a couple of minutes. A scalper tries to beat the bid for a trade and take a few points of the profit right before closing. These trades make use of tick charts.
- Positional Trading: This is a long-term trend that aims at maximizing profit that comes from major shift in prices. This trading style will suit you if you’re looking at making long term trades and would only look at charts at the end of the day
- Swing Trading: If you wish to hold your trading position over a number of days and gain profit from any short-term price pattern, then this is your style. A swing trader would take a look at charts every hour or half hour.
Picking a Strategy
There really isn’t an answer to guarantee you the single best strategy because the use of strategies depends on the individual. Meaning what may work for someone else may not be the same go to solution for you, and what others might disregard as the wrong strategy to pick could eventually be the one for you. Your personality would need to be considered as well as experimenting on various strategies to find the one that works and vice versa.
When selecting the type of trading strategy to use, two options could be considered; the paid and the free options.
With The paid trading system: A lot of money could be spent to buy a trading strategy that does not suit your trading style and turns out to be a waste of money if you no longer use it later on down the line. If you ever consider using a paid trading strategy, make sure you have researched and are aware of what your trading style and pattern is before investing that money.
Free Trading Strategies: At least with this option you have the chance to test out whatever strategy you feel like until you find the one that suits your style without having to pay for it. These free strategies can also help you make money so disregard any myths that say only paid strategies help you make money.
Over the years countless trading strategies have been invented, but with all that’s been said, we give you our pick of the best trading strategies to use and explain how they work and the ways you could use them.
Types of Forex Trading Strategies
Carry Trade Strategy: This strategy is dependent on a fluctuating market and is obsolete in a stable market that doesn’t trend in any direction.
How It Works: It works by purchasing a currency that has a higher differential ratio; this means that the interest rate of the currency you wish to sell will be lower than the interest rate of that which you are buying. Any profit that is made here will be gotten from the difference between the rates. For greater profits to be achieved, the differential should be higher.
This type of strategy works best when we expect that the interest rate of the currency we want to buy will go up and the interest rate of what we want to sell will go down.
Just because profit is made from the difference between the interest rates of both currencies, this doesn’t mean that the change in price between both of them is irrelevant.
If you choose to invest in a currency because it has a high interest rate and for example the price of that same currency dropped, after closing the trade you might find that although you gained from the interest rate, you still lost some money due to the difference in buy/sell price.
This is why a Carry Trade strategy is mostly recommended only for a market that moves sideways.
If you intend on using this method to trade, then do so with a currency that has a higher differential ratio.
Price Action Strategy: This strategy is based on the fluctuation in price and in order to predict movements with this strategy, it is very necessary to observe it for a period of time. You can do this by relying on candlesticks, a combination of different indicators or chart patterns. This way you get to see how certain economic events reacts with the rice when the price reaches certain levels.
A secret to using this strategy is to have a clean chart and placing only your support and resistance areas along with your candlestick saves you from over complicating your chart and making it difficult for you to use this strategy. No indicators on your chart make your evaluation, simple clear and very easy to understand
A Clean Candlestick Chart
News Trading Strategy: Even if you rely on price action, this only gives you a technical strategy; a factor that can make any technical result irrelevant and move the market in a way that it so pleases is the news. The forex market is a market that trades occur 24 hours a day, with that news related to trades and currencies can come at anytime. Any change in the economic news can give you a hint as to what currencies to trade on. News from Japan comes almost every day for those who wish to trade on the YEN. GBP, USD and EUR also receive their news in the morning or afternoon, so prepare on time if you wish to use this strategy as your preferred method of trading.
Arbitrage Strategy: Arbitrage is a practice that has been used for a long time; it is a speculative strategy where a person would attempt to gain from the difference in price of the same item in the same market or in another. You have to buy and or sell an item at two different prices in order to profit from this strategy. This is not an easy method, as you and everyone else will be trying to find a loophole to take advantage of, in order to make your profit. This trading form is the best for traders who get the quickest information and have quick systems so they can place and close a trade before it gets to other peoples attention.
Two conditions that could be bent a little but still need to be met before a trade is considered arbitrage are that.
- The price of the product (Same or Similar) is different depending on the markets.
- The genuine price of a product is unlike the potential price discounted at the interest rate.
Arbitrage might occur as two-way or multiple ways.
Forex Scalping Strategy: The Scalping strategy is one where the trader executes the trades during the day but exits after a few minutes or in some cases seconds. If you intend on being a scalper, you would be aiming for a consistent large number of very small profit targets and not the big ones.
The point with using this strategy is that during the trading session, the trader is able to make many trades with the hope that by the end of the session these small profits would have accumulated and exceeded the losses incurred from other trades.
Most traders do not like this scalping method because they prefer to go for higher profits and see no use in going for small profits when such pressure is involved in a trading environment.
If you still wish to choose scalping as your preferred trading method, then you need to find trading systems that will allow you trade between or one and five minute time frame.
Counter Trend Strategy: This strategy relies on the fact that the breakouts that occur do not develop into long-term trends. Any trader who wishes to use this strategy should aim to gain momentum from prices that bounce off formerly established highs and lows.
This is the best trading strategy on paper and is essential for building confidence because it tends to have a high success ratio.
Also to take charge of this strategy, constant monitoring of the market is necessary as this market environment offers healthy changes and is controlled within a range. It is uncertain as to how the state of a market could change as a stable market could always trend while remaining stable and then become volatile soon as it begins to trend, so research is necessary to inform yourself whether the current state of the market will be beneficial to your trading style.
Trend-following Strategy: It has been established that markets are always going to get volatile, based on certain factors. When they are, trends become more hidden and price swings will be increased. A trend following strategy is the best for a calm and quiet market.
Due to the long duration of some trades, this strategy demands a particular mind frame, which makes it more psychologically demanding than some other strategies. An example of a trend-following strategy is the Donchian Trend system.
Which Strategy Works Best For You ?
There is no right or wrong way to trade the forex market, there is only making profit from a trade or losing money from it. Big names like Warren Buffet say there are only two rules when it comes to trading. 1. Never lose money, 2. Remember rule 1.
With time invested in research, practice and trial and error, you would eventually discover which strategy works best with your style. Be patient, Think before you leap, use indicators and find the right style.