In order to try and succeed in the market, forex trading strategies are deployed by forex traders. What is a forex trading strategy? A forex trading strategy is a comprehensive trading procedure deployed by a forex trader to determine how he will approach the markets at any given time.
It helps the trader to determine which currency pairs to trade, time to trade, to buy or sell, stop loss and take profit values as well as other metrics to use or watch out for in the trade. When these data are generated from the strategy, the trader then makes informed trade decision.
A trader may have different forex trading strategies to use depending on the market conditions, currency pairs, market sentiment or news. Forex trading strategies can be built using the principles of technical analysis, fundamental analysis or a combination of both. Technical analysis is used to analyze statistical trends and historical trading data with the belief that the patterns will repeat again.
Most trading platforms come with tools for technical analysis such as charting package, drawing tools, technical indicators, etc. Fundamental analysis focuses on social, economic and political events that affect currency prices. Manual strategies usually demands that a trader sits in front of the computer seeking to identify trading opportunities from the charts.
But automated strategies involve the scripting of software forex robots which automatically identifies signals and executes the trades. Several software robots are available on the internet for rent or outright purchase. Forex by TradingView. Several trading strategies have already been developed and are being used by numerous traders.
A trader can study and use an existing strategy or modify it to suit his style. Note that there is no perfect strategy and some strategies work better for some people at specific market conditions. Below are some of the well-known forex trading strategies :. This is a trading strategy where a forex trader holds open positions for weeks, months or years. The trader is not interested in short-term price fluctuations; rather he is hoping to take advantage of long term market trends.
A major advantage of this strategy is that the trader places only a few trades in months or years and there are no frequent analyses. It can be done on a part time basis. But, position trading has major flaws. Swap fees will accumulate and may even cancel out any floating profits accumulated by the trader. Trader discipline is required otherwise the trader might be tempted to close the trade before schedule in order to lock-in profits or cut his losses.
Swing trading strategy is similar to position trading except that the swing trader wishes to capture short and medium term fluctuations in the market and so, maintains open positions for days or a few weeks. The difference with swing trading is that the trade time is shorter than that of position trading.
This strategy requires a thorough understanding of technical analysis methods and much discipline on the part of the trader. Swing trading is one of the forex trading strategies that is suitable for both part time and full time traders. Unfortunately, the swing trader is subject to swap fees which might greatly reduce potential returns. These are a number of forex trading strategies derived from the action of buyers and sellers in the forex market.
Price action strategies focus on price analysis of the forex pairs and it is used by both short-term and mid-term traders. Traders study the historical price of the forex pair and then predict its next movement. Candlestick charts are mainly used in this analysis but it is sometimes combined with some technical indicators. Price action strategies are not difficult to learn; this is why it is widely used by beginners.
But, in most cases, price action strategies are not sufficient to be used alone; it needs confirmations with technical indicators. Trend following is a strategy that seeks to identify price patterns and place trades in the trend direction as it occurs. Trends can be upwards, downwards or sideways. Trend traders do not predict price levels of a forex pair; they only identify a trend and place their trades.
This strategy has no complexities and a newbie can easily understand and use it. Trend followers are likely to capture big moves and quickly cut losses when the market reverses. However, the strategy required appreciable knowledge of technical analysis. The trader should always watch out for false breakouts. Risk management is a top priority for trend followers. This is one of the forex trading strategies that is based on chart analysis.
Range trading looks for support and resistance levels at extremes forming a range and ignoring the trends. The trader believes that price will still come back to the identified support or resistance levels and then positions his trades accordingly. This strategy works well in markets where there are no clear trends and it can be used on all time frames. To execute perfectly, the trader must have a good knowledge of technical analysis and must be a disciplined trader.
Day trading is the strategy of opening and closing positions within a day. The traders speculate on the price of the financial assets in order to capture the intraday movements. Most day traders open positions at the beginning of the day and close it before the market closes for that day. Almost every day trader bases their trading decisions from studying the charts and analyzing with indicators.
By virtue of the trading strategy, day traders avoid swap charges and market gapping. They can choose to place one long trade or a few trades within the day. The most common way to trade news is to look for a period of consolidation or uncertainty ahead of a big number and to trade the breakout on the back of the news. This can be done on both a short-term basis intraday or over several days.
After a weak number in September, the euro was holding its breath ahead of the October number, which was to be released to the public in November. For news traders, this would have provided a great opportunity to put on a breakout trade, especially since the likelihood of a sharp move at this time was extremely high. The table above illustrates shows—with two horizontal lines forming a trading channel —the indecision and uncertainty leading up to October non-farm payroll numbers , which were released in early November.
Note the increase in volatility that occurred once the numbers were released. We mentioned earlier that trading news is harder than you might think. The primary reason is volatility. You can be making the right move but the market may simply not have the momentum to sustain the move. This chart shows activity after the same release as the one shown in Figure 2 but on a different time frame to show how difficult trading news releases can be.
On Nov. The disappointment led to an approximately pip sell-off in the dollar against the euro in the first 25 minutes after the release. One thing you should keep in mind is that, on the back of a good number, a strong move should also see a strong extension. One potential answer to capturing a breakout in volatility without having to face the risk of a reversal is to trade exotic options.
Exotic options generally have barrier levels and will be profitable or unprofitable based on whether the barrier level is breached. The payout is predetermined and the premium or price of the option is based on the payout. The following are the most popular types of exotic options to use to trade news releases:.
A double one-touch option has two barrier levels. Either one of the levels must be breached prior to expiration in order for the option to become profitable and for the buyer to receive the payout. If neither barrier level is breached prior to expiration, the option expires worthless. A double one-touch option is the perfect option to trade for news releases because it is a pure non-directional breakout play.
As long as the barrier level is breached—even if the price reverses course later—the payout is made. A one-touch option only has one barrier level, which generally makes it slightly less expensive than a double one-touch option. The same criterion holds—the payout is only made if the barrier is breached prior to expiration. This is a good option to buy if you actually have a view on whether the number will be stronger or weaker than the market's consensus forecast.
Options on currencies are a viable alternative for those who do not care to get whipsawed in the markets by undue volatility before they actually see the spot price move in their desired direction; there are different types of currency options available through a handful of forex brokers. A double no-touch option is the exact opposite of a double one-touch option. There are two barrier levels, but in this case, neither barrier level can be breached before expiration—otherwise the option payout is not made.
This option is great for news traders who think that the economic release will not cause a pronounced breakout in the currency pair and that it will continue to range trade. The currency market is particularly prone to short-term movements brought on by the release of economic news from both the U. If you want to trade news successfully in the forex market, there are several important considerations: knowing when reports are expected, understanding which releases are most important given current economic conditions and, of course, knowing how to trade based on this market-moving data.
Do your research and stay on top of economic news and you too can reap the rewards. Your Money. Personal Finance. Your Practice. Popular Courses. Key Takeaways Economic data tends to be one of the most important catalysts for short-term movements in the forex market. Since the dollar is one side of many currency pairs, U.
The most common way to trade forex on news is to look for a period of consolidation ahead of a big number and trade the breakout on the back of the number. A variety of exotic options are available for traders who want to capture a breakout move, but with less volatility than trading the currency pair itself.
USD to 10 a. Japan JPY to p. Canada CAD 7 to a. GBP 2 to a. Italy EUR to 5 a. Germany EUR 2 to 6 a. France EUR to 4 a. Switzerland CHF to a. New Zealand NZD to 9 p. Australia AUD to p. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation.
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