Forex is the exchange of currencies on a global market that operates 24 hours, five days a week. It is an over the counter market that is highly volatile and trades at high volumes.
Forex was originally traded by governments and large institutions but has evolved to include retail traders too. Trading forex requires the use of strategies to improve the chance of becoming profitable in the long term.
What are forex trading strategies?
Forex trading strategies are used by traders to determine the prices to enter or exit a position, the direction of the trade and how long a position should be held. Traders employ the use of fundamental research and/or technical analysis to formulate a strategy, analyse the market and mitigate the risks of trading.
7 types of forex trading strategies
We will discuss some of the common forex trading strategies that investors use. These vary in the time spent and frequency of the trades, and traders can choose the appropriate strategy based on their investment horizon.
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Price action trading
The price action trading strategy uses technical analysis of historical prices to determine a pattern of movement. It is possible to include fundamental factors into consideration, such as economic indicators or world news.
Some different methods to determine entry and exit levels are the Fibonacci retracement, which helps to identify support and resistance levels. Other oscillators and indicators are also commonly used by traders employing such strategies.
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Day trading
As the name suggests, a day trade is a short term trade and can be completed even within minutes. This short term trades profit from the volatility and fluctuation within the day.
These trades can occur several times during the day and require close monitoring of the price movements. Day traders are able to avoid the overnight risk because they close their positions within the day.
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Swing trading
Swing traders hold their position for several days and sometimes even weeks. These traders speculate on the trends of the market by picking ‘tops’ and ‘bottoms’ to choose their position. Entry and exit points of the trading position can be determined using oscillators and indicators.
It is important to know the technical concepts such as support and resistance, candlestick and moving average.
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Trend trading
Trend trading is simple and reliable as it tries to gain profits by following the market’s price trend. A trader will have to analyse the direction of the trend and duration to attempt to estimate when it could possibly reverse. Then they will estimate when to enter and exit the market to gain profits and limit any losses.
It is possible to make some losses when the market prices fluctuate against the trend. It is also a strategy that requires investors to understand the technical analysis such as oscillators to be able to determine entry points.
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Position trading
A position trading strategy is a long term strategy that can vary from weeks to years. A position trader is not concerned with minor shifts in the price fluctuations but looks to gain maximum profits in major shifts. Investors use analytical data such as slow-moving averages and fundamental factors.
There are limited trading opportunities for this strategy and traders tend to hold their positions for much longer. Those employing this strategy will have to be well-read on the technical, and macroeconomic factors affecting variouscurrency pairs to make informed decisions for their trades.
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Range trading strategy
Range trading uses the concept of support and resistance, which is the highest and lowest prices a currency reaches before changing directions. In a ranging market, prices tend to form a fixed bracket of price thresholds where price trades within. These are used to determine a trader’s entry and exit position.
This strategy uses the current trend to profit from the movement rather than predicting a future price. Range trading requires the study of the market prices and correctly use the indicators to set up an entry price.
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Forex scalping strategy
Scalping is a very short term strategy of trading within minutes or seconds to take small profits frequently. The success of this strategy is determined by the ability of the platform used to execute the trades quickly and precisely.
Scalpers tend to choose the most liquid currency pairs to scalp and make many trades a day, and even though they have small profits, it does add up substantially. This strategy requires more time investment in monitoring price movements and a strong understanding of technical indicators.
Conclusion
Forex trading strategies need to be paired with a strong understanding of technical analysis and fundamental indicators. Comparing the time investments necessary and the risk to reward ratio of each strategy will allow traders to pick a strategy that is suitable for them.
The article is a part of our comprehensive series on “What Is Forex Trading: A Complete Guide”.
