In a nutshell, it’s a system used to help forex traders decide when to buy or sell a currency pair to maximise potential profit and minimise potential risk. The best forex trading methods incorporate market analysis, risk management techniques and provide clear trading determinants.
While forex strategies can be generally categorised by their use of one of two types of market analysis--technical or fundamental analysis--there are many, many different methods and systems that can be used in forex trading.
Each system offers different pros and cons and tries to determine the best strategy for trading by taking into account as many factors and considerations as possible.
Perhaps the most important factor to consider when choosing from potential forex trading strategies is what your individual and financial goals are. What resources do you have available? How much time, effort, and energy are you planning on spending on forex trading? How much access do you have to the market and how quickly can you realistically execute trades? Your goal will determine the right trading strategy for you.
We’ve broken down and summarised some of the most common and successful forex trading methods for your convenience. Note: We also recommend getting in touch with a professional financial team for specific guidance.
Summary: This simple example of forex trading strategies is based around just trying to take advantage of the movement of the market to trade for a profit. Basically, when there is a strong, positive and upward market trend this strategy dictates that you trade in that same direction, making a profit along the way.
How Long Does It Take: This trading strategy is best implemented over the medium or long term to fully take advantage of the movement of markets. It also requires substantial investment of time in technical market analysis.
The Pro: In addition to its simplicity making trend trading accessible to forex traders of all levels of experience, this strategy also allows the use of ‘stops’ which can both limit loss and profit by determining the entry/exit points in the market. For this reason it also offers an appealing reward to risk ratio.
Summary: Price action trading uses an analysis of the historical prices of currencies to create a technical trading strategy for the future. Complementing this analysis, indicators are often used to formulate the strategy (fundamentals on the other hand are not). But this doesn’t have to be the case: price action trading can be implemented purely off historical price analysis.
How Long Does It Take: One of the many benefits of price action trading is the fact that it can be implemented over short, medium or long terms.
The Pro: Price action trading offers a lot of flexibility in application. There are numerous methods for determining market entry and exit points (indicators being just the one), plus you can always implement other strategies like scalping, position, or day trending among others.
Summary: This method of trading is used in more markets than just the foreign exchange. Incorporating fundamental factors mainly in its analysis it can also take into consideration technical analysis too but it focuses on the larger trends of the market rather than minor fluctuations that occur over the immediate or short term.
How Long Does It Take: Position trading is a long term forex trading strategy as it relies on forecasting market trends and thorough understanding of various impacting economic factors and considerations.
The Pro: One of the biggest benefits to position trading as a strategy is the low investment of time required to execute it. Additionally, the positive reward to risk ratio is an attractive feature too.
Summary: Just like its name suggests, this forex trading strategy refers to multiple trades occurring over the same day i.e. between the market opening and closing over a single day.
How Long Does It Take: Day trading takes place over the course of a single day, so this is a very short term trading strategy, especially when considered against other methods that can last weeks, months or years.
The Pro: Day trading does require a significant time and energy investment because it requires strong technical analysis of the market for immediate and quick execution of trades. The real upside though is that the potential reward (and accompanying risk) is higher and there are many opportunities for trading.
Summary: This forex trading strategy uses a technical analysis of market conditions to try and identify support points and resistance points around which the place trades. What makes range trading particularly popular is the fact that it is not dependent on clear market trends. Hence, it is often best implemented where there is low market volatility.
How Long Does It Take: While there is no particular time frame for carrying out a range trading strategy, this method does necessitate a significant investment of time and energy to maximise the reward versus risk ratio.
The Pro: The really appealing aspect of this forex trading strategy is that, given ample time/energy and a proper technical analysis, it offers a relatively high reward:risk ratio. It also presents numerous different trading opportunities for the well informed and active market analyser too.
Summary: Carry trading, which is largely used in the foreign exchange market as opposed to other markets, is when a trader borrows a currency at a low rate and invests in a different currency at a high rate. Carried out successfully this allows for a positive carry.
How Long Does It Take: While it can depend on the specifics of the trade, this forex trading method is usually medium to long term.
The Pro: The attractive aspect of carry trading is the median reward to risk ratio. The longer time horizon on carry trading, while meaning there are less trading opportunities, does allow for minimal time investment.
Summary: A scalping forex trading strategy just means that multiple trades are executed in the market and along with the market trend in order to pull small profits but done so frequently. Some traders scalp by personally executing the trades but it is becoming more and more common to rely on an automated algorithm. This strategy requires significant time investment and a lot of technical analysis.
How Long Does It Take: If you thought day trading was quick, scalping will blow you away! In order to make these numerous trades with small returns profitable it needs to be done in a matter of minutes. This strategy is very short term.
The Pro: The real pro of using a scalping strategy is the low risk (albeit accompanying low reward) involved but also the largest amount of trading opportunities.
Summary: Swing trading is speculative trading wherein the traders enter and exit the market according to the predicted top and bottom of the market. Depending on the scenario, swing trading can be used for trading short or long.
How Long Does It Take: Swing trading is a medium term forex trading strategy and can take place over hours or a few days.
The Pro: There are two pros to swing trading: namely the medium reward to risk ratio but also the versatility and number of trading opportunities available. It should be noted that this strategy also requires significant time investment on the part of the trader.
If you want to know more about forex trading strategies and which is the right one for you, make sure to speak to the Global Prime team today!