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Popular forex trading strategies for all trader levels

Forex trading strategies
Foreign exchange or forex is the changing of one currency into another for a number of reasons such as: tourism, international trade, e-commerce, etc. The forex market is the global marketplace where international banks, hedge funds, investment firms, etc buy and sell currencies of different nations. The market is decentralized and remains open round the clock on weekdays (24/7). It is an over-the-counter market where huge volumes are traded every day. Currently, it is the largest financial market in the world today with a daily turnover of about $5 trillion.

Forex trading is the profession or business of buying and selling currencies from the forex market with the aim of making potential profits. Access to the forex market is mainly by volume, so huge volumes can only be traded by the biggest banks, hedge funds, and investment firms. Individuals and professional forex traders access the forex market via online brokers who offer software trading platforms where they can open and close forex trades. Most of the reliable brokers are licensed by a financial services authority.

In the forex markets, currencies are grouped into pairs and traded against each other. The exchange rate is written as a quote in terms of the second currency within the pair.

Some forex trading terms

In order to understand forex and its trading strategies; let us define some regularly used forex trading terms.

Going short or long

On the trading platform, you can buy or sell a forex pair of your choice. Going long refers to buying while going short means selling the asset. Generally, traders go long when they envisage a rise in the exchange rate and sell short when they forecast a decline.

Pips

Percentage in point (Pip) is the standard unit used by traders to express the small price movements of forex pairs. For currency pairs that are quoted in 5 decimal places, the pip is the fourth decimal place. For example: if GBPUSD moves from 1.37560 to 1.37590, we say that it has gained 3 pips. For some pairs like USDJPY which is expressed in 3 decimal places, the pip becomes the second decimal place. So, if it moves from 114.290 to 114.220, we say that it has dropped 7 pips.

Swap fees

This denotes the interest fees charged or paid to an account for open positions held overnight. The fees vary from broker to broker. Islamic accounts are special swap-free accounts created for Muslims because they are not permitted by their faith to receive or pay interests.

Spread

In forex trading, two prices are quoted for every currency pair; ask and bid price which represents the buying and selling price respectively. The spread is the difference between the two quoted prices. Most times, it represents the broker’s trading fees.

Lots

Lots in forex trading refer to the contract size of a trade. Traders cannot just exchange any quantity of currency they need, there are standardized contract sizes. They are as follows:

• 1 lot = 100, 000 units
• 1 mini lot = 10,000 units
• 1 micro lot = 1,000 units
One micro lot is the least contract available on most forex trading platforms and brokerages. 

Forex trading strategies

These are methods or techniques used by forex traders to determine how to trade forex at any given time. It informs the forex trading decision by stipulating which pair to trade, whether to buy or sell, contract size, risk management principle, trade duration, etc. Most forex trading strategies were derived from technical and fundamental analysis principles. Below are some of the best forex trading strategies used in forex trading:

1. Position trading

Position trading is a trading strategy that focuses on long-term forex trading spanning several weeks or months. Position traders are generally forex trend followers. They usually spot a trend, take a position and wait for long periods for it to peak before closing out the position. Position traders are regarded as passive traders because they do not place many trades; maybe, about 10 trades in a year. This forex trading strategy requires patience, discipline, and in-depth knowledge of both technical and fundamental analysis principles.

One disadvantage of position trading is that it accumulates swap fees which might be huge when the position is finally closed. Position traders must have huge capitals because the stop loss must be wide enough to accommodate the up and down price movements of the traded currency pair. Position trading is often seen as one of the forex trading strategies that ties down capital but the trader may be able to do other things and trade on a part-time basis. 

2. Swing trading strategy

Swing trading involves opening trade positions and maintaining it for a few days or weeks. This strategy is for traders looking to capture the midterm price movements of the currency pairs. Swing traders usually identify the low and high swings (support and resistance levels) of a trend and strategically place their trades accordingly, maintaining it for a couple of days and then close out before the trend reverses.

So, this forex strategy is suitable for part-time traders because even those that have a full-time job can deploy swing trading. Though widely used by fundamental analysts, swing trading can also be used by fundamental analysts or by combining both analysis methods. On the downside, swap fees accumulate because of overnight open positions. Also, the trading capital and stop-loss must be large enough to accommodate the usual minor market fluctuations. 

3. Day trading strategy

This is the forex trading style of opening and closing a trade position within a day. Typically, trades are held for a few hours and closed before the end of the day. The overall objective is to capture the intraday price movement of the traded forex pair and make profits after paying the trading fees. Day trading strategies are numerous and are based on various timeframes, liquidity, and volatility as well as the trader’s personality and goals.

Day trading does not incur swap fees and risks associated with market gapping. You can easily curb losses by closing out a losing trade. But, sometimes you may close a trade too early or overtrade. A trader overtrades when he continues to maintain an open position against his trading strategy or plan. This is often caused by emotions such as greed, fear or excitement. Day trading is not for emotional traders, you must be disciplined and stick with the stipulated plan irrespective of the trade results.

Many day traders are full-time traders because it takes a lot of time, though someday trading strategies can be automated using trading robots. In order to day trade forex successfully, you need a thorough understanding of technical analysis. 

4. Trend trading strategy

This is one of the simple forex trading strategies prescribed to beginner traders. It can be easily taught to newbies because they can easily identify an uptrend or downtrend from the charts and follow it by buying or selling respectively. They are simply told to jump on a trend and ride it without any prior analysis. The result is sometimes disastrous though newbies do not really invest much. But, this forex strategy can be much more complex when it is utilized by experienced experts.

Trend trading strategy can be a successful forex trading strategy but it requires an in-depth knowledge of technical analysis.

First, the trader needs to identify the trend direction and duration; short term, medium-term or long term. He also identifies the support and resistance levels; the stage of the trend. Most times, some trend indicators and other tools are used for this purpose. Then, he chooses where to place his ‘stop loss’ and ‘take profit’ prices. False breakouts often deceive traders and abruptly reverse the perceived trend leading to losses, so risk management is very important in trend trading. 

5. Forex Scalping strategy

Forex Scalping is one of the most popular short-term trading strategies. The primary aim is to capitalize on the brief market moves, gain a few pips and quickly exit before the price reverses. Scalping may look simple but it is actually one of the advanced forex trading strategies used by experts. The scalper must have an in-depth understanding of technical analysis and also have good exit strategies. Generally, the trade time ranges from seconds to a few minutes; so scalpers open multiple trades within a trading session.

Trading fees are charged per trade opened; so this strategy incurs a lot of trading fees which may cancel out the little profits accumulated. Though an effective forex trading strategy creates many trading opportunities, it is fast-paced and not suitable for many forex traders. Forex scalping strategy is time-consuming and demands high concentration.

Fortunately, some scalping strategies can be automated using trading robots. These are algorithms implemented on brokers’ platforms that can open and close trade positions based on pre-programmed instructions.  It scans the markets, identifies trading opportunities and trades financial instruments. Algorithmic trading is becoming popular because it is fast, saves time and eliminates human errors. 

6. Range trading strategy

This is one of the best forex trading strategies used in non-trending markets. The trader first identifies a range; which is when the price action defines a consistent support and resistance band for a time period. The trader capitalizes by going long at the support and selling short at the resistance until a breakout occurs. There are many indicators to assist a trader in making these decisions.

But, predicting the breakout time is difficult, so range trading requires actively monitoring the markets in order to close out before a breakout. Range trading strategy is time-consuming but can be automated using trading algorithms. A trader can create one, or customize an existing one to reflect his forex trading strategy. He must also be versed in technical analysis. 

7. Price action trading

This is a forex trading strategy based on the analysis of the recent up and down price movement of the selected currency pair. The trader focuses on actual price analysis and generates buy and sell signals from recent historical data, rather than from indicators.

Price action trading is an effective forex trading strategy especially when learned and mastered over time. An experienced trader can spot a quick trading opportunity while looking at the charts and candlesticks without much analysis. There are different price action analysis methods that can be utilized. Traders often find it difficult to find the right stop levels but generally, patience and discipline are required to maximize the potentials of this forex strategy.

Types of forex analysis

The exchange rates of every currency pair keeps fluctuation as long as the forex market is open. In times of volatility the exchange rates move rapidly up and down and market reversals are common. Delving into forex trading without prior analysis is tantamount to gambling, so traders take time to analyze the markets in order to make informed trade decisions.

Below are the common types of forex markets analysis:

Fundamental analysis

This type of analysis focuses on the political, economic and social factors that affect the value of a currency. The trader collates relevant data like inflation, GDP, interest rates, news, etc. The market fundamentals are studied against the currencies within a pair and the exchange rate direction is forecasted. An important tool in forex fundamental analysis is the ‘economic calendar’. It is a customizable calendar that displays the time and dates of important events or planned releases that affects the forex markets. For each event, the calendar shows the currency affected, impact history and analysts’ consensus on the impact forecast.

Technical analysis

This analysis method studies the historical price action of a currency pair in order to identify patterns and trends with the hope that they will repeat in future. The trader focuses on charts, timeframes, technical indicators and other analytical tools.

Below are some trading terms associated with technical analysis:

• Support and resistance

These are points on the charts where the price changes direction. Support is the point at which the falling rates reverse and starts to rise while resistance is the level at which rising prices stop and begins to fall. Support and resistance levels are important to technical analysts; support indicates surplus buyers while resistance means excess sellers.

• Technical indicators

these are chart analysis tools that assist traders in analyzing the price action of currency pairs. They are basically mathematical calculations plotted on charts to help traders identify some signals and market trends. The most popular indicators are: Moving average (MA), stochastic oscillator, MACD, Bollinger bands, RSI, etc.

• Trend

A forex trend occurs when the exchange rate of a currency pair moves in an identifiable direction within a given time period. Market trends can be upwards, downwards, or sideways. 

Sentimental analysis

This analysis method seeks to identify the position of other traders on currency pairs of interest in order to inform your own trading decision. For example; a forex trader may study a sentiment of EURUSD and sees that 65% of traders are on a long position. Based on other data and his style, he may join the crowd or wait for some time in order to take a reverse position. 

Trading forex with InvestBy

InvestBy is an online forex and CFD broker that operates from Belarus. The broker offers more than 45 currency pairs for trading on its platforms. Additionally, there are over 300 CFDs in stocks, indices, cryptocurrencies, and commodities. The broker provides technologically advanced infrastructures and platforms to meet the demands of all levels of trading.

The first step is to sign up for a new account by clicking ‘open account’ and completing the form. Upload your ‘proof of address’ and ‘proof of identity’ documents and transfer your capital to the new account using any of the available payment options. When your account is approved, go to the WebTrader or download the MT4 on pc, iOS, or Android device. You can then open a long or short position on the platform. Your trading decision should be informed by the forex trading strategy which you have chosen. When satisfied, close the position.

By trading forex, you stand a high risk of losing your invested capital. There are no guarantees and previous success is by no means an indication of future success. 

Summary

In recent times, many people are delving into the forex market because of its size and profit potentials. But without a good trading strategy, success is almost impossible because a trade strategy gives trading ideas and shows trading opportunities in the market. Forex trading strategies comprise of the various methodology used by traders to reach a decision on how to trade a given asset. Most strategies utilize technical or fundamental analysis principles. Since the markets are absolutely unpredictable, trading strategies generally include risk management rules.

Investby is a forex broker whose services are suited for both beginner and experienced traders. All trading styles are accommodated including forex trading robots or expert advisors (EAs) which can be installed on the MT4 trading platform. Spreads are competitive with lightning speed executions and no commissions. The broker has an ‘education centre’ on its website for clients that need more trading knowledge. The client support desk is available to assist on a 24/5 basis. 

FAQ: Fundamental Forex Trading Strategies

What are the best forex trading strategies?

There are many forex trading strategies that have been proven to work for different traders. You can find a trading strategy that suits your personality, trading style and then, personalize it to fit your trading goals. Some of best forex trading strategies are:

• Position trading
• Swing trading
• Day trading
• Forex scalping
• Trend trading
• Range trading
• Price action trading

Is there a 100% winning strategy in forex?

No particular strategy is 100% infallible. The financial markets are unpredictable and this includes the forex market. There are no guaranteed winning strategies, however, if you approach forex trading with a plan and at least one trading strategy, you will eliminate gambling and stand a better chance of success. 

Also, bear in mind that even if you do all these, there are no guarantees, and you stand a high risk of losing your invested capital.
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