Forex trading strategies explained : three basic forex trading strategies
Plan Your Trades
Why are trading strategies so important? For a beginner trader of currencies seems an enticing way to make a lot of money. Unfortunately, there is no one single key to successful trading. One has to acquire a deep understanding of quite many peculiarities of the market in order to trade profitably. Likewise, he should bear in mind that neither Forex, nor any other financial market remains in status quo indefinitely. All of them have their own cycles and understanding those cycles is essential in learning to trade specific way. A simple, yet successful trading method used in proper time and within good risk management limits is critical in order to achieve consistent profits in trading Foreign Exchange. Here I am going to review the main methods that really work on a daily basis and are considered to be the best. To tell the truth I believe that all others could be put into subcategories of the three strategies that are going to be explained in the article.
Most of the time currencies do not make sharp moves but stay within certain boundaries that could be called ranges. These time periods show indecision on the part of Forex investing community about direction of any given Forex pair. That is when currencies move between what traders call support and resistance levels. As a Forex trader spots that a certain currency pair is not moving in one direction, or has just stopped moving and bounces off previous high or low he should immediately prepare for some prolonged range and consolidation. When trend exhausts itself and ‘big dogs’ start taking profits and leaving market, it means: time for range trading has come.
Ranges are different
Forex range trading is a more complicated and more advanced than trend trading where money is made quite easily due to currency pairs moving in one direction with minor retracements. Ranges vary in size and time. Some pairs form small and short, others large and longer term ranges. If we take Forex day trading as an example a currency pair might stay in a range the whole day, sometimes a week or even a few months. One has to form definite rules and develop his own unique and easy trading method or system to trade different kind of ranges. That of course, depends on the targets of a specific trader.
Advantages of range trading
1. As currency pairs spend most of the time in ranges you can expect a reversal at support and resistance levels.
2. You do not need understanding of economy to trade this way. You trade technically.
Forex trading defined by Wikipedia
- Foreign exchange market - Wikipedia, the free encyclopedia
The foreign exchange market (forex, FX, or currency market) is a worldwide decentralized over-the-counter financial market for the trading of currencies.
- FX trading - Blogger
Trading currencies is an art and a science. It takes time to learn both and if you want to be an aspiring trader you should read how pros analyze the market.
Trading strategies by Investopedia
- Day Trading Strategies For Beginners
From picking the right type of stock to setting stop-losses, learn how to trade wisely.
Video on Range Trading
How to Trade Breakouts
So, when price gathers momentum and breaks through the upper or lower part of the range a trader should be ready to jump into the trade and go along with the price as the price breakout can lead to a prolonged trend or a substantial swing. Breakouts usually happen when a currency pair stays for too long in range and nobody expects it to be broken. Everybody gets accustomed to these ranges and traders start subconsciously thinking that the range that they are in will last ‘forever’. And that is the time when breakouts happen. A very simple way to implement a breakout strategy is to place a buy order above the highest point in the range and a sell order below the lowest point in the range. If the price crosses the upper part of the range we go up together with the market and if the price breaks through the lower part of the range we go down together with the market.
Example of Trading Breakouts
There are quite many false breakouts in Forex market nowadays. Price pushes through the range and then comes back. A Forex trader might lose courage by watching his order hitting stop loss again and again. One should not be discouraged as it has always been like that. Even the most famous technical trader of the last century Jesse Livermore experienced that a lot of times and encouraged his fellow traders not to give up because market finally pushes through and a trader who has been patient is rewarded and his losses turn to profits. In trading Forex one should have long term plan and not allow himself to be tempted by some sort of ‘super-duper’ Forex scams and quick rich scheme trading ways. One should trade currencies with patience.
“Big money is in big moves”. This was said by above mentioned legendary trader Jesse Livermore and I could not agree more. For a beginner trader, the best way to familiarize himself with Forex exchange trading and start pulling some money out of it is to learn using trend trading. Trends do not happen as often as we wish. But when they do it is one of the best possibilities to earn nice cash. You only have to sit and wait without doing much trading when a trend begins. Watching your profit grow would be your biggest job. I started seeing my account grow only when I learnt trend trading Forex. Other methods I mastered much later. A trend could be defined as a move in any Forex pair in one direction for a prolonged time. If we look in the charts an uptrend will look like a range of mountains each one of them with higher highs and higher lows than the preceding one. And a downtrend would look like a range of mountains with lower highs and lower lows than the preceding ones. Nowadays, there is quite a lot of Forex software which could help you to spot these technical patterns on your charts.
How to Trend Trade?
A trader could apply here a similar approach as in breakout trading. Most trends begin with breakouts from ranges. Therefore a trader can place an order or a few orders above the highest or lowest points of the range and simply wait for the ranges to be broken. Alternatively, if a trader expects the price to explode in a particular direction he can a take a ‘pilot’ position in advance. In this way, if he is right, his profit ratio will only increase. Majority of trend traders and stock trend traders do not use other kind of systems, they simply wait for a trend to begin. Some even use automated trading by allowing a Forex robot to trade on their behalf. Therefore, when it starts they usually build a line of positions and move their stops as the price goes in the direction of the trend, thus protecting their massive positions and profits. Finally when the move gets exhausted and the market fails to achieve higher highs (in an uptrend) or lower lows (in a downtrend) some traders close their positions all at once, some scale out of the market in stages (just in case the trend continues). When that starts happening market slowly but surely moves back to ranges and again a cycle of ranges begins, which again leads us to range trading …
Advantages of Trend Trading
1. You do not have to sit hours every day glued to your computer screen and monitor your trades.
2. You can concentrate more on your trades and make much better choices because you do not overtrade.
3. You can earn interest if you have a carry trade for a long time.
4. If you trade multiple positions during a trend you can double, triple or even quadruple your account. You should not forget that if you want to make much, you will have to risk much. And if you risk much you can lose everything. However, if you have a good risk management system, you will survive and make profit.
Disadvantages of trend trading
1. Using this method your stops have to be larger as you are in the market long term. Therefore, you will be risking more.
2. Trends can reverse any day and prices start collapsing very fast. If you are not careful you can lose all of your profit that you have collected during months of holding your position.
3. Since you are not monitoring your trades every single hour, or on a daily basis, some unexpected news or global event can kick you out of the market or even cause you to take severe losses.
Trend Trading Video
Ability to Adapt and Switch Methods
So, these are the main systems that work. In my opinion, one should utilize all of them and be able to use all of them for a specific market cycle. We have to be like a bat from one of Aesop’s fables. When caught by a weasel and running danger of losing life the bat begged the weasel to be merciful. However, the weasel said that he hated all bats. The bat replied that he was not a bat, but a mouse and thus was set free. Shortly afterwards the bat fell to the ground and was caught by another weasel, whom he likewise entreated not to eat him. The weasel said that he had a special hostility to mice. The bat assured him that he was not a mouse but a bat, and thus a second time escaped. So, by changing self identity and trying to be flexible in these two situations the bat survived. It teaches us traders a lesson: in order to survive and be profitable in trading currencies we should be flexible and use a simple and profitable plan for a proper period of time. You can not be a ranger trader, or a trend trader, or a breakout trader all the time. You will have to learn using all of the mentioned ways under specific market conditions. And then, and only then you will become profitable.
Daily Analysis of Systems
Thursday, January 20, 2011
As I stated yesterday about opportunities using trend trading last week, I will repeat myself today. US dollar was going down against major currencies last week and it was very good to trend trade Actually, you would better call it swing trading as the period of the move is very short and most forex pairs are contained within a large range now. Yesterday I gave you an example with gbp/usd pair, how it trended up from last week. Today I want to mention eur/usd and to see how you could have traded it following trend trading. In the same manner as gbp/usd, eur/usd found its’ bottom on the tenth of January at 1.2893 level. From that time it was steadily moving up. It retraced more seriously on the 17th of January, but found another bottom at 1.3240 very soon. There was a unique opportunity to buy on a dip on the 19th of January after the pair hit a level 1.3355 and formed 123 pattern there. You would have placed a buy stop order above 1.3395 level with a stop loss order below 1.3365 level. You would have entered with two positions at the level and the first one would be closed at the previous high, which was 1.3460 at the time. You would have left another order to go with the market and it would have been naturally closed when the stop was hit at the same 1.3460 level. Look at the chart for more clarity.
eur/usd Trend Trading Example
Before using these systems with real money I would advise all beginners to test them on a demo account till you feel comfortable. More information about that you can find in specific forex forums and blogs, so you could study the subject for yourself.
P.S. Trading forex involves significant risk of losing your capital. Do not risk more than you can afford.