Forex Trading Strategies

Forex Trading Strategies

Forex trading is not rocket science. However, it is easy for anyone to learn and trade. Listed below in this article are some of the best Forex Trading Strategies accumulated by our team of experts and analysts at Blockchain Tradein. Forex has a lot of new participants who need to learn the key strategies and old participants that need help to get on with the latest technology.

How to Choose the Best Forex Trading Strategy

The secret isn’t just in choosing the best forex trading strategy. The focus points are; when to apply the chosen technique and where to use it. Moreover, it is an art the trader must be proficient in. So it is very vital to understand the right way to go about a trading strategy. Hence, our team of experts have come up with three main strategies for the traders to use in the process.

Time frame

Time frames are critical as choosing the best one that fits your style of trading is what matters.The difference between a 15-min chart and a weekly chart is vast, and a trader knows its importance.

  • If you want to become a scalper, you should understand the importance and benefits of smaller market moves.
  • A trader has to give more priority to lower time frames.
  • For example, from 1 minute to 15 minutes charts.
  • Swing traders use the long charts, and they can extend from 4-hour charts to daily charts.
  • With the help of these, many traders can generate profitable trading opportunities.
  • So keep in mind before you choose a perfect strategy for yourself. First, you need to answer a big question “how long am I willing to stay in a trade?”

There are mainly three time periods in trading “short-term, medium-term, and long-term,” all these depend on different things, i.e., “trading strategies.”

Number of trading opportunities

Choosing a strategy is very important, but the most crucial question is, “how frequently do you want to open the positions?” As a trader, if you want to open higher numbers of positions, we advise you to focus on scalping as your primary trading strategy.

But if you’re a trader who likes to spend more time and resources on studying the macroeconomic essential factors and reports, spending less time in front time charts, then it would be best if you settled on a strategy based on higher time frames and more prominent positions.

Position size

A trader must understand that finding the perfect trade size is very vital. In addition, a trader’s decision-making also depends on the risk-taking and trading sentiments. Always remember that risking more than you can afford will lead to more significant losses and more enormous debts.  

We advise you to think twice before you risk it all and set a trading limit for each trade. Many traders use the 1% technique. Traders will impose a 1% limit on their trades, meaning they won’t risk more than 1% of their finances on a single trade.

For example, if your account holds finances worth $50,000, you can risk $500 on a single trade if the risk limit is 1%. Then, depending on how much you want and can risk, you can move the limit to 0.5% or 2%.

To state it in layman language, the lower the number of trades you do, the bigger the position you should open and vice versa.   

Basics of a Forex Trading Strategy

You can useforex trading strategiesfor automated or manual methods to generate trading signals. The manual system is all about a trader sitting in front of a computer screen and looking for the proper trading signal while thinking about buying or selling.

Automated systems are very different. A trade develops an algorithm that automatically finds trading signals of their liking and executes trades automatically. The advantage of an automated system is that it does not waste the trader’s emotions and time. Moreover, the system is proven to improve the performance of traders.  

Caution: We recommend traders stay cautious before purchasing off-the-shelf forex trading strategies, as it is tough to keep a check on their track record, which keeps many successful trading systems a secret.

Best Forex Trading Strategies

We have explained how to identify a time frame and desired position size on a single trade and calculate the number of trades to open in a certain period. Here are the most successful forex trading strategies.

Scalping

Scalping is a popular trading strategy that focuses on small market movements. The trader opens many trades at once and gets small profits from each. Thus, scalper makes large profits by gaining small profits along the way in many trades. Scalping is very famous in forex because of its volatility and liquidity. Scalpers look for markets where prices move constantly and then profit in small increments.    

These types of traders want a profit that is 5 pips per trade. But the main goal is to achieve many successful trades, thus keeping the profits constant, stable, and easily achievable. You cannot afford to stay in the trade too long. Scalping needs a lot of time and attention so that traders can constantly study and find new trades. 

Day Trading

Widely used in forex trading, day trading is the process of trading currencies in one trading day. Traders open and close all trades within a single day. No positions stay open overnight to lower the risk. Day traders remain active the whole day monitoring and managing open trades opposite to scalpers. It takes traders 30 minutes to 1 hour to generate trading ideas.

The strategies of day traders depend on global news. For example, interest rates, economic statistics, elections, GDPs, etc. Day traders set a widespread 3% daily risk limit. But day traders tend to cross the limit set, and we recommend that you do not, as it will put your finances in trouble.

Position Trading

You are in for a long ride as the position is a long-term strategy. Its focus is on fundamental factors. Traders do not consider minor market fluctuations as part of this strategy, as they are not affected by them.

Position traders monitor political developments, central bank monetary policies, and significant fundamental factors to map the cyclical trends. Most experienced traders will open a few trades annually. The profits in each trade are hundreds of pips.

We recommend this strategy to traders who are very patient as these positions take weeks, months, or sometimes even years to play out. Therefore, you need to check weekly charts if you are focusing on Position trading.

How to Develop A Forex Trading Strategy

With the help of experts, we have stated five proven trading strategies, and they will help you manage your system. It is for everyone, be it beginners or experienced.

Understanding technical analysis

Technical analysis uses indicators and price charts to analyze market direction. It helps you find the possible entry and exit points for your trading position.  

Technical analysis is different from fundamental analysis as it concentrates on market patterns and prices. Fundamental analysis is all about the factors that drive the market prices. A trader can combine or use the methods independently.

Importance of Technical Analysis

Primarily technical analysis is used to determine the expected market direction. The market doesn’t move randomly. When traders see an emerging pattern, they are not the only ones who notice it, and many are aware of it. A trend is a self-fluffing phenomenon. Thus traders create patterns in the market.

Understanding Fundamental Analysis

Fundamental analysis is very different from technical analysis. It focuses mainly on assessing the markets, offering a holistic picture of its weaknesses and strengths.

In fundamental analysis, the trader points out the event that affects a specific currency’s strength or weakness. These data comprise economic and political data and also include natural disasters. To sum up, a fundamental analyst will use all the information to process a currency’s strength. The key economic reports and data are the key points, like the unemployment data, the announcement of interest rates, GDP, and production data.

Fundamental Factors That Affect Forex Prices

Natural disasters

Disasters like tsunamis, flooding, and hurricanes will impact a currency’s fundamental strengths and weaknesses.

International trade

When a country starts demanding products and services from a specific country, thus making the country’s currency rise.

Economic output and growth

GDP is a critical indicator of economic growth. It summarizes the production of goods and services provided by the country and shows the country’s performance and economic strength.

Inflation – This factor has two key indicators:

Producer Price Index is used to measure the cost to produce goods and services for producers.

Consumer Price Index is used to measure the change in the average cost of goods and services to consumers.

Interest rates

The interest rates are the essential factors in understanding the value of a currency. They play a vital role in the inflow of global capital in and out of a country or economic region.

Political conditions

Political instability impacts a country’s currency negatively, and investors try to avoid such currencies and countries.

Fiscal policies

A fiscal policy includes budget planning, taxation, and government spending, influencing investors’ decisions.

Monetary policy

The monetary policies that central banks adopt have a direct impact on short-term currency demands.

Choosing your entry and exit points

If you are a forex trader, every approach has a risk. A trader needs to understand price action to know when the trader should place a trade and when to exit a position.

Support & resistance

The definition of support & resistance refers to trading levels where the price has touched and bounced back multiple times. Think of them as key points where demand and supply meet.

Breakouts

A breakthrough at an established support or resistance level is a breakout. Breakouts are strong signals if they have other indicators like gaps.

Gaping action

Gaps play an essential part as they show how buyers (upside) or sellers (downside) are moving in the market. But be aware of a new trend using multiple indicators before you trade.

Sideways market

Always look for sideways because traders know that a breakout is coming when a market trades sideways. A forex market that trades sideways refers to price action within a narrow range of strong support and resistance levels. So when a market sells sideways, traders are preparing for a breakout.

Managing the trading risk

Here is a summary of why you should manage the trading risk.

Do not over trade.

Volatile markets are very seductive, and we recommend you not to trade 2% of the trading account’s balance on any trade. Trading more than 2% can lead to losses that are hard to cope with. You need to go with stop-loss orders to minimize losses.

Test your trading strategy

A demo environment can help a trader test how good or bad their trading strategy will be in the market. Every new strategy needs to go through trial and error before you can use it and trade and invest money to get profits.

Now that you are thorough with all the trading terminologies, forex trading strategies, and every detail that you need to know to get started with forex, you can now create a trading account with Blockchain Tradein. We have on our team, dedicated managers, market analysts, researchers, and other experts, who can help you explore the forex market and be brilliant at it.