A forex strategy is a trading technique that forex traders use to determine whether to buy or sell currency pairs in the forex market. Forex strategies can be based on technical or fundamental market analysis depending on your preferred analytic metrics. It is usually made up of trading signals that trigger buy or sell decisions. You can find different forex trading strategies on the internet or develop your own unique strategy using manual or automated analytical tools to generate trading ideas.
How to Choose the Best Forex Trading Strategy?
Before engaging with a particular strategy, it is wise to identify the type of trader you are. There are three main aspects that should be considered while choosing an effective forex trading strategy.
- Time Frame: Choosing a suitable time frame that suits your trading style is very crucial. In forex, trading on a 15-min chart is completely different from trading on a weekly chart. If you prefer the scalping trading style and benefit from smaller market moves, then you should focus on the lower time frames. You should go for the daily and 4-hour chart if you don’t mind keeping your trades a little longer. So, before choosing your trading strategy, make sure to answer this question; how long do I want to stay in a trade?
- Lot Size: deciding the proper trade size is a major decision that you should consider before setting your trading strategy. Successful strategies in forex trading require strict risk management discipline so you don’t risk more than you can afford. In this regard, you can set a risk limit at each trade. Some traders usually set a small percentage to risk-on trades. This means that if you set a 1% limit, you won’t risk more than this percentage on every single trade. Another good piece of advice is to consider lowering the number of trades if you decide to use bigger trade sizes or vice versa.
- Trading Frequency: How frequently do I want to open trades? That’s an important question you should ask yourself before choosing the best strategy. If you decide to open a higher number of positions then you should focus on a scalping trading strategy. On the other hand, if you are one of the traders that rather focus more on the fundamental background and deeper price analysis, then your trading strategy should be based on longer time frames and bigger positions.
So, what are the top Forex Strategies in 2021?
Forex scalping strategy
This strategy suits trader who prefer short-term, or those who like to seize instant price movements. Forex scalping strategy focuses on accumulating small but frequent profits and trying to limit any possible losses. Despite the fact that these short-term trades would involve few pips price movements, when combined with high leverages, it can lead to significant losses if not executed carefully. So scalping is a short-term trading strategy that involves taking multiple small profits in a considerably short time.
Scalping traders need ultra-quick interaction with price movements as they usually enter and exit trades in maybe just seconds or minutes. This very fast-paced, and stressful, trading style may not suit everyone. Scalpers closely monitor price charts for patterns that can help them predict future exchange rate movements so they usually choose brokers with tight spreads, quick order executions, and minimal or zero-order slippage.
Day Trading Strategy
Day trading strategy is another short-term strategy that includes holding trades during a particular trading session. Day traders do not take overnight positions and close all trades each day which typically reduces exposure to market movements when the trader is inattentive to the market. Although it is applicable in all markets, the day trading strategy is mostly used in Forex trading.
To minimize the risk, no position should stay open overnight. Day traders usually remain active over the day monitoring and managing opened trades. The preferred time frame for this strategy is 30-min and 1-hour time frames. Day traders also tend to set a daily risk limit, besides setting one for each trade. This step is crucial to protect your account and capital.
However, this strategy requires more time to monitor the prices and the trades, as well as a good understanding of how the daily events could affect the pair you’re trading. Major economic news can easily affect your position. But if you prefer trading for shorter periods, but are not comfortable with fast-paced strategies with multiple trades, day trading is an alternative strategy that can suit you better.
Position Trading Strategy
Position trading is a long-term trading strategy. Unlike scalping and day trading strategies, the Position trading strategy is primarily focused on fundamental factors. This strategy does not consider minor market fluctuations as they won’t affect the broader market trend. Position traders monitor central bank monetary policies, political events, and other fundamental factors to identify price trends. This trading strategy is more suitable for patient traders as trades may take weeks, months, or even years.
A successful position trader may open just a few profitable trades over the entire year as profit levels maybe hundreds of pips away. This strategy is based on the belief that prices will eventually reach the expected levels over this long-term time horizon.
Basic requirements for this forex trading strategy include; large stop losses to avoid being hit by possible price fluctuations, sufficient investment capital, the ability to stay calm if the price goes against your trade, and finally a good understanding of the price fundamentals.
Swing Trading Strategy
This one is for traders who prefer a mid-term trading style where positions can be held only for several days. It is based on the idea of making a profit out of changes in price, by identifying the swing highs and swing lows in a trend. For this strategy to be successful, price movements need to be carefully analyzed in order to identify when to enter and exit the trade. Although this strategy saves time by not having to closely watch markets during the day, it does leave you at risk of any disruption that may occur overnight, and sometimes price-gapping.
When it comes to choosing the best forex trading strategy, you need to know that no one strategy will be successful all the time. But each of these strategies, when accompanied by proper risk management, discipline and knowledge can result in big profits.
So, you have to pick the trading strategy based on what type of trader you are, and your trading style. It should also depend on the currency pair or trading tool you wish to trade. For instance, swing trading may be more favorable when trading the more volatile pairs, while the position trading strategy is proved to be more appropriate when trading the less volatile pairs.
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