Forex market is arguably one of the massive financial markets globally that attracts hundreds and thousands of people every day. Despite that, many people fail to make profit when trading because they start their trading journey without a strategy. In fact, Forex trading without a strategy is comparable to going out on a trip without a map because you will have no idea where your trading account will end up. Luckily, there are several forex trading strategies for beginners like you when getting started.
Forex trading strategy is a technique trader uses that help them comprehend when to place sell or buy order on the tradable instrument. The best strategy incorporates both entry and exit points; thus, avoiding guesswork while trading.
Whether you are a professional or novice in the forex trading community, the reality is that having a strategy to guide you is vital. Usually, trading without a plan can be disastrous and is linked to gambling blindly. For a novice trader, it is essential to spend some time searching for a strategy that works. With the right strategy, it is easy to know where the market is headed; thus, you will be able to make meaningful financial conclusions in the future.
Choosing a forex strategy
Choosing a forex trading strategy is one of the vital things to do to guarantee profitable trading. Thus, you will need to pick a strategy that best suits your personality type and lifestyle. Not everyone has time to watch their trades on the screen all day. Others cannot handle the stress of high-risk or fast-paced strategies. Once you have in mind one or two strategies, the next thing would be trying them out to see their performance. You can test a strategy through back-testing using a trading platform. To help minimize the risk, it is always advisable to use a demo account and implement it on the real account once it looks profitable. It is right, to begin with, the small trades and use a huge amount as you acquire conviction in the performance of the strategy.
Basically, three aspects must be considered before choosing a trading strategy.
- 1. Time frame - Selecting a time frame that best fits your style is essential. You must note that there is a big difference between a 30-min trading chart and a weekly or monthly chart. If you are looking forward to becoming a scalper, it is best to focus on lower time frames like 1 to 15 minutes charts. For swing traders, a 4-hour chart and a daily chart is the best. Thus, before you consider any trading strategy, ensure that you keep in mind the time you will need to stay in a trade.
- 2. Trading opportunities - How often do you need to open a position? If you want to open higher positions, you will need to focus on scalping. Usually, traders who use most of their resources and time while analyzing fundamental aspects and macroeconomic reports will probably use less time on the charts. Thus, their best strategy depends on bigger positions and higher time frames.
- 3. Position size - The right trade size plays an integral role. The best strategy needs a trader to comprehend the risk sentiment. It is problematic to risk more than you can make, hence leaning to huge losses. Therefore, it is recommended to set a stop loss or risk limit in every trade. For example, you can set a risk limit of 1%, which means that you will never incur a loss of more than 1% on a single trade.
Best Forex strategies
- Trend following
Trend following is arguably one of the popular and important forex strategies to help beginners become professionals in the field. The strategy is also easy to understand and follow. The good news is that traders can gain from the ups and downs of the forex market. You only need to keep checking on the trend assuming that it will follow a similar direction. All things considered, trend following is a kind of strategy that needs you to pay attention to patterns, charts, and changes. Since market trends are primarily medium, long, or short term, it is important to decide if you need a short, medium, or long term strategy. This will leave you with an idea of the kind of chart and data to use.
Forex scalping is one of the best strategies that consider smaller market movements. It encompasses creating large trade numbers in a bid to put forward small profits per each. Usually, this strategy works by creating massive profits through several small gains. The strategy is literally opposite to others where you have to wait for hours, days, or weeks. The reason why it is profitable is because of its volatility and liquidity. Many investors are searching for a market with constantly moving price action to capitalize on small investments variation. Usually, traders who use this strategy focus on low timeframe charts like 5 or 15 minutes to earn up to 5 pips per every trade. Traders that use scalping find it profitable since it is stable, constant, and straightforward to achieve. A slight downside of this strategy is that it does not allow traders to remain in the trade for a long time. Furthermore, the strategy requires more attention and time due to the chart's constant analysis while trying to get a new entry point.
Example of scalping chart
- Trend line
The trend line trading strategy is an effective strategy when it comes to indicators and charts. The strategy works by drawing a straight line, linking at least two distinct price points. Usually, the lines show the trader the direction and price movement, considering that the market moves in trends. To ensure that you benefit from this strategy, you need to learn how to make these lines properly on the chart. Learning this will help boost the chances of having a successful trade.
- Swing or Momentum trading
Also referred to as momentum trading, swing trading includes a medium-term strategy that focuses on taking more market moves. Traders employ this kind of strategy by trading both with main trends and against them so that they can hold overnight positions. This strategy stresses more on entering and exiting positions depending on the selling or buying signals. Therefore, traders utilize them to evaluate oversold or overbought markets they can buy or sell. Momentum traders can also consider selling prior to resistance levels or buying ahead of the support. Examples of swing indicators can be RSI and MACD.
Example of swing chart
- Day trading
Day trading is trading currencies during the day, and although applicable in every market, it is often utilized in Forex. The strategy recommends traders to open and close their trades in a day. To avoid the risks of losses, you should avoid running trades overnight. Unlike scalping, where you have to stay active day and night looking for an entry point, day traders basically use a 30 to 1-hour time frame to make trading ideas. In most cases, several day traders depend on the news. Events like interest rates, economic statistics, and GDPs seems to have a huge effect on the forex market. If you consider this strategy, ensure that you set a daily risk limit of up to 3% to keep your account protected.
Example of day trading chart
- Forex trading breakout
One of the best ways to boost profit in forex trading is to take advantage of the breakout. Breakouts are awesome indicators for novice traders in the sense that they can alert when an upward trend starts. Essentially, this breakout occurs when a market goes in a new direction, past its support and resistance index. Remember that it is the trader who figures out these changes indicating the demand and supply. Although all the breakouts do not lead to new trends, this strategy is yet a great trading chance to make more money.
- Carry Trade strategy
Last but not least, carry trade strategy is a type of strategy tailored to benefit both the novice and professionals. For example, it is an effective strategy that is easy to comprehend and implement. Implementing this strategy on your trading moves can help you succeed and profit from the yield variation between currency pairs. In simple terms, the interest rate for the currency pair must be higher than the selling pairs. The variation between them, therefore, will regulate the profit you make.
In a nut shell, there are several forex trading strategies that beginners and professional traders can employ in their trading needs. Therefore, the right one will depend on your needs, personality type, and lifestyle. Even if you do not buy the idea of every strategy, remember, forex trading entails trial and error, and thus, you can consider testing all. To get started, you can consider registering at Forex Robot Abi.