BEST FOREX TRADING STRATEGIES EVERY NEWBIE NEEDS TO KNOW
Every trader needs to know about the different forex trading strategies used in the market to minimise losses and maximise earnings. There are many strategies you can use to increase your trading potential. To know the best strategy you should use, you need to how they work and how you can benefit from them.
Also, you should choose a strategy based on your personality, risk tolerance, and lifestyle. Below are the five most commonly used forex strategies and how you can best use them to your advantage.
Forex Scalping Strategy
Scalping refers to a type of forex day trading that involves making a large bulk of trades to gain small individual profits.
Traders who use this strategy rely on the market fluctuations to earn anywhere between 100 to 200 pips for each trade created. Thousands of FX scalpers try to maximise their earning opportunity using the small price fluctuations in a certain currency pair.
To put it simply, the forex scalping strategy takes advantage of the small price movements of a certain asset over a brief trading period.
A large fraction of traders like using this trading strategy because there are a lot of opportunities available within one day. However, you should take note that scalping is done in high trading volumes. As such, you will need to temporarily adjust your risk management value.
Who should make use of this trading strategy?
Knowing whether scalping will suit you depends on your dedication and commitment to doing FX trading.
The technique, while profitable and promising, requires regular in-depth analysis plus multiple orders placement. As such, it can be a highly demanding FX trading style that will take up a lot of your time.
Additionally, this forex trading strategy will require you to learn how to quickly predict price movements and change your positions. If you truly want to succeed in using this strategy, you should practice using your demo account before you make a real trade.
Some traders capitalise on the news or economic data releases. These data releases include a country's GDP, unemployment rate, inflation, and other relevant information. Making a trade in the event of a major economic fluctuation provides you with an opportunity to earn big.
However, you should keep in mind that earning a large sum of money always comes with higher risks. The market becomes highly volatility during the time of a major economic event. Anything can happen to your trading positions.
If you're not equipped with a foolproof game plan for an anticipated news release, don't make any trade at all.
Aside from opening or closing a position during the news release, you can also try to establish a position a few hours after to take advantage of the rate swings.
Who should use the news trading strategy?
According to FBS broker, if you want to take advantage of news releases, you need to learn how to read and analyse an economic calendar.
Economic calendars provide traders with insights on crucial events that can be used for news trading. The tool features indicators for a specific timeframe and three columns of data that reflect the forecast, actual and previous readings.
If the data reflected on the actual exceeds the forecast, the currency pair value increase. Conversely, if the actual figure is less than the forecast value, the value of your chosen currency pair decreases.
If you want to increase your earning potential when using the news trading strategy, remember these following tips:
Understand the reasons behind the market fluctuations before you create a trading plan.
Once you observe possible directional change, you have to prepare your order.
Always set aside extra funds when you make a trade.
Start small when you do news trading.
Minimise your losses by creating limit orders.
Aim to limit your risk per trade you place.
Forex Day Trading Strategy
The forex day trading strategy involves completing every trading position within your usual trading session.
Take note that the forex day trading differs from scalping forex. In the forex scalping strategy, you only need to hold your position for only a few minutes, while a day trade takes about a few hours to complete.
MTrading says that with day trading, you only risk money for a brief period.
As such, if in case you make a mistake, you will immediately see the results within the day. This way, you can quickly take a small percentage of your capital to set up a new trade.
How do you succeed using this strategy?
To succeed in using the forex day trading technique, you need to have a large capital, plus trading experience and knowledge. It may also require you to leverage your capital so you can acquire an asset quickly when you lose money.
Here are additional tips you can use to succeed in using the FX day trading tactic:
Constant practice using a demo virtual account
Find a trusted forex broker
Only make use of your risk capital to minimise loss of investment
Understand how the charts work
Learn more about how price action works
Take note that this forex trading tactic depends on the liquidity of the market. As such, you should choose to trade major currencies. Unlike minor currency pairs, major currencies have high volume, so the price fluctuation and your earning potential also increase.
The forex day trading tactic is best used if you aim to eliminate the payment needed to keep a position overnight.
Swing Trading Forex
Swing trading forex is a short-term trading strategy that lasts longer than day trading. It aims to identify the trend and capture gains.
To increase your earning potential in using the swing trading forex tactic, you should do the following:
Know how technical analysis works
Perform fundamental analysis before creating a trading plan
Determine which trades will provide you with high risks and commission costs
Understand the trend of the chart or the price action
Assess multi-day patterns and short market moves
Look at the bigger picture to understand where the price will go
This forex strategy works best for newbie traders as well as individuals who have full-time jobs. It's also the perfect strategy to use if you prefer holding your position for a few days and if you're okay with having high stop losses.
The last FX trading tactic on the list is called trend trading. It is a strategy that involves checking the trends via technical analysis to find suitable market entry points.
It can take up to one month to fully observe a trend and open and close a position. Traders who use this tactic open long positions when they notice an upward trend. If the asset's trend plummets, trend traders mostly choose to place a short trading position.
Using this tactic will require you to use trailing stops and view daily or weekly charts to observe any consistent price action movement.
Compared to the other techniques in this guide, it doesn't rely much on the market's liquidity. Instead, it focuses on the consistent direction of a currency pair’s trading price.
How do you take advantage of the trend trading tactic?
Trend trading involves the use of price action tactics and FX indicators analysis. For example, if you wish to manage your trading risks, you and to use a stop-loss.
If you observe an uptrend, place the stop-loss just below a support level or a swing low position. For short positions, place the stop-loss above a resistance level or a swing high position.
Now that you have a bit of background on the five most commonly used forex strategies, it’s important to know when you should shift to a new one if in case things don’t go as planned.
When to switch to a new forex trading strategy
All the five forex trading strategies enumerated above are designed to help you level up your trading game as long as you stick with the rules provided.
However, if you notice that the strategy you use no longer works to your advantage, you should try to do the following:
Match your trading style with risk management
If the ratio between rewards and risks is no longer suitable for your current situation, you should consider shifting to a new strategy.
Take a look at the existing market condition
Choose a strategy that can help you take advantage of the latest market trends. If the strategy is no longer relevant to the market's condition, try making a few modifications.
Fully understand the rules
At the end of the day, it all boils down to your comprehension of the rules. By failing to understand how a strategy works, you won't be able to use it to improve your trading potential. Study the strategy and take time to practice using it.
Making it big in the FX trading industry will require you to learn various strategies, methods, terms, and concepts. In the guide above, you have learned about the best forex trading strategies used today.
Aside from learning the techniques, make sure that you completely understand how the market works and how you can effectively manage your risk. Also, see to it that you allocate enough time to practice before you finally make a real trade.
Enroll in our comprehensive forex trading course to take your understanding to the next level, get the advantage and maximize your possible earnings.
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