Forex Trading strategies provide forex traders with insights to determine whether to buy or sell the currency pairs. Identifying a strong forex trading strategy is a significant aspect of currency trading. Different types of traders have designed forex trading strategies to help individual traders make a profit in the market. Individual traders are required to identify the best trading strategy that matches their trading style and risk tolerance. Forex trading strategies assist traders in market analyses and effective risk management techniques. Various forex trading strategies are available for traders viz., technical or fundamental. Traders can develop these strategies by themselves or can find them on the internet.
Choosing a Trading Strategy
While choosing a forex trading strategy, traders must consider the following elements:
- Time Frame– Choose a time frame that suits your trading style. Scalpers should focus more on lower time frames i.e. 1-min to 15-min charts. Swing traders should opt for a daily chart or a 4-hour chart.
- Trading Opportunities– Traders looking to open a higher number of positions should focus on a scalping trading strategy. While those spending more time analyzing macroeconomic reports should prefer a trading strategy based on higher time frames and bigger positions.
- Position Size– A successful trading strategy requires you to know your risk sentiment. It is advised to find a proper trade size and set a risk limit at each trade.
Most Effective FOREX Trading Strategies
Below we have discussed some of the most popular FOREX strategies that have proven to be successful:
1. Scalping
Scalping is one of the most popular FOREX strategies that focus on market movements that are smaller. It involves opening numerous trades in a bid to bring small profits per each. Therefore, larger profits are generated by scalpers through large numbers of smaller gains. This strategy is popular because of its features of liquidity and volatility.
Pros & Cons of Scalping
Pros
- The largest number of trading opportunities
Cons
- Sometimes traders cannot afford to stay in the trade too long.
- Requires a lot of time and attention to analyze charts to find new trading opportunities.
2. Day Trading
Day trading is a process of trading currencies in a single trading day. This is the most used strategy in FOREX. According to this approach, you should open and close all the trades in a single day. To minimize risk, no position is left open overnight. Day trading strategies are majorly based on news. The FOREX market is strongly impacted by scheduled events like economic statistics, GDPs, interest rates, etc. Apart from setting a limit on each position, traders can also set a daily risk limit.
Pros & Cons of Day Trading
Pros
- An adequate number of trading opportunities.
Cons
- Huge time investment
- Requires understanding of technical analysis
3. Position Trading
Positional trading is a long-term strategy that is mainly focused on fundamental factors. This strategy does not consider minor market fluctuations because they do not affect the broader market picture. To identify cyclical trends, positional traders often monitor the monetary policies of the central bank, political developments, and various other fundamental factors. This trading strategy is ideal for patient traders, as their position takes a week, a month, or a year to play down.
Pros & Cons of Position Trading
Pros
- Demand minimal time investment.
- Highly-positive risk-to-reward ratio.
Cons
- Fewer trading opportunities
- Requires a strong understanding of technical and fundamental analysis.
4. Trend Trading
This is a simple FOREX trading strategy used by traders of all experience levels. It explores the directional momentum of a market and yields positive returns. This strategy does not fit for a short time frame, because the trends are constantly fluctuating. This is ideal for a medium and longer time frame where trends can be analyzed.
Pros & Cons of Trend Strategy
Pros
- Adequate number of trading opportunities
- Positive risk-to-reward ratio
Cons
- Requires time investment
- Strong understanding of technical analysis
Final Words
The article outlined some of the most commonly used FOREX trading strategies along with their pros and cons. Each trading strategy is perfect in its way and appeals to different traders on the basis of personal attributes. It is significant to use the right trading strategy that fits the trader’s trading pattern.
