How do you know which trading strategy will work best in your particular case? You won't use them all at once. What kind of trading should you choose? Intraday, swing, position trading, or scalping? Or combine several trading strategies? Let`s try to break it down.
Forex Strategy #1: Position Trading
Position trading is a long-term strategy in the forex market where trades remain open for weeks or months. The time frames on which position traders trade are usually daily or weekly. Position traders rely on fundamental analysis (NFP, GDP, retail sales, inflation figures, etc.) to understand the fundamental situation of the economy, particular industry, and company. For qualitative calculation of the time of entering and exiting a trade, the instruments of technical analysis are used more often.
Here is an example. Suppose you analyze the pair EUR/USD and find a strong bullish trend. But you are not interested in opening a long position from any point. So you wait for the EUR/USD to approach the support line to enter the trade from that area.
And if your analysis is correct, you can enter at the very beginning of a new trend, ahead of the main mass of traders.
Pros And Cons Of Position Trading
Advantages of position trading:
- The trades are long-term. No need to monitor charts and markets all the time;
- Less stress. You don't worry too much about short-term price fluctuations;
- A favorable ratio of risk to reward for trades (perhaps 1 to 5 or more).
Disadvantages of position trading:
You are required to deeply understand the causes of market movements; You need to analyze global economic trends and more local stories like the situation in a particular industry, a group of companies, etc.;
You need more capital to trade than in intraday trading, for instance, because your Stop Loss is wide and you deliberately ignore minor market fluctuations, remaining with an open position;
Your profits may not be regular.
Forex Strategy #2: Trend Following
This trading strategy is similar to the position method. The difference is that trend following is a purely technical approach. There is no definite fundamental basis here. Trend following may be the best trading strategy for trending pairs. You can use trend indicators to understand when to open/close trade and be aware of what stage of the trend your trade is in at any given time.
You can also trade on trend lines, including support/resistance lines, trade line breakouts, etc.
Forex Strategy #3: Swing Trading
Swing trading is a medium-term trading strategy where you hold trades open for days or even weeks. The time frames for this forex strategy are usually 1-hour or 4-hour. A swing trader hunts for one single movement, a swing, which he uses to enter, and then the same movement to exit the trade. Within the broad concept of swing trading, many narrower trading strategies can be employed.
For example:
- Long position from support level;
- Short position from a resistance level.;
- Breakout trading;
- Pullbacks trading;
- MACD or EMA rebound trading.
In any case, no matter what specific technical methods you use, it is important to learn all the technical concepts, including the use of candlestick patterns to determine the nature of the trend and the areas/points of the chart to enter and exit the market from:
- Head and shoulders;
- Triangles;
- Bullish and bearish flags;
- Bullish and bearish engulfing patterns;
- Hammer;
- Pin Bar;
- Double top and double bottom.
Pros And Cons Of Swing Trading
Advantages of swing trading:
- This forex strategy doesn't take up all of your time;
- You can combine different trading techniques to calculate the best time to enter and exit the market. You have time to analyze the market and experiment with indicators.
Disadvantages of swing trading:
- This forex strategy does not allow you to benefit from big trends;
- There is a risk for each position left open overnight.
But overall, this forex strategy may be best for you if you are trading a pair that is historically trading in a range.
Forex Strategy #4: Intraday Trading
Intraday trading is a short-term forex trading strategy where you keep trades open for a few minutes or even hours (it's similar to swing trading, but at a more brisk pace). The time frames most often chosen for this forex strategy are usually 5 or 15 minutes. The intraday trader seeks to capture intraday volatility. Here you need to trade in the most volatile session for the currency pair of your choice. Since the maximum earnings are generated during such an active period.
Intraday trading strategies ignore long-term trends and fundamental analysis. All that matters here is what happens during the trading session.
Pros And Cons Of Intraday Trading
Advantages of intraday trading:
- If you are good at it, you can make money daily;
- No overnight risk. You close your positions by the end of the day.
Disadvantages of intraday trading:
- Trading is intense. It can be stressful, and emotional, as you need to watch the markets all the time;
- This forex strategy implies that you can lose a lot more than you expected if you have severe slippage;
- Intraday trading actually implies that you trade a full trading session - that is, you give very much of your resources to the market. You are left with very little time for other work;
- Intraday trading may be the best forex strategy if you view trading as your main job.
Forex Strategy #5: Scalping
Scalping is a short-term strategy where you keep trades open for a few minutes or even seconds. It is the fastest of all forex strategies. The main tool used in scalping is tape reading (shows buy and sell orders in the market).
Pros And Cons Of Scalping
Advantages of scalping:
- You have a lot of trading opportunities every day;
- This trading strategy can bring you a good income.
Disadvantages of scalping:
- You have to spend a lot of time in front of the monitor;
- It is a very stressful job (resource-intensive).
By the way, if scalping seems too complicated a forex strategy, but it is still very close to you ideologically, you can invest in scalping strategies of experienced traders through the Allpips trading platform. In doing so, the settings of the service will allow you full control of the investment process on your side through the setting of parameters "copy ratio".
Forex Strategy #6: Transition Trading
What is it? This method is not found in trading textbooks, but many experienced traders use it, and this strategy is the best for them because it gives a lot of flexibility and allows you to increase your profit targets in case a good situation occurs on the chart already during the trade. The idea is to enter a position in a lower time frame, and if the market goes in your favor, increase your profit target and trace the Stop Loss to a higher time frame.
Let's say you are trading a breakout in the hourly time frame of GBP/JPY, and the price starts to move quickly in your favor:
You notice in the 4-hour time frame a price movement relative to the 20MA Moving Average. And in that situation, instead of taking a profit, you track your Stop Loss using the 20MA, hoping to get an even bigger move in your favor. And if you're wrong, you can close the trade when the price closes below the 20MA line.
A transition forex strategy involves:
- You look for an entry in the lower time frame.
- If the price moves in your favor, plan your exit relying on a higher time frame.
Pros And Cons Of A Transition Strategy
Advantages of the transition strategy:
- Excellent risk-reward is possible (up to 10 more);
- There is an opportunity to reduce risk by having your entry in a lower time frame.
Disadvantages of the transition strategy:
- The probability that each trade will be successful is not very high. The strategy is complicated. It requires experience and accuracy;
- You must have the skill to work in several time frames.
How To Choose A Forex Trading Strategy?
How to choose a forex strategy that is perfect for you? You should answer several questions to choose a strategy. Do you want to increase your capital or make a profit from trading? If your goal is to have a stable income, you should find more trading opportunities in lower time frames (for the law of large numbers to work). That means you should trade in lower timeframes and spend more time in front of the screen. Forex trading strategies you can use are scalping, intraday trading, and swing trading.
If your goal is to continuously grow your wealth, and if you want to increase your fortune by trading, you can afford to trade less frequently... You can trade in higher time frames and spend fewer hours in front of the computer screen. Forex strategies for this purpose are swing or position trading.
How Much Time Should You Devote To Trading?
If you have a full-time job, or can't afford to spend 12 hours a day in front of a monitor, it makes no sense to try scalping or intraday trading (this is a short-sighted option). Instead, use swing strategies or position forex strategies. But if you have a carload of time and you like short-term trading and sit in front of the screen and watch the market, then scalping is your everything.
How to test and understand that one or another forex strategy suits you?
Most trading strategies can be classified into one of two categories:
- High winning percentage with low risk-reward;
- Low winning percentage with high risk-reward.
Which approach is more effective?
In terms of profitability, both approaches can work great. It all depends on your win rate and risk-reward ratio.
A better way of saying it this way: which approach is more comfortable?
So, if you prefer a higher win rate, but a lower profit margin, use swing trading. If you prefer a lower win rate but higher profits, use position trading.
Forex Trading Strategies For Beginners
If you have little experience in the forex market, it is quite difficult for you to decide on a strategy. Especially, for each strategy, there are a lot of tools such as trading indicators, candlestick patterns, etc. ... One can easily get confused.
So, what steps should you take first?
Experienced traders recommend starting with a study of support and resistance lines. These lines are truly priceless. And here's why... Because when you think about it, the price can only make one of two moves relative to those lines:
- Price reverses at the support/resistance level;
- Price breaks out support and resistance.
That means that if you understand the mechanism of how these two lines work, you can use trend line trading and other strategies where support and resistance will be the main pillar in your market entry and exit decisions. Support/resistance lines work in a variety of time frames regardless of whether you're using a day trading strategy, swing trading, or even position trading.
What goes next?
Learn how price reacts to support and resistance. When price breaks out these lines, ask yourself: what happened on the chart before the breakout? When the price makes a reversal at the support/resistance lines, ask yourself: what happened before the reversal? Read more about reversal indicators. As you study thousands of charts, you will develop intuition... You will begin to anticipate whether a trend will be broken out or whether the price will reverse at support/resistance levels.
Determine your trading time frame. Choose a time frame in which you can trade comfortably. For example, if you have a full-time job, it doesn't make sense to trade in a 5-minute time frame. Instead, you're better off trading in higher time frames (like 4 hours and higher). Be honest with yourself and choose the period that suits you best.
Develop a trading plan. Once you decide on the time frame, you can develop a trading plan and forex strategy.
Conclusion: What Forex Trading Strategy Is The Best?
- Position trading: an approach to systematically increase personal wealth for those who can't spend all day in front of a screen;
- Swing trading: this approach is perfect for those who can spend a few hours a day trading.
- Intraday trading and scalping: a profitable approach for those who can spend all day in front of a computer screen.
Before learning any forex strategies, you need to answer a few questions:
- What is your trading goal?
- How much time do you have for trading?
- Does the strategy you choose fit you as an individual? Does it create internal conflict? Only after that you can take a pick and start mastering this or that forex trading strategy.
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