There are a variety of ways to trade forex, so it’s important to choose an approach that is well-suited to your experience level, your goals, and the context in question. Below, we’ve outlined the basics, benefits, and drawbacks of nine popular forex trading strategies to help you find your ideal fit.
Trendtrading is one of the most reliable and simple forex trading strategies. As the name suggests, this type of strategy involves trading in the direction of the current price trend. In order to do so effectively, traders must first identify the overarching trend direction, duration, and strength. All of these factors will tell them how strong the current trend is and when the market may be primed for reversal. In a trend trading strategy, the trader doesn’t need to know the exact direction or timing of the reversal; they simply need to know when to exit their current position to lock in profits and limit losses.
Even when a market is trending, there are bound to be small price fluctuations that go against the prevailing trend direction. For this reason, trend trading favors a long-term approach known as position trading. When investing in the direction of a strong trend, a trader should be prepared to withstand small losses with the knowledge that their profits will ultimately surpass losses as long as the overarching trend is sustained. For obvious reasons, trend traders favor trending markets or those that swing between overbought and oversold thresholds with relative predictability.
Tools Used
Todetermine the direction and strength of the current trend, traders often rely on simple moving averages and exponential moving averages such as the moving average convergence/divergence (MACD) and average directional index (ADX). All moving averages are lagging indicators that use past price movement to lend context to current market conditions. In addition to providing insight into the current trend direction and strength, moving averages can also be used to gauge support and resistance levels. When price fails to reach anticipated support and resistance levels, or when a long-term moving average crosses over a short-term moving average, it’s thought to signal a reversal. Rather than anticipating the direction of the reversal and entering into a new position, trend traders will use these signals to exit their current position. Once the new trend has manifested, the trader will once again trade in the direction of the current trend.
Pricemomentum will often change before a price change occurs, so momentum indicators, such as the stochastic oscillator and relative strength index (RSI), can also be used to help identify exit points. These indicators help traders identify when price is approaching overbought or oversold levels and provide insight into when a change will occur.
Pros and Cons
Trend trading doesn’t require traders to know what will happen next—only to understand what is happening right now. As such, it tends to be a more reliable and consistent strategy. To trade effectively, however, it’s important to confirm the direction and strength of a new trend before entering into a position. Although you may not be the first one to enter the trade, being patient will ultimately shield you from unnecessary risk.
Forextrading strategies come in all different shapes and sizes, so before you jump into any of them, we highly recommend you test-drive them first.
2 Position Trading
Position trading is a strategy in which traders hold their position over an extended time period—anywhere from a couple of weeks to a couple of years. As a long-term trading strategy, this approach requires traders to take a macro view of the market and sustain smaller market fluctuations that counter their position.
Tools Used
Positiontraders typically use a trend-following strategy. They rely on analytical data (typically slow moving averages) to identify trending markets and determine ideal entry and exit points therein. They also conduct a fundamental analysis to identify micro- and macroeconomic conditions that may influence the market and value of the asset in question.
3 Range Trading
Range trading is based on the concept of support and resistance. On a price action graph, support and resistance levels can be identified as the highest and lowest point that price reaches before reversing in the opposite direction. Together, these support and resistance levels create a bracketed trading range.
In a trending market, price will continue to break previous resistance levels (forming higher highs in an uptrend, or lower lows in a downtrend), creating a stair-like support and resistance pattern. In a ranging market, however, price moves in a sideways pattern and remains bracketed between established support and resistance thresholds.
When price reaches the overbought (resistance) level, traders anticipate a reversal in the opposite direction and sell. Similarly, when price approaches the oversold (support) level, it’s considered a buy signal. Finally, if price breaks through this established range, it may be a sign that a new trend is about to take shape. Range traders are less interested in anticipating breakouts (which typically occur in trending markets) and more interested in markets that oscillate between support and resistance levels without trending in one direction for an extended period.
Tools Used
Rangetraders use support and resistance levels to determine when to enter and exit trades and what positions to take. To do so, they’ll often use banded momentum indicators such as the stochastic oscillator and RSI to identify overbought
