In forex trading, a strategy would actually refer to the precise and direct techniques that are used by traders to enter into a position and then exit when the time is right.
Trading strategy is sometimes mistaken for trading style. But there is a crucial difference between the two of them. A trading style is the general approach of a trader with regard to the market and with regard to trading. There are 4 main trading styles of day trading, scalp trading, swing trading, and position trading.
On the other hand, a trading strategy is more detailed and precise, in that it actually tells that trader what to do when he or she is engaged in a trade. These are the actual techniques used in forex trading. So, in this article we want to take a look at the best forex trading strategies and techniques.
Top Techniques and Strategies for Forex Trading
Trend Trading Strategy
Let’s start off with one of the most straightforward strategies on our list, i.e. trend trading.
Trend trading is simply a method of trading that involves opening and closing positions based on the general direction of the market at the moment.
So, if you want to use this strategy, all you need to do is to use tools and techniques to identify the major trajectory of the trend in the market.
When you find the major trend to enter into a position, then you need to keep monitoring the trend to find out possible points of reversals in the trend. This is important because when you are riding a trend, it is important to get off at the right time.
Range Trading Strategy
This type of strategy in forex trading has to do with the ranges that can be obtained in the market. These ranges are mostly dependent on two levels of support and resistance.
For instance, when you are watching out the market based on the range created through support and resistance lines, when the price breaks through either one of these lines, then it is said that a higher high or a lower low has been registered.
This creates various opportunities for traders to enter into a position or simply scalp one.
The most important concept in range trading is that when a range is obtained by the trader through analysis, whether or not this range is broken becomes highly important.
Price Action Strategy
The third strategy on the list is price action trading. This trading strategy revolves around analyzing the current price moments and going through the process of decision making based on these alone. This means that the trader does not go over the lengthy process of technical analysis.
Although in price action trading there are several types of techniques including breakout trading and reversal trading. However, as was mentioned, price action trading does not include much technical analysis. Meaning that price action is rather more straightforward to implement by traders compared to other methods.
Price action trading is an appropriate method of trading especially for day traders who are looking to make profits from short term movements.
News Trading Strategy
No market can stand alone. All markets are affected by one thing or another that is outside itself. These external factors can be a quite wide range of items. News events are one such class of factors. Though, different markets are impacted by news events in varying degrees.
The foreign exchange market, however, is heavily impacted by important news events. News such as the release of important economic indicators, like inflation or trade deficit, or most importantly interest rates.
This is why certain traders would have something called a news calendar where their trading experience is governed by the release of these news events.
For instance, when important news such as interest rates are announced, news traders will either opt to trade or opt out of them. If they opt out it is because the market would get a bit hectic following the release of this news and it might be safer to stay out.
If they opt in, it is because they can benefit from the fluctuations that will occur in the market as a direct result of the news.
Retracement trading is all about relying on retracements that occur in the price of an asset or trading pair. But what is retracement?
A retracement is the short term reversal of price movement within a larger market trend. For instance, the overall trend in the market could be an uptrend or bullish. In this situation, a retracement would be a short and quick dip below before going back up again.
Please keep in mind that retracements and reversals are not the same thing. With a reversal a trend reverses to the opposite trajectory. But with a retracement, a trend will merely experience a temporary reversal which will end and the trend will continue as before.
Now, those moments of short lived reversals (retracements) can present a great number of opportunities for traders to make profits.
Different tools can be used to identify retracements, the most well-known being the Fibonacci retracement levels.
Grid Trading Strategy
Grid trading is kind of similar to putting your eggs in various baskets in order to increase your chances of profitability. With this technique, a trader would open numerous stop entry orders. The reason all these orders are opened at the same time is so that no matter which way the market turns, one of these orders will be triggered and the position will be opened.
Grid trading will help traders enter a position only and only after they have made sure a trend exists and has been fully confirmed.
Breakout Trading Strategy
Breakout trading is a strategy that aims at opening a position and entering a trade when the price movement breaks through a price range. So whenever a range is broken, it is believed that a breakout has taken place. In this regard, breakout strategies are rather similar to range trading.
This breakout from the range will create a powerful signal to enter into a position that will actually be profitable.
In this article we provided you with a list of the most useful trading strategies and techniques in the forex market. Each of these strategies are designed for a specific purpose.
So when you want to choose either of them you need to consider certain factors. These factors include your own favorite trading style, which is the general approach you have toward trading. Also the trading pairs you want to trade. Other factors including how much money you have for trading and how much money you are willing to lose in the market are also important.
This way, you can pick the best trading strategy for trading in the foreign exchange market and be able to benefit from trading foreign currency pairs.