Trading strategies are an important part of forex trading. From day trading to fundamental and technical analysis, they can help you make better informed trading decisions.
Forex trading is very popular because of the volatility in the markets. Traders can benefit from big movements in prices, up or down, on a daily basis. And all this market movement makes day trading one of the most popular forex trading strategies.
The concept is very simple. You open and close all your trades on the same day. Critically, you don't roll over any positions into the next day.
Keep your eye on the markets
This can be a very challenging strategy, especially if you're new to forex trading. You need to be extremely vigilant and keep your eye on the markets. Most of all, you need to be able to move quickly if there's a sudden rise or fall in your chosen currencies. This will ensure that you can maximise profits and minimise any losses.
Of course, not even the most diligent day trader can be at their screen every second of the day. Therefore, there are two techniques that reduce the stress of having to watch the markets all the time – the use of ‘stop loss’ and ‘take profit’ orders.
Manage your risks
The principle is simple. When you open a trade, you can set a ‘stop loss’ order. You will set a less favourable market price in order to limit your losses in case the market turns against you. On the other hand, a ‘take profit’ order works the other way – it is an order that will automatically close at a specified favourable price if the market reaches this level. This locks in profits in case the market turns the other way later on.
In other words, you can decide how much money you are prepared to lose, or the amount of profit you are happy to make. This offers much more control over your trading and gives you greater peace of mind. You should consider using a stop order on every position you open.
Traders who follow the trend take a longer term view on whether the market will rise or fall. They place less emphasis on the day to day movements.
Remember bulls and bears
Here we need to remember the difference between bullish traders, who think that the market is rising, and bearish traders who think it will go down. If the trend is bullish, you will look to buy the currency pair and ride the positive wave higher. If the trend is bearish, you will look to sell the currency pair and follow the trend lower.
Traders following a trend typically hold their positions from a day to even a few months.
Technical analysis is based on the idea that in the markets, history can repeat itself. In other words, levels that were important in the past will become important again in the future. When we talk about technical analysis, we're talking about how we study market price action using charts.
When it comes to technical analysis, there are three basic indicators we use to predict market direction.
Support, resistance and trends
Support means the price level the currency pair rarely falls below. Resistance is the opposite – in other words, the price that a currency pair rarely breaks through. These levels are typically defined as the levels where many traders are willing to buy (support) or sell (resistance), but if these trend lines are broken, new levels of support and resistance are usually established.
Technical analysis is widely used among traders and financial professionals. It's especially popular because charts enable you to anticipate and ride volatility and turn it to your advantage.
Fundamental analysis is the study of news and economic announcements that have an impact on the markets. This could include anything from economic factors, such as interest rates and unemployment figures, to current affairs, such as elections or conflicts.
You can use this information to make better-informed decisions on whether to buy or sell.