Forex or Foreign Exchange trading involves exchanging currencies in the global forex market. This market is highly active and volatile, with colossal trading volumes to the tune of $5 trillion a day. Forex trading is risky; however, when you know the right forex trading strategies, it somewhat makes life easy for you. Here, we will explain some of these strategies for your trading journey to be smooth.
Forex Markets and its Types
Let’s first understand what these forex markets are all about before jumping to the details about forex strategies. Unlike the stock market that is exchange-based, forex markets are over-the-counter (OTC) markets. There are no exchanges in the forex market, the buyer and seller of currency are directly trading with each other.
Also, this market is active 24 hours and 7 days a week, unlike the usual stock markets. There are four major hubs of forex trading in the likes of Tokyo, London, New York, and Sydney. Before learning the best forex strategy, we must know the types of forex markets. The first is the “Spot Forex” market, wherein the exchange of currency happens at the spot (at the same time). The second is “Forward Forex,” and the third is “Futures Forex,” which are similar to forwards and futures in stock markets.
Forex Trading Strategies
Now, we will look at effective forex trading strategies that you can learn and apply before taking your next trade. A caveat upfront, these trading strategies do not guarantee assured returns. They are mere outcomes of years of experience of professional traders and theoretical concepts in finance. Let’s get started:
Scalping means benefitting from small price movements in currency exchange. To make money out of scalping, you will have to trade in huge volumes. This is the best forex strategy of experienced forex traders around the world, as forex markets are highly liquid and volatile. The whole idea is to gain small profits from a single trade and generate a decent profit from a large number of trades.
Also, this strategy is for a very short-term (sometimes for seconds and minutes). Thus, it might not be a good idea to continue holding a scalping trade for a few hours or days. In scalping, you will have to sit in front of the trading screen until you close the trade.
Positional Trading :
Unlike scalping, positional trading is more of a long-term strategy and one of the renowned forex trading strategies. Fundamental analysis plays a crucial role in this strategy, and thus minor dip or spike does not affect positional currency traders.
In fundamental factors, the central bank’s monetary policy on currency circulation in the economy, macroeconomic factors like GDP and inflation data, political developments in the country, geopolitical issues (trade war, crude oil, etc.) are considered while taking a trade. This is considered as the best forex strategy for currency traders with skin in the game having patience.
Price Action Trading:
Unlike positional trading, this is more of a technical trading-based strategy wherein technical currency charts are studied and analyzed for patterns. This is the most popular forex strategy of currency trading preferred by technical traders. In this, historical price movements are analyzed to find out the patterns to predict the future trajectory of price movement.
There are a few indicators used by technical traders in the best forex strategy, according to them. These indicators are oscillators, RSI (relative strength index), Fibonacci retracement, and length of candles to name a few. The whole idea is to find the precise entry point to enter the trade and find the right exit point.
As the name implies, this strategy involves identifying a range in which the trade has to be executed successfully. The topmost point of this range is known as ‘resistance,’ and the lowest point is known as ‘support’. The price is expected not to go below the support levels, and the price will reverse after reaching the ‘resistance’ level. However, there are times when the price breaks the resistance level making the trade even more profitable.
This is one of the most preferred forex trading strategies for novice technical traders, as it is not complicated to identify a range to enter a trade. Here also, some indicators are used by traders to identify the right support zone and resistance zone. These indicators could be stochastic oscillators, moving averages, channel indices, RSI, etc.
This is more of a speculation based trading strategy wherein traders are looking at a range based chart of currency in a trending market. A trending market is one where markets move in momentum in a fixed direction. Tops and Bottoms are identified according to which traders go long and short in the market. If they identify the top, they will short the market, on the flip side, if they identify a bottom, they will take a long position. The ideal length in such forex strategies in currency trading is for a medium-term from a few hours to a couple of days.
Day trading or intra-day trading means buying and selling the security on the same day. It is tantamount to intra-day square-off in stock markets with the difference that here the security is currency instead of shares. This is considered the best forex strategy for traders who want to make quick money on the same day and don’t want to carry the trade overnight. The risk-to-reward ratio is given due consideration in intra-day trading of currencies in forex markets.
This is all we had for you in this edition of effective forex trading strategies. We hope you get a better sense of what these trading strategies are all about, and what to look for in them. To start goal-based currency trading, open a Demat account with Angel One to enjoy the lowest brokerage amount per trade. Click here to know more. Allow us to serve you!!