To be successful in the foreign exchange market, traders need to have a trading strategy that works for them. Without a forex trading strategy, some traders end up taking a gamble in the market with increased risk of capital loss. We examine what forex trading strategies are and look at some popular ones used by many traders worldwide.
What is a Forex Trading Strategy?
A forex trading strategy is a method used by traders to decide on when to enter and exit the market and which currency to buy or sell. Forex strategies may be developed by the traders themselves or by brokers who teach how to use them in their education platforms. Some brokers also allow traders to copy the strategies of the accomplished traders. Forex strategies developed are based on technical analysis and fundamental analysis.
Popular Forex Trading Strategies
Some of the strategies used by traders are and not limited to the following:
Martingale Strategy
This is a technique where traders double their losing trades when making a new trade. This strategy requires significant amounts of capital in the trader’s account due to the risk involved.
For example:
You buy 1 lot of EUR/USD at 1.1630. The price drops by 10 pips to 1.1620. This means you lose $100. Then you double the losing trade by buying 2 lots of the same currency. In this way, when the currency rises by 10 pips, you earn $200. First, you recover the $100 you lost plus you make an extra profit of $100.
Support and Resistance Strategy
Support level is a point where price drops to but never breaks through which results in a reversal of the direction of the price. Resistance level is a point where price rises to but ceases to cross that level thus indicating a reversal. For example;
GBP/USD may have its support and resistance level at 1.3200 and 1.3300 respectively. If prices drop near or to the point of 1.3200, then it is an indication that the price will reverse and start to rise thus buyers enter the market. If prices rise close to the 1.3300 level, then it may be a signal that the price may begin to drop and sellers enter the market at this point.
Trend Trading Strategy
In this Forex strategy, traders find out whether currency price movement is either on an upward trend or a downward trend. An upward trend is indicated by higher highs and higher lows while a downward trend is indicated by lower lows and lower highs. Of course, the prices do not move smoothly and there may be retracements. But at the end, the prices move in that specific general direction.
This strategy is one of the most popular and is used by both beginners and professional traders. Due to its reliability, it has led to the phrase, “the trend is your friend.”
Position Trading
This strategy is where traders hold their positions in the long term for weeks or months. This method involves the use of long-term charts like the daily or monthly charts. First, the traders identify the trend of the currency movement by checking the higher highs or lower lows before entering the long or short position.
Alternative Strategies
In addition to those above, there are many others such as hedging which can be applied in order to minimise risk. With research you can learn more and decide what’s right for you.
Final Thoughts
Using a Forex strategy is significant to any trader in the foreign markets. Keep in mind that using strategies does not necessarily mean you will always make profits though. Some strategies may work for you while others might not. See our list of recommended brokers to try them out for yourself. Remember, it’s better test your strategies in Demo test accounts before using them in Real ones.
