How to trade: Forex trading strategies

15 May, AtoZForex, London – Treating Forex trading as a business is vital to achieve success, because trading is a business. A successful trading requires personal trading plan that covers your actual business, goals, and your actual trading. Your business plan would include short term and long term aims, the amount of capital you have available to dispose, and your cash flow statement, etc. Meanwhile, your personal trading plan includes the details of trading: which currency pair will you trade, your trade criteria, risk management, and many more. Both business and trading plans should be objective and concise that you could hand it over to another trader and they would be able to asses it and provide feedback.

Furthermore, every trading plan should be tailored accordingly to the strategy a trader chooses. This article, therefore, will cover various trading strategies and different plan alterations depending on a chosen primary Forex trading strategy.

How to trade: Forex trading strategies

Forex is often associated with short term trading. In contrary to investing, where an investor believes in a company or a stock and hence buys and holds it ‘riding out’ fluctuations over time, Forex traders aim to buy low and sell high, benefit from the same instrument in both bullish and bearish markets. The amount of time a trader holds its position, its size, exist point, and which time-frame is used depends on primary Forex trading strategies.

#1 Swing trading

Swing trading refers to a strategy in which positions are held for a period of days, weeks or even months in an attempt to capture short to medium term market moves. Swing traders rely on a combination of technical and fundamental analysis to make trading decisions and refer to daily and weekly price charts. Positions are closed either when a previously established profit or stop levels are reached, a set amount of time has elapsed, or trend changing fundamental developments take place.

A trading plan is therefore used to focus on long term technical and fundamental developments, such as central bank interest rate decisions, GDP and CPI data,  and weekly support and resistance levels. Entry sizes are usually small since stop loss levels can be 100 to 200 pips away. Swing type traders do not need to be as precise as scalp traders, as long as they enter in the right direction. However, since the trades are left open over days, swap and commission costs are of major concern.

Time-frame used: W1, D1, H1;

Held positions: Days to weeks;

Analysis: Technical and fundamental.

#2 Intraday trading

Intraday trading refers to a strategy in which positions are entered and closed on the same day. Trades are often closed using predetermined profit and stop levels, or before European or US trading sessions closing. Intraday traders typically use technical analysis and fundamental data releases.

Since opened positions are held for a period of hours, traders rely on either frequent small gains or few large entries to build profits. Therefore, a general intraday trading plan relies on a trading strategy, risk management, and precisely determined entry levels. Hence, constant evaluation of the strategy in a trading plan is needed to ensure you stay profitable.

Time-frame used: D1, H1, M15;

Held positions: Hours;

Analysis: Technical and fundamental.

#3 Scalp trading

Scalp trading is an extremely form of intraday trading that involves frequent buying and selling throughout a chosen trading session. Because scalpers target the smallest price movements and rely on frequent and small gains to build profits, precise entry levels, personal trading strategy, and broker spread costs are vital. Unfortunately, as gains seem frequent and quick, most Forex beginners fall for “easy money” illusion and various scams covering it, not understanding the big secret to Forex trading.

Scalpers tend to thrive during fundamental data releases which impact the market with immediate price rallies providing opportunities for small price fluctuations. Therefore, scalp trading plan gives priority to scheduled data releases (needlessly understanding the fundamental meaning), technical analysis, and strict risk management.

Time-frame used: H1, M15, M5, M1;

Held positions: Minutes to hours;

Analysis: Technical.

Choosing a strategy

In order to choose the right trading strategy, traders must consider a variety of factors, including: account size, amount of time that can be dedicated, personality, risk tolerance, and level of experience.

More often than not, market participants do not fit into one category or have multiple accounts for different trading styles. Starting out, it’s always good to experiment but before mixing and jumping primary Forex trading strategies – master one first.

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