Forex traders use a variety of strategies and techniques to determine the best entry and exit points — and timing — to buy and sell currencies. Market analysts and traders are constantly innovating and improving upon strategies to devise new analytical methods for understanding currency market movements. Successful traders are not only able to analyse and formulate strategies but also stick to them. As a trader, you should identify some well-reasoned and tested strategies you would like to use and ensure that you follow the rules for those strategies. Maintaining discipline is one of the key aspects of success for any professional trader.
Various Types of Trading Strategies:
Range trading is a simple and popular strategy based on the idea that prices can often hold within a steady and predictable range for a given period of time. Range traders rely on being able to frequently buy and sell at predictable highs and lows of resistance and support, sometimes repeatedly over one or more trading sessions. Range traders may use some of the same tools as trend traders to identify opportunistic trade entry and exit levels, including the relative strength index, the commodity channel index and stochastics.
Swing trading is a medium-term trading strategy that is often used over a period from one day to a week. Swing traders will look to set up trades on “swings” to highs and lows over a longer period of time. This is to filter out some of the “noise,” or erratic price movements, seen in intraday trading and also to avoid setting narrowly placed stop losses that could force them to be “stopped-out” of a trade during a very short-term market movement.
Momentum trading and momentum indicators are based on the notion that strong price movements in a particular direction are a likely indication that a price trend will continue in that direction. Similarly, weakening movements indicate that a trend has lost strength and could be headed for a reversal. Momentum strategies may take into consideration both price and volume, and often use analysis of graphic aides like oscillators and candlestick charts.
Position trading is a long-term strategy that plays out over weeks, months or even years. Position traders often base their strategies on long-term macroeconomic trends of different economies. Traders typically operate with low levels of leverage and smaller trade sizes with the expectation of possibly profiting on large price movements over a long period of time. This strategy require greater levels of patience and stamina is more likely to rely on fundamental analysis together with technical indicators to determine a trade entry and exit levels.
Carry trade is a unique category of forex trading that seeks to augment gains by taking advantage of interest rate differentials between the countries of currencies being traded. Typically, currencies bought and held overnight will pay the trader the interbank interest rate of the country of which the currency was purchased. Carry traders may seek out a currency of a country with a low interest rate in order to buy a currency of a country paying a high interest rate, thus profiting from the difference. Traders may use a strategy of trend trading together with carry trade to assure that the differences in currency prices and interest earned do not offset one another.
Reversal trading happens when traders seek to anticipate a reversal in a price trend with the aim to guarantee entrance into a trade ahead of the market. This strategy is considered to be more difficult and risky to execute as true reversals can be difficult to spot, but are also more rewarding if they are correctly predicted. To spot reversals, traders use a variety of tools such as momentum and volume indicators or visual cues on charts such as head-and-shoulders, and triple tops and bottoms patterns.