So far we have covered some of the Forex basics, such as tips and insights, choosing the right broker or avoiding making costly mistakes in the market. Now it’s time to go a little deeper with our series of educational articles. We will discuss the most popular Forex strategies & styles that are still fresh in 2018.
The role of a successful Forex strategy
Discipline is probably the most important thing you must adhere to when trading in the Forex market. But how can you manage to be disciplined at all times when so many different things can go through your mind during a trade?
The answer is by using a successful Forex strategy. A trading method which is consistent, tested and compliant to your needs can help you set limits to your positions sizing, but can also provide safety, security, and stability regarding your risk management and trade exit points.
The most popular trading styles in Forex
If someone tells you he’s figured out the perfect trading strategy that works for everyone, don’t listen to him any further. There’s no such thing as trading strategy that suits everybody. The best Forex strategies can only be individual strategies. If one works extremely well for me, it doesn’t necessarily mean it will work for you too.
Therefore, you simply have to experiment. Test as many strategies as you can and eventually you will find your own personal solution. Depending on your desire to go short or long with your trading, here are 4 popular styles that are still trending in 2018:
The style with the shortest timeframe, scalping only lasts for several minutes. The trader who uses this style, called a scalper, looks to beat the bid/offer spread and get some points before closing. Scalping offers many trading opportunities every day, but it’s highly stressful and requires a bit more experience than the average Forex beginner has.
2. Day trading
Just as the name suggests, day trades are exited before the day ends, so there’s no chance they can get affected by big moves overnight. Day trades last several hours and day traders look to profit from the volatility in the markets
3. Swing trading
Short-term price patterns are the sought-after term here. Swing trades last several days and they look to take advantage of short-term price patterns, of course. In other words, traders hunt for the “single moves” in the market, which are called, of course, swings.
4. Positional trading
The major shifts in prices are what traders are looking for when they choose positional trades. This trading style is basically a long-term trend following that can be highly rewarding.
As a position trader, you mainly rely on fundamental analysis in your trading (such as major economic events throughout the world).
As a trader, you must consider a variety of factors when determine the trading style that suits you best, including:
- account size
- amount of time that can be dedicated to trading
- level of trading experience
- risk tolerance
Price action/technical analysis in Forex, the most popular Forex strategies
Since we briefly mentioned one of the two major trading analysis, the fundamental one, it’s time to talk about the technical analysis, which is as equally important.
Price action (or technical analysis) is at the very core of the most popular Forex strategies & styles.
For currency trading, trend-following and counter-trend trading are the most famous styles you can use. The common element here is the price pattern, as both styles rely on exploiting it,
Since we got to this point, it would be helpful for you to know that support and resistance are the key concepts when it comes to price patterns. They analyze the market’s capacity to bounce back from either low (support) or low (resistance) points.
If the market goes to the low points, traders will buy more because they see this as a cheap investment. On the other hand, if the market goes near the highest points, it will be sellers’ time to go for profits by getting rid of their “stock”.
Trend-following and counter-trend trading
A. Trend following
The trading style with the highest potential to be the most successful Forex strategy is definitely the trend-following system, according to a lot of experts.
It works like this:
when a market breaks out of range (it can either go below support or above resistance), it starts a trend
if prices hit new lows, buyers hold their trades and wait for the bottom point to be reached; on the other hand, sellers panic and start getting rid of their stocks
this trend lasts until the selling is depleted or when the general market consensus is that prices will not fall further
Because trends can be quite dramatic and they can last for a long time too, traders can earn a good income from this very popular Forex strategy.
B. Counter-trend strategy
The other very well-known technical analysis system is the counter-trend strategy. Traders who use it often try to profit from the fact that prices tend to bounce off the previously established highs and/or lows. Most breakouts do not develop into long-term trends, so this trading style’s working mechanisms is quite solid.
The only issue is that the risk involved is quite high because support and resistance levels are supposed to hold in order for you to profit. That’s why you should look for stable, but lightly volatile markets, as they can offer the best risk-reward ratio.
You should keep in mind that markets can change at any point and you need to be vigilant enough to adapt and change your approach to trading accordingly.
Trend-following and counter trend strategies can both be profitable. That being said, calling market tops and bottoms is a lot harder than catching a piece of an established trend. Contrarian strategies can get less experienced traders in trouble quickly. On the other hands veterans love them due to the high risk to reward ratios which they provide.
C. Breakout strategy
A breakout is any price movement outside a defined support or resistance area. The breakout can occur at a horizontal level or a diagonal level, depending on the price action pattern. The reason these breakouts are such an important trading strategy is because they often represent the start of increased volatility. By waiting for a break of a key level, we can use this volatility in our favor by joining the new trend as it begins.
There are four parts to this Forex breakout pattern.
Whichever of the most popular Forex strategies, styles or systems you opt for, keep it stupid simple at the beginning. A good idea would be to start with the well-established strategies that have worked for most traders already and tailor them in order to fit your style like a glove.
As you get experience, you can polish it more and more, by adding extra layers of complication. Only by trial & error can you learn the top Forex solutions that can get you to the professional status.