When it comes to Forex trading strategies there are many variables which can determine whether a trader finds success and ultimately, traders are best advised to test different Forex strategies to find the most suitable.
There are a wide variety of forex strategies that traders can use from indicator based strategies to pure price action strategies, intra-day scalping through to long term positioning strategies and traders are well advised to consider the pros and cons of these different methods before settling with one.
Considerations when choosing Forex trading strategies
How much time do you have to dedicate to trading?
Many new traders approach trading as a hobby alongside a full-time job, with a view to eventually making the leap into being a full-time trader. For these traders, time constraints play a big part in determining the forex trading strategies they can use. Typically, these traders are much more suited to end-of-day strategies which allow them to trade whilst only checking the markets once or twice a day such as before and after work.
Trading on the higher timeframes has some great benefits: moves are much more clearly defined allowing traders more time to plan trades and assign risk. However, some traders find the higher time frames off-putting as generally, they require much wider stops when compared to intraday trading. Similarly, it can take much longer for moves on the Daily time-frame to play out and so tends to appeal more to patient traders which don’t mind a lack of action
Alternatively, traders who have more free time can engage on the lower time frames and depending on the extent of their free time, can even try a scalping approach whereby they look to make a large number of trades each day, targeting a very small pip return each time. This style of trading is high pace and can be quite stressful as traders have much less time to plan trades and can find themselves operating in more of a reactive manner.
The benefits of scalping are that results are seen much quicker and traders can use much tighter stops. However, this style of trading is typically used by much more advanced traders as newer traders can find themselves quickly suffering strings of losses amidst intra-day volatility.
Indicator based strategies are a favourite of many new traders as the idea of following a “guide” on the market appeals to traders. However, no indicator gives precise readings all the time and traders need to ensure that they properly research the pros and cons of an indicator before trading it. For example, momentum based indicators tend to work better in ranging markets than trending markets whereas an indicator such as the MACD works very well in trend but less well in range conditions.
One of the key aspects to successful indicator trading is learning to identify the conditions which best suit the indicator and the conditions where the indicator struggles, that way traders can modify the way they apply the indicator in less favourable conditions and reduce their risk. Indicator trading can be a fantastic way for new traders to approach the markets and many successful automated systems have indicator inputs.
Price Action Strategies
Price action trading tends to appeal to intermediate and advanced traders who typically have been through the cycle of trading indicators and come to understand that reading price action alone can be enough to determine a consistently profitable approach to the markets. Price action strategies rely on interpreting candlestick formations and identifying reoccurring price patterns with a view to exploiting high-probability outcomes.
Another aspect to consider is how traders use fundamental analysis as part of their Forex strategies. Some traders eschew technical altogether and focus solely on trading fundamentals, using economic indicators as a guide for anticipated currency strength. Other traders look to incorporate some fundamental analysis into their trading, typically looking to stay on the right side of key fundamental trends and considering key news events as part of their risk management approach.
Focus On Risk: Reward & Risk Management
The bottom line is that there are many different forex strategies that traders can use to achieve success but the two key elements which underpin the vast majority of successful strategies are positive risk reward and sound risk management.
Traders should focus on looking to achieve at least 2 – 3 times the amount they risk on any given trade. This allows them to achieve and maintain positive returns despite a hit rate lower than 50% and makes it far easier to recoup losses from drawdowns.
In terms of risk management, traders should adopt a conservative approach where they apply a low level of uninformed risk such as 0.5 – 1% per trade. This will help them achieve sustainable profitability and limit the potential for destructive drawdowns. Keeping risk and leverage low forces traders to focus on delivering returns through quality trading instead of gambling tactics.
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