Before you act as a primitive, you must know how to plan like a great strategist. This is a course of action to adopt before plunging headlong into the chaotic Forex environment.
Beginner, intermediate or established, no one should deviate from the rule, because adopting an effective Forex trading strategy is essential to be able to generate the expected profits and avoid unpleasant surprises.
Adopting a Forex trading strategy should suit both your trading style, but also your level of stress tolerance and risk taking.
Swing trading, Scalping or Coveragethere is something for everyone, but which of these strategies is the most effective?
How to choose your Forex trading strategy?
Availability and “times”
The time reserved for trading is the decisive element in choosing your Forex trading strategy. For a trader, there is a big difference between speculating every 2 days and staring at chart patterns all day to decipher the trend in financial prices for the next two hours.
This working hours reserved for trading will be decisive in the choice of what is called the “timeframe”, the time scale in French. A confirmed trader will be more able to launch on short time frames, i.e. M5 (five minutes), to make his entries on the various currency markets, while a beginner or long-term investor will use longer time frames, H1 (a ‘ Now) .
Here is an overview of the different “time frames” based on the three best Forex trading strategies selected.
- Long Term Investor: Monthly / Weekly / Day
- Short Term Investor: Hour (hourly)
- Swing trading : Weekly / D1 (day 1) / H4
- Trading day : H4 / M30 / M5
- Scalping : H1 / M5 / M1
Character traits and goals
The Forex strategy you choose should depend on its ability to withstand stress and fatigue. In the trading world, psychological resilience is an important key to success. Indeed, any action resulting from a desperate, hasty or reckless decision could have very costly consequences. Patience and self-control are mothers of security.
In the event that calm and patience were not your strengths, you would do better to undertake strategies based on a rather long time scale rather than a short one, such as that of the strategies developed for example by Swing Trading, as opposed to Day Trading and Scalping. which are based on much shorter time units.
Finally, the last very important point, the ability to take risks. The Forex strategy you choose should reflect your risk tolerance. You will have to choose your side between a conservative profile and a love of risk. The first question arises as follows: are you ready to take losses?
If you are putting your only personal income on the line, it would be wiser to adopt a conservative strategy. Otherwise, if you have a purely commercial bank account, the lights are green.
When to open a position? This is one of the fundamental questions to ask yourself before adopting your preferred strategy.
There are two ways to trade: with the trend or in a range. In range-based trading, if a trend is bullish, it indicates a Forex signal to buy, and if not, it indicates a signal to sell. This type of short term tactic works when the price is unpredictable in the long term or shows trend swings every hour or even minute.
(Alternative text: Green and red illustrative chart of financial assets)
Of course, this requires you to be diligent in front of the screens and this is indeed the case in the context of a short-term strategy such as day trading or swing trading, described later in the article. Sometimes, these strategies require setting parameters to automate entries and exits on a market, to avoid losses as much as possible.
As part of a safe and reasoned trading, it is always advisable to adopt a long-term strategy, immersing yourself in a rigorous and assiduous analysis of the global situation that could indicate a decline in the short and long term. You can enter a market and invest for the long term when you are sure that a market’s trend will be steadily rising and exit when the trend becomes slow. With a Forex Hedging strategy, you position yourself for the long-term purchase of a currency pair, for example EUR / USD, which trend indicates an overall increase over periods of a few weeks or months.
In general, no matter if you adopt a strategy based on the market trend or on a range, it will always be necessary to keep an eye on the Forex signals that will help to identify the right trading opportunities at the right time and to take the necessary decisions. .
Perfect for traders who prefer medium term trading where open positions can be held for several days on a daily (D1) or hourly (H4) basis. This technique is based on the analysis of currency fluctuations and allows you to base your actions on previous trends.
This Forex strategy aims to exploit price changes by anticipating bullish “swing highs” or bearish “swing lows”. The analysis of price movements requires a good understanding of the stock markets and requires careful monitoring of supports and resistances on asset prices.
To have a good foundation in swing trading, it is recommended that you train and learn on sites like ProfessorForex offering courses for beginners and advice from the best brokers. Start at least fifty trades to sharpen your trader’s senses.
Close to day trading, Scalping is based on the same basis as the latter, with market openings on shorter time frames. This strategy provides for a greater number of openings, in a shorter time (a few minutes).
This method focuses on the accumulation of small but regular profits, with limited losses. However, with fluctuating prices in combination with high leverage, the trader could suffer losses, if the ratio of investment capacity and generated margins is not balanced.
During this short period of time (a few minutes), the scalper can quickly make a profit, but only a small percentage of the profit. To do this, the scalper must use the change in prices on currency pairs, with narrower gaps between two quotes, ie “pips” (gap between purchase price and sale price) with a narrower spread. This makes it easier to enter and exit a position in order to reduce losses when the market is volatile.
With this type of strategy, it would be wise to use risk management or money management tools with parametersstop loss order in order to limit losses by closing a position when the predetermined price is reached.
The safe and reasoned Forex strategy par excellence. The latter allows Forex traders to protect their position on the currency market for several weeks and thus to better manage the ratio of gains and losses in the event of an unfavorable market fluctuation. There are two types of Forex hedging strategy, direct and indirect.
In direct hedging, the trader makes a trade that buys a currency pair and at the same time sells that same pair. Not only is the trader protected from possible risks, but he can make money if he synchronizes perfectly with the rather outlandish trends in the market. The advantage of direct hedging is that you can hold your position in the market and gain with a second trade when the market moves in the opposite direction to the initial position.
Finally, in the case of indirect hedging, the trader creates an opening against a certain currency using two different currency pairs. For example, buy EUR / USD and the second pair EUR / MYR. The only problem is that the trader here is exposed to fluctuations in the US dollar (USD) and the Malaysian ringgit (MYR). That is to say that if the price of one currency increases like the MYR then the trader runs the risk that the fluctuation of one pair, EUR / MYR, is not covered by the other pair, here EUR / USD.
In both cases, the trader can use “options” which are contracts that give the buyer the right to buy or sell the defined financial asset, over a specified period of time. This standard contract offers insurance against an unfavorable change in the price of one of the financial assets, here a currency, and thus reduces the risk of loss.
What you need to remember
As cool as it sounds, each of the strategies presented above has its pros and cons.
However, it is certain that one of these will please you, if it matches your availability and your trading style.
Finally, agree if you want to speculate on short, medium or long term time frames.
Posted on 09/17/21 08:35