Three Popular Forex Trading Strategies: For Successful Traders
By Manumhegde
JK
Identifying a
successful Forex trading strategy is one of the most important aspects of
currency trading. In general, there are numerous trading strategies designed by
different types of traders to help you make profit in the market.
In the end, no one size fits all. In order to make profit, traders should focus on eliminating the losing trades and achieving more winning ones. Any trading strategy that leads you towards this goal could prove to be the winning one.
How to Choose The Best Forex Trading Strategy
Time frame
On the other hand,
swing traders are likely to use a 4-hour chart, as well as a daily chart, to
generate profitable trading opportunities. Hence, before you choose your
preferred trading strategy, make sure you answer the question: how long do I want
to stay in a trade?
Number of trading
opportunities
On the other hand, traders that tend to spend more time and resources on analyzing macroeconomic reports and fundamental factors are likely to spend less time in front of charts. Therefore, their preferred trading strategy is based on higher time frames and bigger positions.
Position size
A popular advice in this regard is to set a risk limit at each trade. For instance, traders tend to set a 1% limit on their trades, meaning they won’t risk more than 1% of their account on a single trade.
For example, if your account is worth $30,000, you should risk up to $300 on a single trade if the risk limit is set at 1%. Depending on your risk sentiment, you can move this limit to 0.5% or 2%.
In general, the lower the number of trades you are looking to open the bigger the position size should be, and vice versa.
Three Successful Strategies
Below, we share three popular Forex trading strategies that have proven to be successful.
Scalping
Forex scalping is a popular trading strategy that is focused on smaller market movements. This strategy involves opening a large number of trades in a bid to bring small profits per each.
As a result, scalpers
work to generate larger profits by generating a large number of smaller gains.
This approach is completely opposite of holding a position for hours, days, or
even weeks.
Scalping is very
popular in Forex due to its liquidity and volatility. Investors are looking for
markets where the price action is moving constantly to capitalize on
fluctuations in small increments.
This type of trader
tends to focus on profits that are around 5 pips per trade. However, they are
hoping that a large number of trades is successful as profits are constant,
stable and easy to achieve.
A clear downside to
scalping is that you cannot afford to stay in the trade too long. Additionally,
scalping requires a lot of time and attention, as you have to constantly
analyze charts to find new trading opportunities.
Let’s now demonstrate how scalping works in practice.
Below you see the EUR/USD 15-min chart. Our
scalping trading strategy is based on the idea that we are looking to sell any
attempt of the price action to move above the 200-period moving average (ma)
Each time, the price action moved slightly above the 200-period moving average before rotating lower.
A stop loss is located 5 pips above the moving average, while the price action never exceeded the MA by more than 3.5 pips.
Day Trading
In the chart below, we
see GBP/USD moving on an hourly chart. This trading strategy is based on
finding the horizontal support and resistance lines on a chart.
In this particular case, we are focused on resistance as the price is moving
upward.
The price movement tags
the horizontal resistance and immediately rotates lower. Our stop
loss is located above the previous swing high to allow for a minor breach
of the resistance line. Thus, a stop loss order is placed 25 pips above the
entry point.
On the downside, we use
the horizontal support to place a profit-taking order. Ultimately, the price
action rotates lower to bring us around 65 pips in profits.
Position Trading
Position traders are likely to monitor central bank monetary policies, political developments and other fundamental factors to identify cyclical trends. Successful position traders may open just a few trades over the entire year. However, profit targets in these trades are likely to be at least a couple of hundreds pips per each trade.
This trading strategy is reserved for more patient traders as their position may take weeks, months or even years to play out. You can observe the dollar index (DXY) reversing its trend direction on a weekly chart below.
A reversal is a result of the huge monetary stimulus provided by the US Federal Reserve and the Trump administration to help the troubled economy. As a result, the amount of active dollars increases, which decreases the value of the dollar. Position traders are likely to start selling the dollar on trillion-dollar stimulus packages.
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