Forex Trading Strategies for Beginners

 

Twelve Forex Trading Strategies for armatures and beginners.

We are all aware that forex trading may be challenging at first, but choosing the appropriate forex techniques to trade with is critical for newcomers to the forex market.

The foreign exchange market is the world's biggest and most liquid financial market. With an average daily trading volume of $6.9 trillion, it is more than twice the size of the New York Stock Exchange, making it an appealing trading venue.

Currency trading may be a lucrative business for those ready to take on risk. There are, however, several mistakes that novices should avoid if they want to succeed in the long run.

That entails developing the appropriate trading strategy!

Continue reading to learn about effective forex trading methods and to acquire insight into what a newbie trader must do to be successful in the forex market. However, you must first grasp what a forex trading strategy is and how to pick the one that is best for you.

What is the definition of a forex trading strategy?

A trading strategy may be thought of as a series of principles that guide a trader in determining when to engage, how to manage, and when to exit a transaction. A trading strategy may be either basic or quite sophisticated; it is unique to each trader.

Traders who use technical analysis will find it simpler to determine their entry/exit criteria, however traders who employ fundamental analysis may find it somewhat more challenging due to the added discretion. Regardless, every trader should have a plan in place, since this is the most effective approach to create consistency and correctly assess success.

How do you choose the optimal forex trading strategy?

Rarely do traders immediately discover the optimal forex approach. The majority will spend considerable time back testing and/or testing multiple strategies using a demo trading account. This ensures that your tests are conducted in a safe and risk-free setting.

Also Read:  The Top 5 Forex Profit Maximization Strategies               

Even if a trader discovers a technique that produces positive returns and feels good, it is improbable that they would stay with it for a lengthy period of time. Financial markets are continuously developing, and traders must adapt along with them.

If you are a newbie, it may be better to adhere to basic tactics. Numerous novices make the error of attempting to include an excessive number of technical indicators into their approach, resulting in information overload and contradicting signals. You can always fine-tune your approach as you go and use the knowledge gained by back testing and demo trading.

For beginners, here are the most frequently utilized forex trading techniques

1. Trading based on price action

Price action trading is a method that focuses on making choices based on an instrument's price movements rather than on technical indications (e.g. RSI, MACD, Bollinger Bands). There are several price action tactics to choose from, including breakouts, reversals, and basic and complicated candlestick patterns.

Technical indicators are normally not included in a price action approach, but if they are, they should be utilized sparingly and as a supporting tool. Certain traders like to integrate basic indicators such as moving averages to aid with trend identification.

The advantages of price action trading are that your charts stay uncluttered, and there is less chance of information overload. Multiple indicators on a chart might provide contradicting signals, which can be confusing for novices in particular.

Additionally, reading the price movement may help you get a better sense of the market and assist you in identifying trends more quickly. Another reason price action trading is so popular with day traders is because it is better suited to traders seeking to benefit from short-term swings. When day trading, you must make rapid judgments, and having a "clean chart" and concentrating just on the price movement can aid in this process.

The following is an example of a straightforward breakout trading technique. 1.1772 was a critical support level, and our trader was looking for a breakthrough to short EUR/USD and benefit on the subsequent move down. We can see that the general trend is favourable to them (downtrend). There was a breakthrough, and the currency pair plummeted more than 70 pips before reaching support around 1.1700.

While some traders like to enter immediately upon the price breaking below the critical support level (maybe with a sell stop order), others prefer to study the price movement and act later. False breakouts are common, and it is critical to have adequate risk management policies in place to address them.

Also Read: Multi-Time Frame Analysis – A Strategy For Every Trader

2. Trading technique using ranges

Traders that use a range trading strategy will seek for trade assets that are consolidating inside a certain range. This range may be anything from 20 pips to several hundred pips, depending on the period on which you trade. What the trader is searching for are stable support and resistance levels - that is, price rebounding off the support level and being refused at the resistance level.

Traders using this approach must seek for non-trending trading instruments. To do so, you may either observe the instrument's price behaviour or use indicators such as the moving average and the average Direction index (ADX). The ADX number is inversely proportional to the strength of the trend.

After identifying a good trading instrument, you must determine the range within which the item is consolidating.

A traditional range trading technique will urge you to sell when the price reaches the main resistance region and to buy when the price reaches the key support area. Some traders will trade two specific levels, while others will trade "bands" or "areas" - for example, if you identified 1.17 as a critical resistance level but price frequently stalls at 1.1690 or 1.1695, you can highlight that area (1.1690 - 1.17) and begin looking for selling opportunities within it. Concentrating only on that level may result in missed trading opportunities, since price often reverses before reaching it.

The currency pair EUR/SEK is an example of a range-trading currency pair. The ADX is often below zero, and we can observe that the price frequently bounces off the 10.00/04 support region, while having difficulty breaking through the resistance area between 10.27 and 10.30.

3. Trading technique based on trends

Trend trading tactics include locating trade opportunities along the trend's direction. The notion is that the trading instrument will continue in the direction in which it is presently moving (up or down).

When prices continue to rise (make new highs), we are in an uptrend. In the other direction, dropping prices (the trading instrument makes lower lows) signal a downtrend.

Except when observing market activity, traders may discover trends with the usage of supporting tools. Moving averages are a particularly popular kind. Traders may simply check at whether the price is above or below a moving average (the 200 DMA is a popular and regularly followed moving average) or they can employ MA crossovers.

Also Read: How To Identify a Trend Reversal

To use moving average crossovers (which may also be utilized as entry signals), you must first establish a fast MA and a slow MA. The 50 DMA and the 200 DMA are two popular examples. The crossover of the 50-day moving average above the 200-day moving average might signal the start of an uptrend, or vice versa.

The USD/JPY is used as an example, along with two DMA crossovers (50 DMA & 200 DMA).

moving average crossover strategy

4. Position trading strategy 

The objective of position trading is to benefit from long-term trend changes while avoiding the day-to-day noise. Traders that use this method of trading may maintain positions open for weeks, months, or even years.

It is, along with scalping, one of the most challenging trading methods. It demands a trader to be very disciplined, capable of ignoring background noise and remaining cool even when their position swings against them for several hundred pips.

Consider that in early 2018, you had a pessimistic perspective on markets. You sold short the S&P 500 at the start of the year, intending to hold the position for the remainder of the year. While you may have loved the price changes at the beginning and end of the year, the climb from March to September may have been excruciating. Only a few traders have the discipline to hold their positions for such an extended length of time.

5. Day Trading Technique

Unlike scalpers, day traders often do not hold trades for just a few seconds. However, their trading day is often centered on a certain session or time of day, during which they attempt to capitalize on opportunities. While scalpers may trade on an M1 chart, day traders often trade on anything from the M15 to the H1 chart.

Scalpers often open more than ten trades per day (some really busy traders may even open more than 100), whilst day traders take it a little slowly and end for 2-3 nice chances each day.

Day trading may be a good fit for you if you like to close your positions prior to the end of the trading day but do not want to deal with the high degree of pressure associated with scalping.

6. Scalping technique

Scalping is an advantage used by traders to profit on tiny intraday price movements. Some trade for as little as 5 pips, and the period of the trade might range from seconds to a few minutes. Scalpers must be numerate and able to make rapid choices, even under pressure. Additionally, they spend more time in front of the screen and tend to focus in one or a few markets (for example, just scalping EUR/USD or only S&P 500 futures).

The advantage of scalping is that it enables you to focus on a particular period and eliminates the need to maintain positions overnight or understand long-term fundamentals.

Scalping, on the other hand, comes with a lot of pressure, since you must maintain complete focus during your trading session. Additionally, since your trades are only running for a few minutes, it is simpler to make errors and react emotionally. As a result, it may not be the greatest trading technique for novices to begin with.

Also Read: The Best Bollinger Bands Trading Strategies

7. Swing trading Technique

Swing trading is a word that refers to traders that tend open positions over many days. They may utilize an H1 to a D1 chart, or even a weekly chart. Trend following, range trading, and breakout trading are all popular trading methods.

Traders that use this trading method must have patience and discipline. It may take many days for a good chance to end itself, or you may find yourself holding a trade open for a week or more while running an open loss. Certain traders lack the requisite patience and close their trades prematurely.

Swing trading may be the appropriate trading technique for you if you like analysing markets without rushing and are comfortable running positions for days or even weeks. Additionally, it enables you to include fundamental research (attempting to forecast monetary policy changes or political events) - something that is impossible to accomplish while scalp trading.

8. Carry trade Technique

A trader who employs a carry trade strategy will attempt to benefit on the interest differential between the two currencies that make a currency pair.

A trader would go out and purchase a currency with a high interest rate and then sell it for a currency with a low interest rate. A popular example is buying the AUD/JPY currency pair (because to Australia's historically high interest rates and Japan's historically low interest rates). The trader will then get an interest rate pay-out according to the amount of their position.

The advantage of using a carry trade strategy is that you may earn a significant amount of interest just by holding a position. Naturally, this requires the proper market climate. If the AUD/JPY is in a significant downturn and you are long, the interest payments will be insufficient to offset the total negative PnL.

Carry trades work effectively in a bull market scenario when traders are looking for a high degree of risk. The Japanese Yen has historically been a safe haven currency, which is why many carry trades include selling the Yen against a "risk-on" currency.

You should, however, be aware with the qualities of the currency you want to trade. For example, the Australian Dollar benefits from growing commodities prices, whereas the Canadian Dollar benefits from increased oil prices.

The AUD/JPY chart below highlights a time where the currency pair performed very well, making a carry trade a no-brainer.

Carry trade Technique

 9. Breakout  trading strategy

A breakout strategy seeks to initiate a trade immediately when the price breaks out of its trading range. Traders are searching for significant momentum, and the real breakout signal serves as a signal to join the trade and benefit from the subsequent market action.

Traders may initiate positions at market, which requires constant monitoring of price activity, or through buy and sell stop orders. Typically, they will position the stop slightly below or just above the previous resistance or support level. Traders may utilize traditional support/resistance levels to determine their exit points.

Breakout strategy

10. Trading economic news

News trading is a trading method in which the trader attempts to benefit on a market move sparked by a significant news event. This might be from a central bank meeting to the release of economic statistics to an unforeseen event (natural disaster or geopolitical tensions escalating).

Also Read: How To Enhancing Your Forex Trading Experience

Trading news events may be extremely risky, since the market is prone to tremendous volatility during the period. Additionally, you will notice that the spreads on the impacted trading currencies may significantly expand. Due to dwindling liquidity, you are also at risk of slippage, which means your trade may be completed at a significantly lower price than anticipated or you may have difficulty exiting your trade at the level you intended.

Now that you are aware of the dangers, let us consider how you may trade the news.

To begin, you must select which economic news event you want to trade and which currency pair(s) it will have the most impact on. A European Central Bank meeting will undoubtedly have the greatest influence on the Euro. Which currency combination, though, should you choose? If you anticipate a hawkish ECB signalling rate increases, it makes sense to pick in a low-yielding currency, such as the Japanese Yen. EUR/JPY may therefore be the best option.

Additionally, you might approach news trading with a bias or without any bias at all. This implies that you have a sense of how the market could move to the outcome of the event. On the other side, news trading without a bias implies that you will attempt to capitalize on any significant move, regardless of its direction.

The chart below illustrates the effect of the July NFP release on the US500.

Economic news trading

11. Trading  retracements

Temporary shifts in the direction of a particular trading instrument are referred to as retracement or pullback trading. Retracements are not to be confused with reversals; although reversals signal a significant shift in the trend, retracements are only transitory pullbacks. By trading retracements, you remain in the trend's direction. You are attempting to profit from short-term price reversals inside a longer-term price trend.

There are a variety of techniques to trade retracements. You might, for instance, utilize trendlines. Consider the chart of the US500 below. The index is clearly on an upward trend, and the rising trendline may have provided a purchasing opportunity (once the price tests the actual trendline).

Fibonacci retracements are another popular technique for trading retracements, notably around the 38.2 percent, 61.8 percent, and 78.6 percent levels.

Retracement or pullback strategy

12. Grid  trading  strategy

Grid trading is simultaneously placing orders above and below a certain price. The concept is to benefit from volatility by placing buy and sell orders at regular intervals above and below a certain price level (for example, every 10 pips above and below).

If the price advances in one direction, your position and floating PnL grow in size. Naturally, there is a possibility of false breakouts or abrupt reversals.

Grid trading strategy

How can forex trading techniques be compared?

Each trader should make an effort to identify their personal advantage. This might be a collection of skills possessed by the trader.

For instance, some traders may have a short attention span yet are fast with numbers and are adept at dealing with the stress of intraday trading. Whereas a trader with a different trading style may struggle to work well in this environment, a smart strategist will always have the larger picture in mind.

For novice traders, it is critical to identify potential skills and adjust the trading strategy to the individual's personality, not the other way around. There are several advantages to forex trading, and it is up to you to examine the tactics that may be more suitable for you.

How can you choose which trading technique is best for you?

Demonstrate them in a simulated environment using fictitious funding. Once you have determined which one is the greatest match for you, you may try checking it out in a real environment. 

Certain traders may find day trading to be advantageous at first, but then transition to swing trading later in their trading careers. Just as the market environment changes regularly, traders and their tastes alter as well.

Additionally, you may take one of the several free personality tests available online, which may give additional information.