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Colombian Swing Traders: Profiting In The Forex Market – We use a variety of cookies to give you the best browsing experience possible. By continuing to use this website, you consent to our use of cookies.
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Colombian Swing Traders: Profiting In The Forex Market
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Psychological Levels & Round Numbers In Forex Trading
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A forex trading strategy defines a system that a forex trader uses to determine when to buy or sell a currency pair. There are different forex strategies that a trader can use including technical analysis or fundamental analysis. A good forex trading strategy allows a trader to analyze the market and execute trades with confidence using sound risk management techniques.
Forex strategies can be divided into a separate organizational structure that can assist traders in determining the most suitable strategy. The diagram below illustrates how each strategy lies within the overall structure and relationship between forex strategies.
Forex trading requires a combination of factors to build a trading strategy that works for you. There are countless strategies that can be followed, however, understanding and being comfortable with this strategy is essential. Every trader has his or her own goals and resources, which need to be considered when choosing the right strategy.
Forex Trading Strategies Revealed
To easily compare forex strategies by three criteria, we have presented them in a bubble chart. On the vertical axis is the ‘Risk-Reward Ratio’ with strategies at the top of the chart having a higher reward for risk taken on each trade. Positioning trading is often the strategy with the highest risk-reward ratio. On the horizontal axis is the time investment representing the amount of time it takes to actively track transactions. The most demanding strategy in terms of your time resources is scalp trading due to the high frequency of trades being executed frequently.
Price action trading involves studying historical prices to build a technical trading strategy. Price action can be used as a standalone technique or in conjunction with an indicator. The fundamentals are rarely used; however, it is not uncommon to include economic facts as a proof. There are several other strategies that fall within the price action framework as outlined above.
Price action trading can be used for different time periods (long, medium and short term). The ability to use multiple timeframes for analysis makes price action trading appreciated by many traders.
In price action, there is trading by range, trend, date, rate, oscillator, and position. These strategies adhere to different forms of trading requirements which are detailed below. The examples show the different techniques for trading these strategies to show how diverse trading can be, along with a wide variety of trader-specific options to choose from.
Foreign Exchange Market
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Range trading involves identifying support and resistance points whereby traders will place trades around these key levels. This strategy works well in the market with no significant volatility and no obvious trend. Technical analysis is the main tool used with this strategy.
There is no fixed duration for each trade as range-bound strategies can work in any timeframe. Risk management is an integral part of this approach as breakouts are possible. Therefore, the range trader wants to close any existing range-bound positions.
Oscillators are most commonly used as a timing tool. The Relative Strength Index (RSI), the Commodity Channel Index (CCI), and the stochastic index are some of the more popular oscillators. Price action is sometimes used in conjunction with oscillators for further confirmation of range-bound signals or breakouts.
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USD/JPY has been exhibiting a range-bound price over the past few years. The chart above illustrates a clear support and resistance band that traders use as entry/exit points. The RSI oscillator shows the timing of entry/exit points marked with shaded blue and red boxes – blue: overbought and red: oversold.
Range trading can provide an effective risk-reward ratio, however, this comes with a long time investment per trade. Use the pros and cons below to align your goals as a trader and the amount of resources you have.
Trend trading is a simple forex strategy used by many traders of all experience levels. Trend trading tries to make a positive profit by exploiting the directional momentum of the market.
Trend trading usually takes place over the medium to long term as the trend fluctuates in length on its own. Like price action, multi-timeframe analysis can be applied in trend trading.
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The entry point is usually specified by an oscillator (RSI, CCI, etc.) and the exit point is calculated based on a positive risk reward ratio. Using a stop gap, a trader can equal that distance or exceed it to maintain a positive risk-reward ratio, e.g. If the stop is placed 50 pips away from the entry point then the stop level Profit will be set at 50 pips or more from the entry point.
In the simple example above, EUR/USD represents an uptrend confirmed by higher highs and higher lows. The opposite will be true for a downtrend.
When you see a strong trend in the market, trade in the direction of that trend. For example, the strong uptrend of EUR/USD above.
Using (CCI) as an entry time tool, notice how each time the CCI fell below -100 (marked in blue), the price reacted with a rally. Not all trades go this way, but since the trend is being followed, each drop in price will cause more buyers to enter the market and push the price higher. In summary, identifying a strong trend is very important to have an effective trend trading strategy.
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Trend trading can be laborious with many variables to consider. The pros and cons list can help you determine if trend trading is right for you.
Position trading is a long term strategy that mainly focuses on fundamentals, however, technical methods can be used such as Elliot Wave Theory. Smaller and smaller market movements are not considered in this strategy as they do not affect the broader market picture. This strategy can be used on all markets from stocks to forex.
As mentioned above, position trading has a long-term outlook (weeks, months, or even years!) for more persistent traders. Understanding how economic factors affect the market or technical trends thoroughly is essential in forecasting trade ideas.
Key levels on longer timeframe charts (weekly/monthly) contain valuable information for position traders thanks to a comprehensive view of the market. Entry and exit points can be assessed using technical analysis according to other strategies.
The Foreign Exchange Market And Forex Trading Explained
The Germany 40 chart above depicts an approximate two-year head and shoulders pattern, consistent with a potential drop below the neckline (red horizontal line) following the right shoulder. In this chosen example, the decline in the Germany 30 index went as planned technically as well as fundamentally. At the end of 2018, Germany experienced a technical recession along with the US-China trade war which took a toll on the auto industry. The Brexit negotiations did not help as the possibility of the UK leaving the EU would most likely have a negative impact on the German economy. In this case, understanding technical patterns as well as having a solid fundamental foundation allows a combination of technical and fundamental analysis to build a powerful trading idea.
The Pros and Cons list is based on your goals as a trader and the amount of resources you have.
Day trading is a strategy designed to trade financial instruments within the same trading day. That is, all positions are closed before the market closes. This can be a single trade or multiple day trades.
Trading times range from very short-term (minutes) or short-term (hours), as long as trades are opened and closed during the trading day.
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The traders in the example below would be looking to enter when the price crosses the 8-period EMA in the direction of the trend (blue circle) and exit using a 1:1 risk-reward ratio.
The chart above shows a typical day trading setup using moving averages to determine
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