Top Ten Forex Trading Strategies - mersano/Article GitHub Wiki
With regards to daily trading volumes, the foreign exchange (forex) market is by far the largest in the entire world. Every day, roughly $5 trillion of financial activity takes place on this market, meaning that anyone who is interested in trading has a natural duty to—at the very least—understand how it operates.
In general, the forex market is characterized by high volume trading, high levels of liquidity, and its uniquely international character. The market operates through the consistent exchange of currency pairs (the most common being the United States Dollar and the Euro) whose exchange rates fluctuate throughout the day. By consistently investing in currencies right before they are about to increase in value, you can quickly establish yourself as a successful forex trader.
The forex market is not without risk because, as is the case with all volatile assets, the exact relative value of a given currency can be difficult to predict. However, there are many different approaches you can take to trading that can help you navigate the market with a greater sense of precision. In this article, we will briefly review some of the most popular forex trading strategies and also discuss how they can be successfully employed.
- Position Trading (Fundamental Analysis)
Though many forex traders are day traders (opening and closing multiple positions a day using technical analysis), there are some successful strategies that involve holding longer positions as well. Position trading uses fundamental analysis, meaning that you should open your positions based on what you think the intrinsic value of a given currency may be. This involves closely monitoring economic metrics such as GDP, stock values, employment rates, and others. If you believe that a nation’s economy is on the verge of expanding in intrinsic value, then you should invest in that currency and then close your position when you believe it has reached its zenith.
- Executing Stop Loss Orders
As stated, the forex market still involves some inherent risks. If a currency happens to begin losing value shortly after you have opened a position, then your total wealth will begin to decrease. Fortunately, even for day traders, using stop losses can help you automatically cut your losses before the value of a currency has fallen too far. Stop losses trigger an automatic trade once a price drops before a certain level (effectively cutting your losses). Conversely, stop limit orders cause you to cash out a position once the price has increased a specific amount.
- Price Action Trading
Technical indicators are an important part of forex trading, but reading price graphs are similarly quite important. Price action trading is a broad term that may encompass a wide variety of different strategies including swing trading, resistance testing, and consolidation. With a price action trading strategy, the goal is to monitor price graphs and invest immediately before you believe a price increase is about to occur. Similarly, if you believe a price decrease is about to occur, then you may want to consider assuming a short position or investing in currencies that have typically demonstrated a negative correlation with each other.
- Exploiting Opening Volatility
If you are a day trader, one of the most important things for you to recognize is when the market is about to become more volatile. Volatility—whether it is generally pushing the market in an upward or downward direction—will result in the greatest number of opportunities for you to earn a short-term return on your investment. Regardless of what else is going on in the global economy, the most volatile times of the day occur when the major markets begin to open. Major markets include Tokyo, New York, and most significantly of all, London. The end of the trading day also experiences a significant amount of volatility as well.
- Buying Support, Selling Resistance
Support and resistance are frequently referred to when discussing price action trading. Essentially, instances of support can be considered to be occurring immediately before a price increase is about to occur. On the contrary, instances of resistance can be considered to be occurring right before a price is about to fall. These instances can be difficult to identify because they may occur contrary to the current trend (for example, prices may be increasing while there is an instance of resistance). In order to master the art of entering and exiting these positions, you should familiarize yourself with technical indicators.
- Momentum Trading
Momentum trading involves some of the same principles as price action trading, but—generally speaking—is uniquely characterized by having more patience before opening a position. Momentum traders recognize that both price increases and decreases will both inevitably occur throughout the day. Consequently, in order to position themselves to earn the greatest possible return on investment, momentum traders closely monitor various signs indicating that a relative value increase is in the process of occurring and then invest in that specific position as soon as it begins to gain momentum.
- Follow the Moving Average
When you look at moving average charts, it can be very easy to find yourself a bit overwhelmed by all of the apparent “noise” that exists there. However, when you break moving averages down to their fundamental components, they are actually quite easy to follow. Essentially, moving averages demonstrate the average value of a specific currency within a specific set of parameters. Moving averages may be calculated over a period of hours, days, weeks, or even longer. By taking the time to look at multiple different timeframes, you can get a better understanding of how a currency has been performing.
- Options Trading (Calls and Puts)
The options market makes it possible for owners of an underlying asset to be sell that asset in the future at a specific price. Conversely, this market also creates a wide variety of opportunities for investors hoping to exploit assets that are priced differently from market value. Learning to use calls (the right to buy in the future at a specific price) and puts (the right to sell in the future at a specific price) can help you protect yourself from the risk of changing prices and create unique opportunities for growth.
- Diversify Your Currency Holdings
As is the case with all areas of finance, diversification has proven to be one of the most important principles in the forex trading market. By diversifying your portfolio, you can reduce the risk that is connected to holding a single currency. For example, if the dollar sudden loses its international spending power, holding GBP or Euros will protect your portfolio from liquidity damages.
- Using a Strategies Tester
Clearly, there are many different strategies that can be used in the forex market. There is no “right” formula that will always guarantee a return on your investment and, because of this, it may take some time to develop an approach that works for you. A forex “strategies tester” is a program (often free) that allows you to spend pretend money and test new strategies against the real market. Once you have been able to consistently succeed while doing this, you will likely be ready to begin actually investing.
Conclusion
The forex market is absolutely massive and involves many different moving pieces. The more you can educate yourself about this market and the various strategies involved, the more likely you will be able to establish yourself as a successful forex investor.