Although trading is simple, making money on the forex market requires planning and analysis, and patience. As with other financial markets, forex is prone to price fluctuations from day today, and it takes discipline not to accept these at face value and make impulsive moves with your investment. For this reason, having a strategy pays off. Aside from setting ground rules, it helps you act consistently rather than giving in to emotion when volatility occurs.
Trying to figure out which Forex trading strategies you should use? There’s no guarantee against risk, but these three are time-tested and have brought about many wins:
Position trading takes a long-term perspective, such that traders look out for strong macroeconomic trends over weeks, months, or even years. It’s important to know your way around market concepts and data interpretation, and specialized tools such as technical studies and fundamental analysis can narrow down the timing. Aside from this, you should have a significant capital base to work with. While you’re better off not hoping for short-term gains–you might not profit every year—it’s convenient in that you only need to check now and then, unlike with trading where you have to be glued to your screen for hours daily. The extended timeline also drowns short-term volatility, and the risk-to-reward ratio can be as good as 1 to 5. All in all, this is a relatively conservative strategy because it almost always guarantees money as long as it’s properly practiced and you’re willing to wait.
Range trading is another strategy that downplays risk. As opposed to trend trading, it’s popular when there’s no strong market direction, and prices seem to bounce back and forth between a constant maximum and minimum. To check if a range exists, traders usually draw two horizontal lines on the chart to mark out the support (minimum) and resistance (maximum) zones, such that prices stay in between while occasionally hitting these extremes. A rule of thumb is to declare it a range if the prices hit the support and resistance zones at least twice each over a close period of time. Once the range is determined, traders try to enter or exit as close to its boundaries as possible, buying near the support zone and selling near resistance. To refine the timing, they may turn to technical analysis or even oscillators.
A breakout sounds like exactly what it is–when the price goes beyond the usual range between support and resistance, signifying the start of a downward or upward trend. It can be tricky to assess whether this will lead to a long-standing pattern or it’s only a temporary change, but genuine breakouts often exhibit rapid momentum. This is accompanied by increased volatility as the trading volume rises, with more people getting interested and jumping in. Additionally, it’s worth observing the timeframe. The longer it’s been previously since the price has reached its current high or low, the more likely the trend will last for a while. Traders act on this by selling when the price goes below support or buying when it goes above resistance. However, look out for natural market volatility–sudden, misleading swings are common, thanks to high-frequency trading from supercomputers.
To find out which forex strategy works best for you, there are many factors to consider: goals, timeframe, technical knowledge, and risk appetite, among others. No strategy is so foolproof that it works for everyone, so experimentation is key. Whichever you choose, though, keep in mind that risk is inherent in trading, and you’ll get better at it with time and experience.