Every trader during the beginning of their career looks to try and make the best of their resources and the strategies available to them, but not all of us know the strategies that are out there.
There are a lot of different types of strategies out there for different types of trader. As you may know, the same hat won’t fit every trader’s head and this is why it is important for us to understand the options out there for you when you get started
Today we will be going through a few of the simple strategies for trading which you need to know, and once you’ve seen what strategy does what… you’ll be able to decide which one you want to try out for yourself!
The first type of trading strategy is fundamental analysis. This is one of the most popular methods for trading and it is used by most traders in some capacity.
The idea behind fundamental analysis is to use the country’s economic data to predict trends and make trades. It uses data from many different sources such as:
- Economic conditions
- Future profit outlook
- Company analysis
- Industry analysis
All of these factors make an impact on the economy and therefore make an impact on the way people will interact with different currencies. Using multiple sources of information allows traders to make an educated guess at the trend of the market as a whole, and specifically, certain currencies.
Where fundamental analysis is loved by many, technical analysis is another popular strategy which is preferred by some traders. The idea behind technical analysis is to use past data and trends in order to see what will happen in the market in the present. For example, if a certain level of Interest Rate affected a currency in a certain way once, chances are it will do the same thing again this time.
Trading psychology is a big factor in trading because it uses knowledge of how people react to decisions in order to make the best possible trade. We can use an example such as Brexit here where people panicked after the decision was made and therefore started to sell GBP as a result of this. You can peg this down to people feeling uncertainty in the future of the UK’s economy as a whole.
Trend trading is a simple way of trading where people use a current trend to make trades. For example, if we look at the graph above, we can tell that the trend is heading in a downward motion, marked by blue lines. If you see a trend like this, chances are it will continue in the same direction and you can safely bet on a sell. This, of course, can change with a sudden decision, however, it provides a helpful indicator for us to use.
Momentum trading is a strategy which uses swift U-Turns in a trend in order to make a trade. For example, in the chart above, we can see a swift change which sends the value of a said currency in a downward spiral. Whenever you see a stable value and a sudden change like this, it is a good idea to open a trade as people will flood the market and swing the trade in one direction or another like osmosis.
Swing Trading is a simple strategy for new traders to follow as it allows us to use sharp changes in a market trend to make a trade which brings a decent profit. For example, here it is in a chart where the value of the currency rises, swings down and then swings back up again. You will often see a point during the market where people suddenly change their position and this is often due to indicators such as the Average True Range or Relative Strength Index.
Breakout Trading is a trading strategy which uses support and resistance lines to help indicate the likelihood of a trade. Usually, the value of a currency will stay between the support and resistance levels because a lot of retail traders use the same indicators and when the value of a currency reaches either line, most people will push it back the other way.
However, this isn’t the case all of the time. There are instances when the market changes, and during these instances, people will react in an unpredictable way. We all know that the news and politics has a huge impact on the foreign exchange market, and when something happens in the market such as a political event, the value of a currency can sway either way in a short amount of time.
We can see sharp changes in market value through breaks, and this will allow us to make a trade and make a profit utilising this volatility.
Trend Retracement is a type of trading which can be useful to try to make a profit. When looking at the market trend as a whole, there will be a general upward or downward trend depending on the strength of bulls and bears on the value of a currency.
Even when a trend is generally moving in one steady motion, there will be times when it will ‘retrace’ and briefly push the other way. The example above shows that the trend is going upwards generally, however, there is a brief moment where bearish traders have gained control to push the price down. You can use this small decrease in value and make a trade during the retracement to buy. Therefore when the value rises again, you have bought the currency at a lower price and therefore will make a bigger profit.
Reversal Trading kind of speaks for itself. This is the act of waiting for a price to level out in the market, placing a bid here, and making the most of the change in direction it brings. For example, above we see the price dropping before shooting up. If you make a trade as the price levels out (circled in red) you will be able to buy the market at a low price and make a profit as it shoots up in value.
If you fancy trying to trade passively this year and play the long game, Position Trading can be a good strategy to take. This type of trading is used when a trader opens a position and leaves it for months on end to watch it appreciate in value.
It can be a useful technique to use alongside political news and world events because if there is a strong chance of a currency rising or falling across the scope of a year, you can make the most of this with a long term trade which you can simply check on now and again.
Carry Trading is a strategy which is incredibly popular in the forex market and it is one which a lot of traders use. This uses the high-interest rate changes of a currency to ‘carry’ a trade up or down. It is used very often with the AUD/JPY and NZD/JPY pairs as the interest changes a lot here.
A Pivot Point is a line which is drawn on your chart which depicts the average opening, closing and trading price of the previous day. This is a line which can be used as an indicator for trading by telling us whether the trading day is bullish or bearish.
A bullish day will be indicated if the value moves above the Pivot Point, and the opposite is true for a bearish day.
All of the strategies we have shared with you today are popular in the forex trading world and are ones which you should try out for yourself. Forex trading is a very subjective thing and it may take you a long while to find your flow and choose the right strategy for you. In the meantime, try different techniques and during this time you may find one which fits your style of trading.
Want to learn more? We have recently launched our Full Forex Trading Guide on Amazon which will guide you through how to trade on the forex market, which indicators you can use, and how to utilise the economic calendar for success. You can download below and make that extra step towards becoming a successful trade this year!
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