The most effective and common foreign exchange trading strategy

already existing 4497 Secondary Reading2022-4-14 18:14

Many traders who have just entered the market have a confusion - should I be a day trader, band trader, or long-term trader? It is normal to have such confusion because many people are not familiar with these trading strategies.


Foreign exchange trading strategies can help traders determine whether to purchase or sell currency pairs. Multiple trading strategies can be used, each requiring different levels of technical and fundamental analysisAll strategies exist continuously, from minutes to a day, all the way to long-term analysis of price momentum trends.


Traders can choose one strategy or combine several, but all strategies can help increase the potential for foreign exchange trading.Below, we will introduce several common foreign exchange trading strategies to help traders weigh the pros and cons of each strategy.


1、 Position trading


Position trading is a longer-term trading method, where you may hold orders for weeks or even months. According to this trading strategy, your trading time frame is usually daily or weekly.


These types of traders heavily rely on fundamental analysis in their trading, such as non-agriculturalGDPData, terrorist data, etc. However, they will also determine the best entry and exit timing based on technical analysis.


For example, if you have analyzed the fundamentals of the euro against the US dollar and are bullish on that currency pair. However, do you think the current price is not a good time to enter. So you have to wait until the euro reaches support against the US dollar before entering. If your analysis is correct, you can take a step forward and enter the market at the beginning of a new trend.


This trading strategy may seem simple and easy to understand, but let's take a look at its pros and cons:

Advantages:

  1As it is a medium to long term trading, you don't need to spend a lot of time monitoring the market every day;

  2There is no need to worry about short-term price fluctuations, as psychological pressure will be relatively low;

  3Can improve your risk return ratio.

Disadvantages:

  1A profound understanding of the fundamental factors driving the market is required;

  2The requirement for capital is relatively high because your stop loss will be relatively high;

  3Due to the relatively small number of transactions, it is not necessarily profitable every year.

This trading strategy is somewhat similar to trend tracking strategy, with the only difference being that trend tracking relies purely on technical aspects and does not use any fundamentals.


2、 Band trading


Band trading is a medium-term trading strategy, with your holding period ranging from a few days to several weeks. The time frame for transactions is usually1Hour chart and4Hour chart.


As a band trader, one typically captures a single trend in the market. The common practices of such traders are as follows: long at support level, short at resistance level, enter trading at breakouts, pullbacks, or rebounds on the moving average.


Therefore, for band traders, learning support and resistance levelsKTheoretical analysis of line shapes and moving averages is a fundamental skill.


Here's a dollar/Example of Japanese yen volatility trading: This type of trading also has advantages and disadvantages:

Advantages:

  1Don't give up your full-time job just to become a band trader;

  2There are many trading opportunities, so there are also more profit opportunities.

Disadvantages:

  1Unable to control major trends;

  2The risk of holding overnight positions.


3、 Intraday trading


Intraday trading is a short-term trading strategy, and the holding period of such transactions is usually very short, usually calculated in minutes or hours. Transaction Time Framework Usually5Minutes or15MinuteKLine diagram. This type of trading strategy is somewhat similar to band trading, but its trading frequency is higher.


As an intraday trader, the most important thing is to capture intraday fluctuations. This also means that such traders usually take action during the period of maximum market volatility within a day, as volatility means opportunities for them to make money. They are somewhat similar to band traders in choosing entry points, usually looking for support and resistance levels, but what they see isKThe period of the line graph is different.


For an intraday trader, the fundamentals or long-term trends of the economy are irrelevant. Their main tool is technical analysis, which only requires determining direction and then deciding whether to short or long.


Give an example of the exchange rate between the US dollar and the Canadian dollar:4On the hourly chart, the United States and Canada1.29There is a resistance level at the position. If the price cannot break through it, the probability of the subsequent trend will decrease.


Additionally, in the15minuteKOn the line chart, the currency pair has formed a straight downward trend, which is a signal of short selling. At this point, as an intraday trader, one needs to short and profit within the blue box area.

There are two main benefits to choosing intraday trading. Firstly, if you do well, you can see an increase in account funds every month. Secondly, there is no overnight risk because intraday trading involves closing positions on the same day.


There are also many drawbacks: day traders need to constantly keep an eye on the market, which can put a lot of pressure; If unfortunately encountering the Black Swan incident, the losses will far exceed expectations; Day traders need to spend a huge time cost.


4、 Ultra Short Term Trading


It also has a less elegant name - scalp trading, its English name isScalping. The meaning placed in the foreign exchange market is to gradually obtain and accumulate small profits through multiple operations.


It is not recommended for ordinary traders to adopt this trading strategy, as trading costs will gradually erode your profits. And compared to robots, people have an irreparable disadvantage - their reactions cannot match those of computers. This trading strategy requires extremely high speed, and the holding time may only be a few minutes or even seconds.


Short term traders need to constantly monitor market trends, and their main trading tool is order flow, which will display buying and selling orders in the market to users.


This trading strategy has both advantages and disadvantages. The advantage is that there are a lot of trading opportunities every day, and skilled trading experts can earn ten or even dozens of times the profit by using this strategy. But it is not a perfect strategy, being able to bring high returns means having high risks.


Individual traders may have insufficient or even no understanding of the risks associated with this strategy. Many individual traders who use this strategy to trade often end up selling out after earning a few smiling profits. In summary, this ultra short term strategy mainly includes4Major risks:

It is very difficult to predict price fluctuations from a few points to several tens of points;

The development of algorithmic trading puts people at a disadvantage;

Cost issues caused by point differences;

The dual pressure of physical and mental well-being.

Of course, the risks are not limited to these four points, but those who can successfully apply this strategy are definitely those who have overcome these four points.


5、 Overtrading strategy


Many people may not have heard of this trading strategy because it isRayner TeoA strategy invented by oneself. This is a trading strategy he discovered based on his own insights while engaging in self operated trading.


The so-called excessive trading strategy refers to the trader's ability to trade within a shorter time frame. If the market is favorable to him, he can increase profit targets or track stop losses over a longer time frame.

For example, in the following context, the exchange rate between British pounds and Japanese yen1On the hourly chart, you enter the market after a price breakthrough, and in the end, the price quickly moves in a favorable direction for you.


At this point, what you need to do is not search for an exit point, but switch to4hourKOn the line chart, follow20MAUsing this moving average to set a tracking stop loss to pursue greater profits. If your judgment is unfortunately wrong, when the price is below20MAAt that time, you can leave.


There are many ways to engage in excessive trading, but the core mindset remains unchanged and can be summarized into two points:

  1Find the entry point within a shorter time frame;

  2If the price is moving in a favorable direction, consider setting a stop loss exit within a higher time frame.

The advantage of this trading strategy is that it can obtain a more objective risk reward ratio and has lower risk. The downside is that traders must have a thorough understanding of all time frames, and only in rare cases can they make big money for you.

For every trader, choosing a trading strategy that suits them can achieve twice the result with half the effort and save a lot of money, time, and energy. Everyone should choose the most suitable trading strategy based on their trading goals, available time, and personality.


VI. Swinging Trading

For traders who prefer a medium-term trading style, this trading method can hold positions for several days, so there is swing trading, which aims to profit from price changes by identifying "swing highs" or "swing lows" in price changes. Trends.

It is necessary to carefully analyze the price trend to identify where to enter or exit the transaction. Economic stability or political environment can also be analyzed as an indicator of possible price trends in the next step.


The volatility depicted by the fluctuation between one value and another is used to trade selected financial instruments. Some traders choose to hold stocks for a few days, while others prefer to base their holdings on monthly price changes.


When adopting a swing trading strategy, it is more appropriate to choose currency pairs with larger spreads and lower liquidity.

Although this strategy typically means spending less time in the market than during daytime trading, it does put you at risk of overnight or shortfall.


7. Hedging Foreign Exchange

 To protect themselves from the adverse effects of currency pairs, traders can hold both long and short positions simultaneously. This offsets the potential adverse factors you face, but also limits any profits.

By taking long and short positions, you can understand the direction of market development, which allows you to close positions and re-enter at better prices.


In fact, you are spending some time checking the market situation to have the opportunity to improve your position.

The decision to adopt a foreign exchange hedging strategy depends on your amount of funds, as you need to take on two positions at the same time and monitor the market time. This is also a strategy that is usually more suitable for traders who want to hedge more liquidity against major currency pairs.


Hedging trading is very useful for long-term traders, as they predict that their forex will perform poorly but then reverse as it can reduce some short-term losses.


8. Price Action

To conduct foreign exchange trading without examining external factors such as economic news or derivative indicators, price behavior strategies can be used. This involves reading candlestick charts, And only use them based on price trends to identify potential trading opportunities. Usually, this strategy should not be used alone, but should be used in conjunction with other strategies such as swing trading or intraday trading to help traders take the next step.

Using a price action strategy means you can see real-time results without waiting for external factors or news outbreaks. However, for those who may use price behavior strategies, a key consideration is that it is highly subjective, so although one trader may see an upward trend, another trader may predict potential opportunities for that specific forex pair or time period.


 Conclusion:As far as foreign exchange trading strategies are concerned, no strategy can always remain successful. But these strategies, combined with wise risk management methods, can help you highlight trading opportunities in a wide range of foreign exchange markets 。

Your selection strategy will depend on your trader type and the time you can allocate to trading. This also depends on the currency pair you want to trade. For example, when using currency pairs with higher volatility, one may prefer to use volatility trading, while in currency pairs with lower volatility, position trading strategies may be more appropriate.

Regardless of the strategy chosen, use necessary risk management tools(Such as stop loss orders)They are all very important.


Finally, before learning any forex trading strategy, you must consider whether your investment goals, trading time, and trading strategy align with your personality!

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