Popular Forex trading strategies
There are many different currency trading strategies that have been found to be reliable and profitable. The factors that determine an effective Forex trading strategy include:
- Market selection: Traders must select the currency pairs they will trade, and become experts at reading those pairs.
- Position sizing: Traders must decide the size of each position in order to control the amount of risk in each trade.
- Entry points: Traders must establish rules controlling when to enter a position in a given currency pair.
- Exit points: Traders must establish rules controlling when to exit a position and when to close a losing position.
- Trading tactics: Traders should establish rules for how to buy and sell currency pairs, including the selection of the most suitable execution technologies.
Trend trading is a popular trading method with a successful track record. Using this strategy, traders identify an upward or a downward trend in a currency price movement using technical analysis and then decide when to enter or exit the market accordingly.
A simple and popular Forex trading strategy, range trending is based on the idea that a currency will return to its point of origin regardless of the direction in which it trends. Traders base their trades on the possibility of prices trading at the same levels several times and they may benefit from fluctuations several times.
A ‘breakout’ refers to the point when the price breaks out of a consolidation or trading range, or when the market breaks beyond a key support or resistance level. Breakout traders aim to profit by entering the market at the point of breakout. Breakouts produce the best results when traded in the direction of the underlying trend.
Momentum trading is based on the assumption that strong price movements in a particular direction likely indicate that the trend will continue in the same direction. Moreover, weak movements may indicate that a price is losing strength and may be heading for a reversal.
Countertrend trading, on the other hand, refers to when traders aim to anticipate a reversal in a price trend. Traders seek to enter a trade ahead of the market in order to make a profit from the reversal. Countertrend trading is considered more complex and high-risk as reversals can be difficult to identify.
Pivot point trading
In pivot point trading, traders aim to determine resistance and support levels based on an average of the previous trading session high, low and closing prices. The theory is that the average can help to predict the next session’s likely highs and lows, and intraday market reversals. These averages are widely used in the market and are therefore considered a healthy gauge of how long a short-term trend may continue. Additionally, the averages may predict whether a particular range has been surpassed and a new breakout will occur.