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Forex Trading Strategies

The forex market is the largest and most liquid market in the world. And it is important to learn some strategies before trading.

Think of a market that never closes and has the largest volume of trading from all the countries all over the world. If you’re one of those beginners, you wouldn’t think that such market exists. Well, in fact, it is the forex market.

Forex, also known as foreign exchange, FX, or currency trading, is a decentralized global market where all of the world’s currencies trade. And there are several reasons why investors choose forex trading over trading stocks.

All the currencies shown in the form of a world map

 

The Forex market is the largest, most liquid market in the world with an average daily trading volume exceeding $5 trillion. Combining all of the world’s stock markets won’t even come close to this. Additionally, it is highly accessible because it is open 24 hours a day. It also offers greater leverage than the stock market that can potentially amplify gains as well as losses.

Before trading in the forex market, you have to remember that all trade here is a trade-off between the pairs of currencies from two different countries.  Each currency pair is the economy of a country. And bear in mind that complexity plays a huge role here due to the fact that you are dealing with two major economies and their relationship with each other.

You can learn more about the basics of forex trading to give you a firmer footing in the world of investing.

If you are now ready to step into the game, then it is time to become the next forex hero. But in order to become a superhero, you need superpowers or a lot of money. But in this reality, your powers are your investment strategies.

Let us take a look at some of the useful strategies to dominate forex trading:

Forex Trading Strategies

Trend Trading

Trend trading is one of the most popular and common forex trading strategies. It is used by new and experienced traders. It is a trend-following strategy that identifies the direction that prices have been moving, then place trades in that same direction. “The trend is your friend,” is the best expression to apply to this strategy.

Basically, you have to choose trade entry and exit points based on the positioning of the price within the trend and its relative strength.

With strong trends, they tend to generate larger results. In most cases, those strong results came from moves in the direction of the preceding trend. Traders who use this strategy use various tools to evaluate trends, such as moving averages, relative strength indicators, volume measurements, directional indices, and stochastic indicator.

Range Trading

Range trading is a popular, yet simple strategy. It is also referred to as mean reversion and is similar to value investing. This strategy is based on the idea that prices can sometimes be used in markets that hold within a stable and predictable range for given a period of time, especially in economies. Most likely, this applies to currencies that are not often subject to surprise news events.

The key to this strategy is determining price points that are more favorable to you. That means it is about identifying a price level to enter where sellers stop selling and buyers are more likely to start buying. Generally, identifying levels of supply and demand will obtain these price points by performing technical analysis on the chart. The tools used in trend trading can be used as well.

Technical Analysis

The main category of forex trading strategies that are highly used among traders is technical analysis. As much as we hate looking into the past, this strategy involves reviewing the past and recent behavior of price trends on a chart. This helps to identify where they may move forward.

To make it as simple as possible, the historical price action predicts future price action. This strategy is for traders who believe that price movements are ultimately determined by supply, demand, and mass market psychology. It builds limits and ranges for prices to move upward and downward.

But keep in mind that there are no certainties when it comes to predicting exact price movements. This strategy is about identifying probabilities and taking trades when the odds are in your favor.

Lastly, it is common for traders to use technical tools, such as trends, charts, and indicators. It also involves a wide range of individual methods used for detecting currency trends.

Momentum Trading

Momentum trading is a strategy that involves buying and selling according to the strength of recent price trends. This strategy has been around for centuries as early as the late 1700s. A famous investor and economist David Ricardo used momentum-based strategies that made him very successful in trading. He bought stocks with strong performing price movements, then sold stocks with prices performing poorly.

Price momentum is like the momentum in physics, mass multiplied by velocity equals the likelihood that an object will continue on its path. The measurements of momentum are used in the short and long term, making them useful in all types of trading strategies. Tools are used to look for the strength of trends and if a trade on a particular asset may be a good bet.

However, actual momentum and price can always change at any moment depending on events that weren’t included in the calculations. That is why it is important to be careful and take preventive measures, such as setting stop-losses. This will help you against unforeseen price reversals.

Summary

A forex chart shown in the laptop

Traders have their own unique approach when it comes to trading. While others may have developed their own strategies, you too can have your own super-secret trading strategy. There are still tons of strategies out there for you to discover. You can combine them to develop to make your own hybrid versions, or research to focus more on a particular strategy.

While none is guaranteed to help you dominate forex trading, you can try different strategies to familiarize yourself with them. No need to be a master with all the strategies. However, familiarizing yourself with them can help you choose which strategy to use in any given market conditions.

There is no doubt that you will encounter mistakes along the way. But the most important thing to become a successful investor is to keep moving forward.

 

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