Every Forex trader needs to develop a Forex trading strategy. Strategies can be defined as the preset rules set by the Forex trader that determines the right time to enter into a trade and when to close the trade. The strategies can help the trader to predetermine the entry price, stop loss and also take profit from that particular trade. There are so many Forex trading strategies all over the place and many more are coming up regularly.
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Before you use a Forex trading strategy, you should first find out how reliable that strategy is so that you will not make wrong moves. How can you check if a Forex trading strategy is reliable? All you have to do is to back-test that strategy. Back-testing involves an assessment of all the previous performances of the strategy to know if it can be trusted for Forex trading or not. There are different categories of Forex strategies, which are:
- Short term strategies
- Long term strategies
Another type of Forex trading strategy is active trading, which is a strategy involving “beating the market” via the timing and identification of profitable trades; this strategy is one of the best for short term traders, who are only looking for sort holding periods. Other types of Forex trading strategies will be discussed in the course of this write-up.
Day trading strategy
This strategy is considered as the most popular of all active trading strategies. This strategy is usually considered as another name for active trading. It is a method that has to do with the buying and selling of securities within the same day. The trading positions are also closed within the same day without any position being held overnight. Most professional traders prefer day trading, examples of which are market makers. However, many novice traders also use this method of trading today.
This strategy is related to the buy-and-hold strategy and not related to active trading in any way. Be that as it may, this trading strategy can look more like an active trading strategy when it is used by a professional trader. Traders using this strategy make use of longer-term charts; they can use daily or even monthly charts to make trading decisions. Their trading decisions are determined by the trend. A trend trader seeks to take advantage of lower highs and higher highs for trend determination. Such traders seek to jump on and ride the trend for as long as possible.
This is also another form of Forex strategy. Swing traders are known to enter into a trade immediately a trend breaks. There are usually some forms of price volatility as the new trend attempts to get itself established. A swing trader will buy or sell when the volatility of the price starts. Swing trades are usually held for over a day. However, they are only held for a short period per trade. Swing traders usually use either fundamental analysis or technical analysis to determine their trading decisions.
The scalping strategy is considerably popular among Forex traders. It is also considered as the quickest of all available Forex trading strategies. A scalper looks to take advantage of price gaps that occur consequently of order flows and bid-ask-spreads. Scalpers buy at the bid price and then sell at the asking price. The difference between the price points translates to the profit. Scalpers hold their open positions for just a short period and this helps to reduce the risk of losing their investment.
Most scalpers do not attempt to trade large high volumes. Scalpers do better during small market moves occurring frequently and they can open and close scores of trades per day.