One of the most crucial elements of currency trading is figuring out a profitable forex trading plan. To assist you make money in the market, several traders have created a wide range of trading tactics.
Individual traders must, however, determine which forex trading strategy best fits their trading preferences and level of risk tolerance. Nothing is one size fits all in the end.
Traders should concentrate on closing out failing deals and making more winning ones in order to turn a profit. Any trading method that helps you get closer to this objective can end up being the most successful one.
How to pick the optimal trading approach for forex
It’s critical that we comprehend the best practices for selecting a trading strategy before moving on to our discussion of the most often used forex trading strategies. In this process, there are three primary components that need to be considered.
Duration
It’s critical to select a time frame that works for your trading style. The difference between trading on a weekly chart and a 15-minute chart is significant for a trader. If your preference is to be a scalper—a trader who looks to profit from minor market movements—you should concentrate on charts with shorter time frames, such as those that range from one minute to fifteen minutes.
Conversely, swing traders are more likely to create good trading chances by utilising both a daily and a 4-hour chart. Therefore, make sure you have an answer to the following before deciding on your favourite trading strategy: how long do I want to stay in a trade?
Various trading techniques are corresponding to different time periods (long, medium, and short-term).
Quantity of trading opportunities
You should respond to the question, “How frequently do I want to open positions?” when selecting your approach. You should concentrate on a scalping trading technique if your goal is to open more positions.
Conversely, traders are likely to spend less time in front of charts if they focus more of their time and resources on analyzing fundamental aspects and macroeconomic news. As a result, they prefer to trade using larger positions and longer time frames.
Position Size
Determining the appropriate deal size is crucial. Understanding your risk sentiment is essential for using successful trading techniques. It’s dangerous to take on more risk than you can handle because it can result in larger losses.
Setting a risk limit for each trade is a well-liked tip in this regard. To avoid risking more than 1% of their account on a single trade, traders typically place a 1% limit on their trades.
For Example, if the risk limit is set at 1%, you should risk no more than $300 on a single trade if your account is worth $30,000. You can change this restriction to 2% or 0.5%, depending on how comfortable you are with risk.
Generally speaking, the larger the position size should be, the fewer trades you are aiming to open, and vice versa.
Three successful strategies
You should now know how long to give yourself, how big you want to take a position on a single trade, and roughly how many trades you want to open in a given amount of time. Three well-liked and effective forex trading techniques are provided here.
Scalping
A well-liked trading technique that concentrates on minor market moves is forex scalping. Using this method, a lot of trades are opened with the hope of making little profit on each one.
Because of this, scalpers aim to produce many smaller gains in order to produce larger profits. This is the exact opposite of maintaining a position for several hours, days, or even weeks.
Because forex is volatile and has high liquidity, scalping is highly common. To profit from changes in little amounts, investors seek out marketplaces where price movement is changing continuously.
Traders of this kind typically aim for gains of approximately five pip every deal. Still, given that gains are steady, predictable, and accessible, they are hoping that a sizable number of trades will be profitable.
You cannot afford to stay in the trade for an extended period of time when scalping. Furthermore, scalping takes a lot of time and focus because you must continuously examine charts to identify new trading opportunities.
Now let’s see how scalping actually functions in practice. The 15-minute EUR/USD chart is seen below. The foundation of our scalping trading approach is the notion that we want to sell any effort by the market to climb above the 200-period moving average (MA).
We produced four trading chances in approximately three hours. The price action rotated lower each time, having gone just over the 200-period moving average. The price movement never moved more than 3.5 pip above the moving average (MA), and the stop loss is placed 5 pip above the MA.
Since our goal is to achieve a large number of successful trades with lesser profits, our take profit is similarly 5 pip. Therefore, using a scalping trading approach, a total of 20 pip were acquired.
Day-trading
The practice of trading currencies inside a single trading day is known as day trading. While the day trading method is applicable to all markets, it is primarily utilized in forex. This method of trading suggests that you initiate and close every trade in a single day.
To reduce risk, no position should remain open overnight. As opposed to scalpers, who aim to spend only a few minutes in the markets, day traders typically monitor and manage open trades throughout the day. The most common time frames used by day traders to come up with trading ideas are 30 minutes and an hour.
News is often the foundation of trading strategy for many day traders. Scheduled events, such as GDPs, elections, interest rates, and economic indicators, frequently have a significant effect on the market.
Day traders typically set a daily risk limit in addition to the limit on each position. Traders often decide to set a daily risk limit of 3%. This will safeguard your funds and account.
The GBP/USD exchange rate is fluctuating on an hourly basis in the chart above. The foundation of this trading approach is the identification of a chart’s horizontal support and resistance lines. Since the price is rising in this instance, our attention is on resistance.
The price movement instantly turns downward after tagging the horizontal barrier. In order to allow for a slight breach of the resistance line, our stop loss is placed above the previous swing high. Consequently, an order to stop losses is set 25 pip above the entry point.
To take a profit on the downside, we employ horizontal support. In the end, the price action turns downward, earning us a profit of almost 65 pip.
Trading positions
Trading positions is a long-term tactic. This trading method, in contrast to scalping and day trading, is mostly centred around fundamental issues.
This method does not take into account small market changes because they have no bearing on the overall market picture.
To spot cyclical patterns, position traders frequently keep an eye on political developments, monetary policies of central banks, and other key variables. Over the course of a year, a successful position trader may only open a few deals. Profit objectives in these trades, however, are probably going to be at least a few hundred pip for each trade.
Because their position may take weeks, months, or even years to play out, traders using this approach are typically those who are more patient. On the weekly chart below, you can see how the dollar index (DXY) is changing its trend direction.
The massive monetary boost that the US Federal Reserve and the Trump administration gave the struggling economy is what caused a reversal. The dollar loses value as a result of an increase in the quantity of active dollars. Position traders on trillion-dollar stimulus programs are probably going to start selling the dollar.
The macroeconomic climate and long-term technical indicators are two variables that could influence their goal. They will look to get out of the trade whenever they think the present bearish trend is about to cease from a technical standpoint. In this case, four months later (March – July), the DXY rotates at the multi-year highs and trades more than 600 pip lower.
Conclusion
Finding the ideal forex trading strategy necessitates striking a balance between trading frequency, position size, and time commitment. Before choosing a strategy, traders should choose their level of risk tolerance and chosen trading style (position, day, or scalping). While day traders are better suited for people who want to actively monitor the market, scalpers are more suited for those seeking for rapid profits. For those with patience and a great interest in fundamental analysis, position trading is a long-term approach. The optimal approach is ultimately one that focuses on minimising losses and maximising profitable transactions, and it is in line with your objectives and risk management plan.
FAQ’s
Which time window works best for trading forex?
Based on your trading style, there is a best time frame. Position traders look at long-term charts, such as daily or weekly, while scalpers utilise shorter time frames, such as 1 to 15 minutes, and day traders use charts that last 30 to 1 hour.
How much should I risk on each forex trade?
In a single deal, most traders never risk more than 1% of their account amount. Nevertheless, this can change based on your level of risk tolerance; some traders choose to use between 0.5% and 2%.
What distinguishes day trading from scalping?
Day trading entails maintaining holdings during the trading day but not overnight, whereas scaling focuses on rapid trades to generate little profits in a matter of minutes.
Can I use long-term tactics while trading forex?
Certainly, position trading is a long-term approach in which traders concentrate on significant market changes caused by macroeconomic variables. Weeks, months, or even years may pass between trades.
How important is risk management in forex trading?
In order to prevent large losses when trading forex, risk management is essential. Essential practices include having a daily risk limit, risking a modest portion of your account, and setting stop-loss orders.