Trading Strategies An introduction to the most popular strategies and how to choose the best one for
Having placed some random trades, you would have figured out that when you place an order to buy or sell, you could potentially earn or lose money. The theory is quite simple, pick the right direction and you will make money. The important question is how do I pick the right direction?
Strategies are a systematic and planned course of action based on existing information you know of the market. There are a multitude of strategies for Forex trading. A lot are available to learn for free by doing an Internet search, books available and people that will teach these strategies for a fee. Around the world, professional traders and recreational traders alike will always hold at least one trading strategy to heart and will attribute their success in trading to following that one or many trading strategies. The following section covers some popular strategies that are used by many traders.
The Trending Strategy
The trending strategy is to follow the market in the direction that it is clearly following over an extended period of time. Currency pairs often take either bullish (up) or bearish (down) trend.
By following the trend of a particular currency pair, you are banking on the fact that the currency continues its existing direction and you are taking in a profit by following the market direction. This strategy is by far the most popular strategy method for trading currency.
Trends can be long or they can be short, meaning that there are short-term trends and there are long-term trends. An example would be that during a 6-month period, there was a bullish trend for the AUD/USD, however, in between this 6-month period there were 2 short periods where it took a bearish trend. The following is a graphical representation of the example.
If you held a buy position from the start of the 6 months to the end, you would be well in profit. Be careful when you look for your trends. Sometimes when you look at a chart and it shows a very clear trend, if you were to expand your chart to include more data it could very well show you the opposite. As such, if you are looking for trends make sure you view the time frames of all charts.
The Ranging Strategy
The Ranging Strategy occurs when a currency is trading between a set upper and lower limit and seems to constantly bounce up and down between the high and low limit. Traders take the opportunity to sell when it is at the upper limit and to buy when it is at the lower limit. Represented in the image below, you will see a sideway trend. This marks the opportunity for people who follow a ranging strategy.
The Breakout Strategy
The Breakout Strategy is the break out of a sideways trend. Usually, momentum is greatest on breakout points. A lot of traders take advantage of the breakout strategy when sideways moving prices break the upper or lower limits.
Below represents a few breakouts following some periods of sideways tending.
News Release Trading Strategy
News traders trade off economic news release. The Forex market is particularly reactive to economic news, in particular, interest rate news from the G8 countries, as well as unemployment news for each corresponding country.
News traders will have to bear in mind that the Forex market movements have already taken in to consideration existing and expected economic news. The sharp movements you see due to economic news are corrections due to unexpected news, either better than expected or worse than expected.
Another consideration to take to heart for potential news traders is that during negative sentiment news reports, currency movements generally head towards lower yielding and perceived safer currencies; USD and JPY in particular.
A good grasp of economics is generally recommended for traders wishing to start news releasing trading.
An economic news calendar is highly recommended. Forex Economic calendars show the release date for important economic news such as non-farm payroll, GDP figures and interest rate news.
Below is an example of what an economic calendar shows:
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