Do you want to trade in the forex market but you still don’t know how to do it? Do you have doubts about doing short or long term operations? Don’t you know what kind of analysis to use? If you are a trader who is starting in the exciting world of Forex and doubts assail you with any of these questions, then we present a few types of strategies, the most popular in the market, so you can decide which one suits better to your needs.
If, later, you decide to train in more depth in any of these trading methodologies, you can always find more information here (see article on trading systems) or in the different publications specialized in trading strategies that we have on this website.
Most used strategies in Forex
Trend Following Trading
This type of strategy adapts better than anything to medium or long-term movements. That is, to those transactions that are going to be closed on a day after the moment in which the position was opened. Its objective, therefore, is to find clues in the behavior of currency pairs that indicate what their movements will be in the next few days or weeks.
Thus, one of the most used tools in trend trading is the fundamental analysis, since this type of analysis focuses on political, macroeconomic, financial, natural or any other aspects that may have an effect on the price of a currency. For example, a comment by a member of the ECB on a possible rise in the interest rates of the euro would be a compelling reason, through fundamental analysis, to bet on an increase in the value of this currency.
Therefore, trading by trends requires extensive knowledge of macroeconomics, political news and always be aware of the latest news. That or have an automated trading system that does that job, of course.
Day trading is practically in the antipodes of trend trading. What day trading is looking for is to open and close a trade on the same day, for which you need to find patterns and movements in the price that do not lengthen more than a few hours.
In favor of this type of trading strategy plays the fact that the rates that have to be paid for these transactions is much lower than those of medium or long-term trades. Normally, in any Forex transaction a fee (the Forex rollover) is charged for each night that it remains open and, therefore, if the positions do not last more than one day they will be much more affordable.
Usually the technical analysis is used in these types of strategies, which, instead of focusing on the more social aspects of the economy, focuses the analysis from a much more statistical point of view, based mainly on the use of charts and paradigms. What counts, in the end, is to anticipate the next move, regardless of the reason it is caused.
To sum it up in some way, we can define scalping as any trading strategy that aims to reap benefits in very short periods of time, as a kind of shorter day trading. In fact, sometimes, scalping trades can take very few minutes.
Of course, this method involves two factors that are unavoidable: on the one hand, the obligation to be aware of market movements, even the smallest ones; on the other, the need to perform many trades of this type in one day if you want to achieve a respectable amount of benefits.
For this strategy to be profitable, it is very important to have great self-control, being essential in this sense the trading psycology, as well as acting in a methodical way when doing the money management, making an efficient adjustment of the stop-loss in each trade. This means that this methodology is not used by conservative traders or traders who suffer a lot of stress when performing each operation. In parallel, it requires a great speed of action, analysis and decision making.
Unlike the three types of previous strategies, trading in ranges starts from the premise that almost any price movement starts a path that will then return to the starting point. That is, the idea in range trading is to identify that point of return and wait with our trade that the price will fall or rise again to that point.
One of the main tools used by range Forex traders is resistance and support levels, basically the maximum and minimum points, respectively, between which the price of an asset is usually moved.