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Forex Trading Strategies

The Foreign Exchange can be one of the most frenetic, fast-paced and volatile markets available to traders, so deciding on a strategy that best suits both your trading style and aims is going to be instrumental in your trading success. A big factor in your success is going to come from choosing an appropriate strategy, but another part is going to be in your ability to stay flexible if the markets call for it. As a result, we’ve compiled a 5-part list of Forex trading strategies to better help you decide on what will suit your needs.

News and Forex Trading

Part of what makes Forex trading exciting is the influence that 24-hour news cycles have on its market prices. Opening and exiting positions based on the news, or ‘news trading’, can be an effective means of predicting new trends in market prices, playing to the fast-paced nature of the Forex trading markets. The concept of news trading is simple, but implementing it as a strategy requires dedication, analysis and a recognition of what news releases you should be keeping track of. Areas of news affecting the Forex markets are wide-ranging, but generally speaking, the most influential economic weekly releases will consist of the interest rate decision, retail sales, inflation, unemployment and industrial production. For U.K. users, the times at which you should be paying particular attention to releases will be between 2:00 and 4:30, but like we say, maintaining a constant awareness of economic news will really aid in realising your trading goals.

Day Trading

Short-term trading is often referred to as day trading, with the idea being that traders open and close trades on the same day. Day trading is about as fast-paced as it gets, and given that markets typically only move so far in the space of a day, traders often employ riskier trading strategies in order to make a profit. The chart (right) summarises the investment horizons of trading on different timeframes; as you can see, a high volume of succesful day trades would need to be made in order to equal a month or year’s profitable investment.

Day trading tends to be more popular amongst professional traders, and this is because it is not a strategy that suits the everyman. Day traders need to be on the edge of their seat, primed to buy and sell based on constant analysis throughout the day. This fast-paced trading strategy therefore requires not only an instinctive knowledge of the markets, but the snappy decision-making necessary to put you ahead of the curve. It can also be difficult for beginner traders to pick up, because day trading lends itself to market volatility, and without first having a solid understanding of the markets in times of relative tranquility, new traders may struggle to match the pace of their analysis to that of the markets.

Recognising Trading Patterns

Committing a select few trading patterns to memory is a really good idea for improving your chances of success in the Forex markets. Successful Forex trading essentially boils down to the speed with which you can spot trends, so building up an instinctive recognition of some key patterns from the outset could make all the difference going forward.

Widely regarded as one of the best-performing chart patterns, the Head and Shoulders pattern can be both a topping formation after an uptrend or a bottoming formation after a downtrend. Patterns in price charts can be used to anticipate upcoming rises and falls in market prices, and using a correct Head and Shoulders pattern reading, you could effectively preempt both. As seen in the chart (right), a regular Head and Shoulders pattern will see a sudden push in the market followed by a pullback, forming the left shoulder, a drop followed by a larger rise called the head and a final pullback and surge making up the right shoulder. A standard H&S top pattern therefore heralds the fall of a currency pair once the pattern is completed

Bull Flag Pattern

The Bull Flag pattern provides an alternative to the H&S pattern, with the advantage of being able particularly recognisable, having high success rates and a favourable risk-to-reward ratio. Bull Flag patterns begin with a strong, almost vertical uptrend with large range, known as the flag pole. This initial steep upward action draws attention to itself, helping new traders to spot and anticipate the movement of the market. In a standard bull trend pattern, you’ll then see the currency pair retracing in a downward sloping price channel. If you spot a bull flag, remember that the sharper the spike on the flagpole, the strength the bull flag is likely to have. It may help to understand the psychological

Trendlines

Learning how to correctly draw trendlines can be helpful for beginner traders in particular, because they present a means of cutting through the ‘noise’ created by waves and movements in price charts.  Trendlines are useful because they enable you to focus on the patterns present in the price charts in times of volatility, freeing you up to focus on the all-important preempting of new trends.

So how do you draw trendlines on your price charts? Well, the answer is probably already in front of you. Most trading software will give you the option of using a trendline or ‘line tool’. Once you’ve found this tool in your respective software, you can draw an uptrend line by connecting the low of one wave to the low of the next, then simply extend this line out to the right so as to give you an estimate for where the next wave lows could possibly occur. Similarly, for a downtrade, you just need to connect the high of one price wave to the next price wave’s high point and extend the line to the right. This is your projected future for the next wave lows that may occur. Easy, right?

Unfortunately, trading effectively using trendline analysis requires a little more finesse than a basic click-and-drag approach, but as with all things Forex, understanding the basics inside-out is going to set you in good stead for the future.  That’s why it’s a good idea to start with longer timeframes when learning to use trend lines, because they typically provide more accurate readings. This should prove beneficial when starting out because your predictions are likely to be more successful. Once you start to feel more comfortable with the use of trendlines on longer timeframes, start to reduce the timeframes you use to increase the likelihood of capitalising on market volatility.

Support and resistance

Support and resistance levels in Forex trading can serve as a useful guideline for determining entry and exit points. The term simply refers to the levels on the chart that the price can neither drop below nor rise above, granting traders an insight into the direction of the market. Support refers to the levels below the price and resistance is the levels acting as a buffer above the. New resistance levels are created when the price breaches the current support and resistance levels, which means that the most reliable support and resistance levels are the oldest, because they’ve maintained a relative constancy during more testing.

Learning to set and use support and resistance levels is really important when starting out in trading because the price of every Forex pair is informed by different support and resistance levels, regardless of the strategy or tools you use.

Conclusion

Choosing a strategy that matches both your time and capital investment capacity from the outset can save you a great deal of time (and money) in the long run, so take some time to pare down what it is you’re looking for in your time on the Forex markets. Forex trading can be fast-paced and volatile, so preparation is going to be key to minimising your exposure to risk on the markets.

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