Currency trading, often termed as foreign exchange or Forex, refers to the buying and selling of currencies in the foreign exchange market. The main objective of this process is to generate profits. It is also referred to as ‘speculative Forex trading.’
Do you know that forex trading is the biggest trading marketplace in the world, where trading of almost $2 trillion takes place daily, with rapid growth projections? The prominent factor that distinguishes currency trading from other types of trading is its liquidity.
Though this market can give amazing returns, it carries a high level of risk at the same time. Among various risks, the biggest one is the impact of news and events on the market. However, the exact impact of the same cannot be determined as this type of trading is usually done in pairs which makes it necessary for the investors to have a carefully derived currency trading strategy.
What is a currency trading strategy?
A currency or forex trading strategy refers to a system that a forex trader utilizes to govern when to buy or sell a currency pair. There are several currency trading strategies that traders can use and are inclusive of technical analysis as well as fundamental analysis. A sound forex trading strategy enables a trader to study the market and assuredly perform trading with wide-ranging risk management techniques such as risk analysis, entry points & exit points, and trade executive strategies.
The fundamental analysis is done based on fundamental indicators like specific events that affect the economy and others. On the other hand, the technical analysis encompasses the analysis of previous trends in currency prices and their pattern is examined to determine how to move further.
Here are some of the widely chosen currency trading strategies:
- Price Action Strategy
Price action trading is one of the easiest types of trading to learn, and one of the most powerful. If you have just begun trading, learning price action trading makes a wonderful starting point.
This strategy is based on the action of price and doesn’t include any indicator or technique. The foundation of this tactic is that currency trading is precisely based on price action- bulls and bears. It encompasses the knowledge of controlling the existing price, bulls or bears, and subsequent action forward.
The most interesting part of the price action strategy is that it works well in all types of market conditions from trending to volatile, ranging, or less unpredictable. That’s why it is considered a swift, effective, and easy, and helps eliminate the clutter around the extremely volatile price variations.
A price action trader remains under impression that the only real source of information emerges from the price only. If a stock turns up, that conveys the price action trader that people are involved in buying. The trader then evaluates, based on the fierceness of the buying, whether it will possibly continue.
Price action traders don’t usually worry themselves with the reasoning behind something happening.
- Trend Trading Strategy
Being one of the most popular currency trading strategies, it is widely used by forex traders across the world. Much gets clear from its name, this trading strategy generally revolves around the running trends. A forex trader usually determines whether the shift of the existing price is pursuing an upward or downward trend and decides his entry point based on the same and the corresponding value of the trend.
When it comes to finding the most rising trading trend, traders resort to various tools like the moving average, relative strength signs, stochastic, and others. Trend trading strategy is equally effective for both new and experienced traders and it is not bothersome for traders to determine the best trends using these tools.
Even in case if a trader finds himself unable to determine the precise start of a trend, he can get involved in as early as possible and expect to get impressive profits. It is also needed to keep in mind that these trends get affected by various events such as interested rate changes, inflation, and government policies. So, it is highly recommended for a trader to keep a close watch on them.
- Counter-Trend Trading Strategy
This is another most popular currency trading strategy used by forex traders.
Due to its high success rate, this currency trading strategy is meant to increase the confidence of traders in the initial stage. The fundamentals of this strategy are based on analyzing the reverse trends.
When the extremes have been attained, the reconciliation becomes certain and this is what is analyzed by a counter-trend forex trader. According to experts, this tactic may not be easy to pursue as following up the emerging trend is quite hard to do.
The most complicated thing in this strategy is to become confident that what you’ve been taking up as extremely high or low.
- Breakout Trading Strategy
Before we move further, it is necessary to understand what breakout means. Break out refers to shifts below any support or beyond any confrontation. Price breakout from
- Initial support and struggle is a break of previous high or low
- Last punch high or low
- Big support and resistance
- Trend line or moving average
Under this strategy, a forex trader tries to enter the market at a stage where the market is breaking out of a previous trading range. If the price shifts higher than the earlier resistance standard, the trader may want to make an entry at this point expecting the prices to reach a new high. Similarly, if the price goes beyond the previous support stage, the trader may choose to sell expecting the market to dip further.
Due to high market volatility and high chances of breakouts, this currency trading strategy is quite popular among forex traders.
The currency trading marketplace is quite famous for fake variations and high volume trading is done by computers. This is where these breakouts are found to be quite effective for the majority of traders.
5. Range Trading Strategy
This is another most popular currency trading strategy today.
Contrary to trend following, range trading perceives forex traders going both long and short depending on the position of the price within that range. Generally in trend following traders will go with the usual direction of the trend, and buy goes down in an emerging trend and sell stocks in a declining one.
The key to success in range trading strategy lies in determining the favorable price levels, i.e, the price ranges at which sellers stop selling and buyers are supposed to get into buying. These price ranges are associated with the prevailing supply and demand of the currency, signified by the resistance and support.
The trader invests in currency with an expectation that the price will come down to a long-term average.
6. Position Trading Strategy
The list of popular currency trading strategies would be incomplete without the inclusion of position trading strategy.
Position trading is a mutual trading strategy where a trader maintains a position in a security for a long period, characteristically over several months or years. Position traders overcome short-term price variations in favour of indicative and profiting from longer-term patterns. It is this kind of trading that most closely look like investing, with the major difference being that buy-and-hold investors are restricted to only going extensively.
Among all currency trading strategies, position trading includes the longest time-frame. Therefore there is a higher profit potential – as well as an augmented characteristic risk.
7. Carry Trade Strategy
A carry trade in currency trader refers to a situation where a trader tries to generate profit from the variation in interest rates – called the interest rate differential – between the two currencies in a forex twosome. There are two primary approaches for a carry trade in currency trading: positive and negative.
Currency carry trades perform by allowing market participants to profit from interest rate differences between various currencies. As forex is usually traded in pairs, traders are simultaneously selling one currency while buying another. It is that level of complexity in forex trading that makes currency carry trades conceivable.
If you have been following any other currency trading strategy, do let us know by emailing us.