There are many different ways to approach forex trading, ranging from taking advantage of minor price movements when scalping to holding long term positions trend trading. There is no single trading style that offers the best results consistently. Instead, it’s up to you to find the trading style that best meets your financial goals, risk appetite, personality and available resources.
You can open aDemo Account with Pocket Trader to explore different trading styles across different assets before you start trading with real money. Pocket Trader is an essential tool for anyone looking to lift their trading game, with an active community of experienced traders that can help you find your preferred style and refine trading ideas.
In this post, we’ll go through 5 basic trading strategies you need to know to master the forex markets.
The scalping trading strategy involves placing very short-term trades, with the aim to capitalise on minor price movements in rapid succession. The idea is that small profits from each trade accumulate over time to eventually build up into larger gains. For that reason, scalpers rarely let their profits run to find the resistance levels, but instead take profits well before the market turns. Typical scalpers place trades no longer than 15 minutes, and closing them after gaining 5 to 20 pips resulting from currency fluctuations.
Because scalping involves placing small trades frequently, traders usually favour themajor currency pairs as trading those markets offers the tightest spreads. But spreads aren’t the only criteria for choosing the right currency pair. Volatility is also an important factor as faster moving markets produce the right conditions for opening and closing positions in a rapid fashion.
The most common technical indicators used by scalpers include simple moving average (SMA), exponential moving average (EMA) and bollinger bands. Some scalpers also useleverage to make the gains more significant, but the reverse is also true as the potential losses increase at the same time.
Having a disciplined approach to pinpointing entry and exit levels, together with stop loss and take profit strategies, are essential to making scalp trading work. Breaking from your own strategy in order to ‘chase missed profits’ or ‘make up for losses’ tends to only result in larger losses, wiping out the many smaller profits gained slowly and steadily.
Day trading involves capitalising on price fluctuations on a single day, between the market open and close hours. Day traders can have multiple positions open on any given day, but they do not leave those trades open overnight to reduce the risk of overnight market volatility.
Similar to scalp trading, the aim is to make profits on intraday price fluctuations instead of long-term market movements. Day traders focus on an asset’s price action, such as gold prices or silver prices, using a vast array of technical indicators to analyse the markets, and keeping tabs on financial news that might cause immediate and significant market volatility. Using CFDs, day traders can capture gains in both rising and falling markets by either going long or short.
This trading style requires time, focus, and dedication. Unsurprisingly, it takes up your whole day as you need to keep a close eye on the markets to spot buy and sell opportunities as they arise. Therefore, day trading is better suited for traders that are able to put in the time to make it work, and not the occasional part-time trader.
End-of-day trading is a forex trading strategy that only requires traders to analyse charts and place orders after the major financial markets close. The benefit is that traders can take their time to review the past price action, analyse the candlesticks and delve into the charts, without the pressure of needing to respond to real-time market movements.
This helps creating a more deliberate trading strategy where the validity of support and resistance levels, as well as buy and sell signals, can be established even by traders who do not have the time for day trading. Plus, outlining your orders before the next trading session makes it easier to carefully weigh risks versus rewards, place orders with greater precision, and remove some of the emotion that can get in the way of sticking to your trading plan.
The view taken by end-of-day trading goes beyond intra-daily charts, making it easier to spot larger market trends which is why traders that adopt this style tend to hold positions for a longer period of time compared to scalping and day trading. Placing stop loss orders is especially important as it helps to mitigate the risks of losses exceeding levels you are willing to accept.
Regardless of the long-term trend an asset is on, financial markets tend to move up and down and swing traders aim to capture profits within those movements. Swing trading takes advantage of the forex market’s oscillations as the price swings back and forth, buying when the market looks like it will rise and selling when it’s likely the price will fall again.
One of the benefits of swing trading is that this strategy creates many trading opportunities as it involves trading both sides of the market. You can go both long and short as the market moves between defined support and resistance levels.
Successful swing trading requires traders to identify support and resistance levels, interpreting the depth and duration of each swing using deep technical analyses and studying the charts. Many swing traders rely on technical indicators such as moving average, relative strength index (RSI), volume, ease of movement (EOM) and stochastic oscillator to determine entry and exit strategies.
At the same time, swing traders need to consider trends to identify if momentum is increasing or decreasing. It requires flexibility as plans need to be adjusted when trends change and ideas are invalidated. When a new momentum low is printed, swing traders tend to close their traders in order to reposition in line with changing market trends.
Another aspect to consider is that some swing patterns play out over several days or weeks, which implies overnight and weekend risk. For that reason, many traders pre-determine stop loss and take profit levels to reduce the risk of getting caught off guard and suffering losses beyond their established risk/reward ratio.
Instead of having a view of where an asset should go, either bearish or bullish, trend traders simply identify a trend and place trades in the direction of that pre-determined trend. Successful trend trading requires you to determine a trend, follow it closely as you enter trades, and closing positions to realign your strategy as the trend changes. This trading strategy requires patience, discipline and confidence to let the market fully play out scenarios.
Essential technical indicators for trend trading include moving average, moving average convergence divergence (MACD), relative strength index (RSI), and volume. All points on a moving average line represent the average for that time frame, which helps visualise price movement in a simple and smooth way. In combination with other indicators, MACD can help generate buy or sell signals. RSI measures excessive sentiment, indicating when an asset is overbought or oversold, which can help anticipate the remaining duration of a trend. Reading volume metrics helps to confirm price trends – a high number of trades during an upward or downward trend is a supporting signal for that trend.
As trend trading takes a much longer view when compared to scalping or day trading, it presents risks because it takes longer to invalidate or validate trading ideas. To reduce the risk of costly losses, trend traders usually set trailing stop loss orders to offer some form of protection during market reversals. Because it’s hard to differentiate between a short-lived dip and a full-blown trend reversal in real-time, many trend traders choose to cut losses short and let profits run.
Selecting the right trading strategy is not about choosing the best, there is no such thing. They can all perform well under the right conditions. It’s more about developing a trading style that best meets your personality type, level of discipline, risk tolerance and the amount of time you are able to commit to trading.
But even then, the best traders may use multiple trading strategies or adopt different ones depending on the market conditions at play. For that reason, it’s a good idea to familiarise yourself with all the different trading strategies so you can switch between styles whenever necessary, adapting to situations instead of rigidly sticking to one specific method.
You can practise any of the trading strategies discussed in this article using a Demo Account on Pocket Trader with a virtual wallet before you commit to trading your own money.
When you join Pocket Trader, you will also have the benefit of an active trading community that can help you refine your trading strategies, with experienced traders sharing their knowledge and skills to help lift your trading game.