How to trade forex
Our top-3 Forex trading strategies explained
Here are three fundamental and successful Forex trading strategies. Experiment and discover for yourself what Forex trading strategy fits you best. Each trader is different, and eventually develops their own approach, but when Forex trading is new for you, these three basic strategies will help you begin on your journey to becoming a pro! Discover your style of trading, and find out what trading strategy fits you best.
The best strategies on how to trade Forex, revealed
There are numerous of strategies that can be utilized to trade Forex. In this article we describe the top-three fundamental Forex trading strategies you can apply to immediately start trading. More information about these strategies can be found in other articles, and the specifics of Forex trading in our beginner and advanced Forex courses.
Developing your own unique trading strategy
Every trader will develop their own approach to trading. Many begin with one of these three, simple Forex trading strategies, and develop them into a personalized strategy as they learn. Many traders combine two simple Forex trading strategies.
Forex traders typically use their own experience, both positive (leading to profits) and negative (leading to losses) to develop their personal strategy. The risk profile of a trade, gut feeling, and in some occasions even superstition, can influence a trader’s strategy.
All strategies are based on three important elements:
Length of trades
You should always select a time frame that suits your style. There is a huge difference trading based on a one-minute chart versus on a weekly chart. The main point to consider is how long you plan to stay in a single trade. Is this a matter of minutes or a matter of days, weeks, or even months?
When you aim to benefit from small market movements, you are probably becoming a so-called scalper, so you might focus on a much lower time frame, like a 1-minute chart. A day trader, on the other hand, is likely to use a 4-to-8-hour chart to identify profitable FX trading opportunities. Position traders typically look at the charts just once per week.
Number of trades
In addition to the length of trades, the number of trades also influences the type of strategy you are utilizing. How often would you like to open new trading positions? Just once per day, week or month, or do you like to open and close hundreds of trades every day?
As a scalper you are looking to open a much higher number of positions in comparison to another kind of trader. Day traders and position traders dedicate far more time to analyse market developments, and aim for long-term profits. Day traders and position traders focus on much larger positions compared to a scalper.
Amount of risk
You should find the right trading size that fits your FX trading profile. Generally speaking, the lower the number of trades you have, the larger the trade positions are. Larger positions also mean bigger risks, which you should sometimes be willing to accept (wisely). FX trading is all about managing risks in order to prevent enormous losses.
Therefore, you should always limit the risk of losing money from any single trade. This can be reflected as a maximum percentage that you are accepting the lose. When the loss is going over this percentage, you leave your position, no matter what. You take your loss, and move on, taking a new position.
Your risk sentiment defines the percentage of risk acceptance. This can be 1% for low-risk traders, and about 5% for aggressive traders.
How to trade Forex according to our best strategies
When you have considered trade length, number of trade positions, and size of trades, you can decide what type of strategy fits you best.
How to Trade Forex Strategy 1: Scalping
When you apply a Scalping strategy, you focus on small market movements. You open a large number of small-sized trades to achieve small profits from each trade. Of course, many small profits can lead to big profits in the end, but this kind of strategy is intense and time-consuming.
Many FX traders are scalpers and have limited liquidity, so they are looking for numerous small profits, taking advantage of the volatility of some currencies. These traders are often looking for markets in which prices are constantly fluctuating. The exotic currency exchange pairs are an example of high volatility where fast profits can be realized.
The huge profit off small trades as a scalper
Scalpers often focus on profits of 5 pips per trade (meaning a price change of £0.0005). For example, when you have traded £100.000, you can earn £50 on a single deal. When you have 10 positions in that situation, you might earn up to £500 in the very same moment.
A scalper may stay in a trade for just a few minutes, enabling them to reinvest the money in other trades quickly, one after another. This quick trading can increase the amount of trades by one hundredfold, producing a possible profit of £50,000 in just one single day. This, of course, only occurs in the unlikely situation in which every trade went exactly the way it was foreseen. However, the profitable quick trading example illustrates how small positions can lead to something enormous.
What does a scalper need?
Due to the large number of trades, and the relatively short time-frame of each trade, a scalper needs to dedicate all their time and attention to numerous trades simultaneously. They are typically looking at a one-minute chart, analysing positions, and discovering new opportunities. A scalper should work rationally and focus on facts, setting objective boundaries concerning when to leave a position.
How to Trade Forex Strategy 2: Day Trading
A day trader typically looks at the development of a currency by the hour, looking less to markets with high volatility. Most Forex traders are day traders, as they typically close all positions each day, opening new positions the next day, which results in a much less dynamic process compared to that of a scalper.
As the Forex market is open 24 hours per day, a day trader hardly leaves any positions open overnight. In 8 to 16 hours a lot of things can happen, so it would be far too risky to leave any position open. By closing off the day, a day trader can sleep well without having to worry about any open trade.
Decisions based on the news
Day traders typically base their decisions on the news, like world developments, interest rates, publication of macro economic numbers, predictions of banks, and elections. They focus on news that could have an impact on the market. Instead of taking profits of 5 pips only, a day trader typically looks at profits of 50 pips and above.
Having larger positions, a day trader might earn 50 pips (meaning a price change of £0.005). A trade position of £1.000.000 gives them a profit of £5.000 on a single day. As you can see, the typical, potential profits are far less than a scalper, but the time and effort that is needed is far less, and the risk is much lower.
Most day traders limit not only the risks of each position, but also cap their daily trading account risk. They define a percentage between 1 and 5 %, depending on their trading style, of what they are willing to lose on a single day. When the total loss is below that percentage, all positions are left. This is an excellent way of managing their risks, protecting both the account and capital.
How to Trade Forex Strategy 3: Position Trading
Position trading is a long-term strategy. This strategy is focused on fundamental economic developments and, therefore, looks to high-volatility markets less frequently, as these markets can rarely be predicted. Even minor fluctuations are not considered, as a position trader is a strategist and foresees a certain macro-economic development. Currency value can fluctuate on a certain day, rarely remaining linear, but a position trader will not leave their position.
More than other types of traders, a position trader analyses decisions of central banks, developments in politics, and other major economic factors. These factors often predict a trend on which the position trader is anticipating.
Very limited amount of yearly trades
It is important to realize that most successful position traders make only a few trades per year. They take a large position in a specific trade, which often gives them a profit of 500 pips per trade and up (meaning a price change of £0.05). Trading a capital of £1,000,000 leads to a profit of £50,000 per trade. Making 4 successful trades per year, you could get an annual income of £200,000 with a capital of just £1,000,000.
Only for patient traders
Patience is one of the main characteristics of a position trader. Of course, one should also have excellent analytical skills to foresee certain patterns due to recent economic developments. Position traders often exclusively analyse weekly charts, as daily and hourly developments do not influence the big picture.
Choose your strategy on how to trade in Forex
Now you know three fundamental FX trading strategies, so you can decide for yourself your Forex trading plan. Are you a stress-resistant trader with ice water running through your veins; do you like focusing on small and short trades?
Or are you that analytic strategist who can translate macro-economic developments into valuable forecasts in the development of currency rates? Find out for yourself and adapt your own skills and talents to the strategy that suits you best. That is how to trade in Forex!
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