Forex trading strategies that work #1 — Position trading
position trading is a longer-term trading approach where you can hold trades for weeks or even months. The timeframes you’ll trade on are usually the Daily or Weekly. As a position trader, you mainly rely on fundamental analysis in your trading (like NFP, GDP, Retail sales, and etc.) to give a bias. Also, you might use technical analysis to better time your entries.
You analyze the fundamentals of EUR/USD and determine it’s bullish. But, you don’t want to go long at any price. So, you wait for EUR/USD to come to Support before taking your position. Now if your analysis is correct, you could enter at the start of a new trend before anyone else.
Now, let’s discuss the pros and cons of position trading…
Don’t need to spend much time trading because your trades are longer-term Less stress in your trading as you’re not concerned with the short-term price fluctuations A favorable risk to reward on your trades (possibly 1 to 5 or more)
Require a firm understanding of fundamentals driving the market Need a larger capital base because your stop loss is wide May not make a profit every year because of the low number of trades And lastly… There’s a trading strategy called Trend Following (which is similar to position trading). The only difference is Trend Following is purely a technical approach that doesn’t use any fundamentals.
Forex trading strategies that work #2 — Swing trading
As a swing trader, your concern is to capture “a single move” in the market (otherwise called a swing). So you’ll likely:
Trade the bounce of the moving average
Thus, it’s important to learn technical concepts like Support & Resistance, candlestick patterns, and moving average.
Here’s an example of swing trading on USD/JPY:
Now, let’s discuss the pros and cons of swing trading…
Don’t have to quit your full-time job to be a swing trader It’s possible to be profitable every year because you have more trading opportunities
Won’t be able to ride big trends Have overnight risk Now, if you want to learn more about swing trading, then The Complete Guide to Finding High Probability Trading Strategy will help immensely. Let’s move on…
Forex trading strategies that work #3 — Day trading
Day trading a short-term trading strategy where you’ll hold your trades for minutes or even hours (it’s similar to swing trading but at a “faster” pace).
The timeframes you’ll trade on are usually the 5mins or 15mins.
As a day trader, your concern is to capture the intraday volatility.
This means you must trade the most volatile session of your instrument because that’s where the money is made.
So, you’ll likely:
Trade the bounce of the moving average
Now… If you’re a day trader, you won’t be concerned with the fundamentals of the economy or the long-term trend because it’s irrelevant. Instead, you’ll identify your bias for the day (whether to be long or short) and trade that direction for the session.
Below is the chart of USDCAD (4-hour timeframe) at 1.2900 Resistance. If the price can’t break above it, chances are, today will be a “down” day.
Next… On the 15-minute timeframe, you noticed a Shooting Star has formed which signals selling pressure. You can take a short trade with possible target profit at Support (blue box).
Here’s what I mean:
Now, let’s discuss the pros and cons of day trading…
If you’re good, you can make money on most months No overnight risk because you close your positions by the end of the day
It’s stressful as you’re constantly watching the markets Can lose a lot more than intended if you suffer massive slippage (from Black Swan events) Huge opportunity cost as you could be earning a full-time salary elsewhere Now if day trading is still too “slow” for you, then the next forex trading strategy might suit you…
Forex trading strategies that work #4 — Scalping
I don’t recommend scalping for the retail traders because the transaction cost will eat up most of your profits.
And you’re slower than the machines which put you at a major disadvantage.
Still, if you want to learn more, then read on…
Scalping is a very short-term strategy where you’ll hold trades minutes or even seconds.
As a scalper, your concern with what the market is doing now and how you can take advantage of it.
The main tool you’ll use to trade is order flow (which shows you the buy and sell orders in the market).
Now, let’s discuss the pros and cons of scalping…
Have lots of trading opportunities each day Can make a healthy income from trading
High financial cost (paying your software, newsfeed, connection, and etc.) Glued to the screen for many hours a day It’s a highly stressful endeavor Lastly… If you want to be a scalper, I recommend you join a proprietary trading firm because they will provide the tools to help you with it.
Forex trading strategies that work #5 — Transition trading
You’ve probably never heard of this before because I came up with it.
Back while I was in proprietary trading, one of the “interesting” things I learned was transition trading.
You’re probably wondering:
“What is transition trading?”
Well, the idea is to enter a trade on the lower timeframe, and if the market moves in your favor, you can increase your target profit or trail your stop loss on the higher timeframe.
Here’s an example:
Let’s say you traded the breakout on GBP/JPY 1-hour timeframe and the price quickly went in your favor Now…
You noticed the 4-hour timeframe respecting the 20MA. So instead of taking profits, you trail your stop loss using the 20MA hoping to ride a bigger move. And if you’re wrong, you’ll exit your trade when the price closes below the 20MA.
Now, there are variations of transition trading.
But the main idea is this:
Find an entry on the lower timeframe If the price moves in your favor, consider planning your exits on the higher timeframe Now, let’s discuss the pros and cons of transition trading…
Can get an insane risk to reward (possibly 1 to 10 or more) Can lower your risk as your entry is on the lower timeframe
Only a handful of your trades will lead to monster winners Must understand multiple timeframes really well Now that you have an idea of the different forex trading strategies out there.
The next question is…
Which Forex trading strategies suit you best?
Here’s the thing:
I’ve seen traders wasting many years on trading strategies that don’t suit them (right from the start). If ONLY they considered these 3 things I’m about to share with you… …they could have saved years of frustrations, money, time, and effort. And, I don’t want you to be one of them. So before you attempt to trade any forex trading strategies, you MUST consider these 3 questions…
Do you want to grow your wealth or make an income from trading?
First, let’s define what’s income and wealth.
Income = Make X dollars a month
Wealth = Grow X % a year