With so many forex trading strategies out there it may be difficult for a trader, especially a beginner, to determine which of them truly work. Whether you are a newbie in this field or a seasoned trader you will find this article very helpful as it gives insight to simple, yet powerful strategies that are proven to work and improve you trading skills when it comes to foreign currency trading strategies.
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Simple Forex Trading Strategies Fall into Two Categories:
The Fundamental Forex Strategies:
This strategy involves basic analysis of things like geographical and political implications. Based on the fundamental analysis, the following strategies will help you understand the link between the real economy and the currencies.
- Trading the news
This is one of the best forex trading strategies for beginners. Big announcements and news coming from various countries have an enormous impact on the market. It is important to watch out for any announcement that could impact forex trading, especially currency option trading, so that you can determine whether to trade or not.
Arbitrage is a foreign currency trading strategy that involves a forex trader attempting to take advantage of market inefficiencies and make profits from price differences. To benefit from arbitrage, one must find the right conditions and look for a possible loophole in the market.
Unlike other currency trading strategies, carry-trade allows traders to make profits even when markets are stable as it does not rely on market fluctuations. In the carry-trade strategy a trader purchases a high differential ratio currency. This guarantees the buyer a high interest rate. A profit can be made if a trader buys when a currency’s interest rate is expected to go up and sells when the interest rate is projected to fall.
- Trading the market sentiment
Market sentiment is a combination of opinions concerning trading. Reading the market sentiment can be one of the forex trading strategies that work. You can understand market sentiment by looking at the primary trend of a particular currency pair in the charts. In reading the market sentiment, observe the market trend, price action, and international events.
- Turn volatility in your favor
As a forex options trader, these factors can turn market volatility in your favor:
- Widen your take-profit and stop-loss targets. This minimizes losses and extends your profit potential.
- Reduce losses: When the price is trading within a certain range, put the stop slightly above the top price when buying and slightly below the bottom when buying.
- Lower your leverage: With a limited amount of capital, traders can make high profits with leverage. To make maximum profit in a volatile market, ensure the risk is the same as normal times.
- Diversify your portfolio: Have various instruments in different markets. It is important to diversify since even during normal times one cannot predict the outcome of a trade. This uncertainty increases during volatile periods. By spreading your funds into different directions, you minimize your risk and increase your chances of making good profits.
- Trading the news
Technical Forex Trading Strategies
While the fundamental forex strategies set the direction of a currency pair, the technical forex strategies make it possible to trade profitably.
- Horizontal levels
Horizontal levels, combined with price change can lead a forex trader to understand the trend and predict where the market will go next. They also help a trader determine the right time to enter a trade. The horizontal level strategy is better used alongside other forex trading strategies.
- Fibonacci indicator
The Fibonacci indicator forex trading strategy is a currency trading strategy that relies on a 'pullback' system of operation. Using a Fibonacci forex trading strategy requires an investor to analyze a trend and determine if there is a pullback of the trend.Through Fibonacci numbers and ratios, an investor can make a decision based on the lines appearing on the graph.Determining the extent the pullback has gone on the Fibonacci graph will help a trader decide whether the price will be bullish or bearish.
Divergence is one of the simple forex trading strategies used by traders and analysts of financial instruments to recognize patterns and predict the next direction prices will take. When used alongside other indicators like RSI, Stochastics, MA, support and resistance levels, the chances of making marginal profits increase. Divergence is one of the best strategies a trader can use to analyze charts.Divergence is calculated between lows and highs of the price as well as the indicators. The best indicators for trading divergence are RSI, Stochastics, MACD, and Volumes.The four categories of divergences include:- Regular Bullish Divergence- Hidden Bullish Divergence- Regular Bearish Divergence- Hidden Bearish Divergence
- ADX (Average Directional Index)
Coupled with other forex trading strategies, the ADX (Average Directional Index) - Forex Trading Strategy helps traders to understand the trend and consequently enter trades likely to yield massive profits.The ADX tool should not be used alone as it only gives an indication as to the strength of and not the direction of a trend.On a scale, the average directional index ranges from 0-100 where 100 indicates a strong trend while 0 indicates a non-existing trend. Values close to 0 indicate a sideways moving trend while above 50 indicate a strong trend.On the ADX scale. Lastly, values under 20 indicate a weak trend.
One of the simple forex trading strategies that financial market traders use is hedging. To hedge means to purchase and sell on the spot or within a short period two separate instruments either in different markets like stocks and options or just a single market such as the Forex market. To great institutions, hedging is a mandatory component used to limit the risks of loss and increase the chances of winning. To understand different possibilities, it is important to use other forex trading strategies alongside hedging.
- Horizontal levels
Forex trading strategies are usually based on technical analysis or on news-based events. A forex trader depends on a variety of signals that trigger the decision to buy or sell. Many of the above currency trading strategies yield profits when combined. It is advisable not to rely on just a single strategy as every approach compliments another.
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