The forex market is the largest financial market in the world with different assets being traded within. Considering the enormity of this market, it is crucial to know what you are looking for in it. This is because if you do not know the asset to trade, when to trade it, and how to trade it, you are not going to profit.
As a beginner in this market, you are likely going to be tossed to and fro by the noise around. Following everyone and anything that seems profitable, jumping here and there from one mentor to the other, one strategy to the other without stability will lead to losses upon losses. But these losses can be avoided. Hidden within the fundamentals of forex trading are the simple ways one can be successful. Keep it simple and you will smile.
What is a trading strategy?
Every successful trader has a strategy without which it is impossible to be profitable over time. Firstly, what is a strategy? The Cambridge Dictionary defines a strategy as “a detailed plan for achieving success in situations such as war, politics, business, industry, or sport, or the skill of planning for such situations”.
Forex trading must be approached with the mentality of going to war. At the battlefront, either you survive or you get killed. It can also be seen as a sport; you win or lose. But there is one thing that separates the winner from the loser, it is called a good strategy.
A trading strategy is therefore a detailed plan for achieving success in the forex market. As a beginner trader, spending time to draft how you want to trade is very important. It is worth all the time spent on trading without any plan or strategy. It is better to spend a whole year planning well than venturing into trading without a well-thought-out plan.
What kind of trader are you?
Any robust strategy hinges on the type of trader you are. People have very good strategies which do not fit their personalities. Great mentors would tell you that every strategy works but some strategies work better. Nevertheless, the kind of trader you are determines the strategy that would work for you.
There are scalpers, day traders, swing traders, positional traders, etc. You must ascertain who you are and your personality traits. What is your risk tolerance level? Some people have a very high risk tolerance. For such people, some strategies work best especially scalping strategies. They can invest more than half their equity, make their profit within 5-15 minutes and they are out of the market. And that is the same way if the strategy fails, they can lose more than half their equity within the same period.
Top five (5) trading strategies for beginners.
Trend trading strategy
This strategy is one of the most common forex trading strategies employed among all kinds of traders. Technical indicators and trendlines are used to identify the direction of market momentum to either buy or sell a particular asset. This is a type of technical analysis approach to trading, that is founded on the study of past trends and the behavior of assets or currency pairs for future forecasting.
Some of the major tools and technical indicators used to ascertain trends in forex include but are not limited to moving averages (MAs), trendlines, relative strength index (RSI), and average directional index (ADX).
- Moving averages
Moving averages are indicators that help to figure out the price of a forex pair over a period of time. It uses this calculation to create a single trend line that traders can follow to determine the trend of an asset. The two types of moving averages used in forex trading are the simple moving averages (SMAs) and the Exponential Moving Averages (EMAs). While SMAs are straightforward calculations of the mean of the price of a currency pair, EMAs calculate the mean price movements by considering recent price movements making it a more relevant indicator in the now.
- Relative Strength Index (RSI)
The relative Strength Index is another very powerful indicator used by a variety of traders. It considers the average gains and losses over a period to indicate whether price movements were either positive or negative. It is therefore a kind of momentum indicator ascertaining whether an asset is overbought or oversold. This information enables traders to identify a change in trend within a particular time frame.
- Average Directional Index (ADX)
The average directional index determines the strength or momentum of an upward or downward trend in price movements. The indicator line will move between a range of zero (0) and one hundred (100). A strong trend is ascertained when the lines move above 25. Also, the higher the number the stronger the trend.
- Trendlines
Trendlines are tools used to connect the highs and lows of the price movements of an asset. They are straight lines that connect two or more price points on a chart, representing the direction and slope of a trend. When the slope is determined, anytime the price comes back to the trendline it gives a buy or sell signal depending on the trend. In an upward trend, a buy signal is indicated when the price moves down to the trendline. In a downward trend, sell signals are ascertained when the price moves up to the trend line. A change in trend is indicated when price breaks the trend line.
Range Trading Strategy
A range is an area of variation existing between upper and lower limits established by the movement of an asset. A range is formed when a market consistently moves between two price levels. Within that range, one can figure out an upward or downward trend. Most beginners love this strategy because it is less complicated and easy to use. With this strategy, traders buy or sell depending on the position of the price within that specific range. An asset is bought in a rising trend and sold in a falling trend. One good thing about this strategy just like the others is that it can happen in any timeframe, both short and long-term. Traders can place trades manually within this range or set stop losses and limit orders as well.
Breakout Trading Strategy
Traders in the forex market often turn to breakout trading as a preferred strategy, as it allows them to enter the market at the onset of a period of increased price volatility. This heightened volatility is sought after as it presents numerous trading opportunities for forex traders. A breakout occurs when the price of a currency pair abruptly moves out of a consolidated range, breaching levels of support and resistance. This strategy entails initiating a position in the forex market very early in the new trend and placing a stop-loss order at the breakout point of the market.
MACD Trading Strategy
The Moving Average Convergence Divergence (MACD) helps identify the end of one trend and the start of another. It can be especially helpful for beginner forex traders who are familiar with indicators. The indicator consists of three parts: the MACD line, signal line, and histogram.
The MACD line is created by subtracting the 26-period moving average from the 12-period moving average, while the signal line is the 9-period moving average. The MACD is represented as a histogram created by the lines crossing each other. When the MACD line (blue) crosses above the signal line (red), it’s considered a ‘buy’ signal. Conversely, if the MACD line crosses below the signal line, it’s a ‘sell’ signal.
Support and Resistance Trading
The Support and resistance levels are identified as areas where the price has reversed in the past especially when it happened consistently. This reveals key levels where buyers and sellers can enter the market. These Support levels usually occur when the demand for an asset prevents a further drop in the price of an asset. On the other hand, resistance levels are areas where an asset’s supply inhibits the price from further going up. Traders use this strategy to buy at or near support levels and sell at or near resistance levels. They also place stop-losses below support levels and take profits near resistance levels. The support and resistance trading is advantageous in so many ways. It is easy to identify these key levels and indicates clear areas for entries and exits. It applies to all time frames
However, it has some disadvantages too. The determination of these key levels is individually dependent making the identification of levels differ among traders.
Conclusion.
Having gone through all these strategies, you must take time off to study them. Practice them on demo accounts to avoid unnecessary losses before you migrate to live account trading. Ensure you incorporate risk management and money management strategies into your overall trading strategy to stay long in this market and enhance profit making while minimizing losses.
