The best and probably the safest way to be in control of your trading is to formulate your own plans and forex trading strategies for frequent positive outcomes and minimal error before you jump in to face the real markets.
When designing your strategies, the most important points you need to consider are:
- Entry & Exit levels – When to enter and when to exit a trade
- Risk exposure & management
- Size of your positions.
There is no definitive answer for which forex trading strategies work and which don’t since each trader has different needs and different appetites for risk. Therefore, there is only one way to find out if a strategy is working or not for you, and that way is experimentation through practice.
Before you do that, however, let’s begin by examining what Price Action Trading is and the types of strategy that you can plan based on it.
You might have heard it before as Technical Analysis, Price Action Trading involves the study of the historic movement of a financial instrument’s price. Specifically, Technical Analysis is trying to spot patterns by comparing historic to current price movement in order to forecast future price movement.
The most important elements of price patterns are Support and Resistance levels. Support is when the price rises from a previously held low point and Resistance is when the price falls from a previously held high point. These levels exist just because traders believe them to exist by anticipating certain price movements and are vital to consider when forming your plans.
Price Action Forex Trading Strategies
When it comes to forex trading strategies developed on Technical Analysis there are two types:
- Trend following strategies that profit from breakdowns in support and resistance levels, selling when price falls from high point and buying when price rises from low point and the opposite
- Counter-Trend strategies where traders are selling when there is a new high and buying when there is a new low.
Both strategies use various types of specifically developed technical indicators, channels, uptrends, downtrends, candlestick charts and many other relevant elements.
Other types of Forex Trading Strategies
There are also strategies that do not rely on Technical Analysis but employ Fundamental Analysis instead. Fundamental Analysis aims at measuring the intrinsic value of a financial instrument by studying various economic data that are directly correlated to that instrument. For example, If the financial instrument is a nation’s currency, then Interest Rates, Consumer Price Indices, Gross Domestic Product, Unemployment Rate and similar data releases are required to be studied to reach an evaluation.
A great example of a trading strategy that uses Fundamental Analysis is News Trading.
News trading requires traders to be on the lookout for important news and events with the power to change the movement of the markets. Coupled with the study of economic data, constant monitoring of the news enables the well-informed trader to spot opportunities as they arise.
Other popular Forex trading strategies are:
- Day trading where positions are exited before the day ends, hence the name. Trades during day trading usually don’t last longer than a few hours
- Positional trading where a trend is followed for a very long time with profit being maximized at big price fluctuations
- Scalping, where positions are rarely held for more than a few minutes and focuses on making small but steady profits
- Swing Trading where positions are held for days profiting on short-term price fluctuations
With the evolution of technology and the availability of powerful trading platforms like MT4, you can use the various pre-existing indicators to help you in your trading, and if you know how to code then you can create your own indicators and Expert Advisors (trading bots).
Try out as many strategies as you like and experiment freely with a demo trading account to find out the trading strategy that works best for you.