Knowledge

Open 24 hours a day, the foreign exchange (forex) market is the most liquid and global of all. No wonder then that traders are excited to be a part of this market, which took the daily turnover to a whopping $7.5 trillion in 2022. Although the forex market offers abundant trading opportunities, beginners sometimes face challenges in choosing the simplest strategy to trade currencies. This article describes the simplest forex trading strategies that are most frequently used by newbies in the forex market.

How to Develop a Forex Trading Strategy?

Trading needs to be based on analysis, rather than emotions. For this, it is important to have a systematic approach to developing a trading strategy.

It’s a good idea to begin by determining your forex trading goals and your risk appetite. You must also consider the amount of capital you can afford to risk. After this, you are ready to define your trading style. Here’s how:

Choose a timeframe in which you wish to trade

The timeframe determines how fast paced your trading is. For instance, if you’re feeling ready to make quick decisions, you can choose very small timeframes, like 1 minute to 15 minutes. Such traders are called scalpers. Day traders have a little more time for decision making. They choose charts of 15 minutes to 4 hours.

Choose a position size

This depends on your risk appetite. The larger the position, the greater the profit potential and risk exposure. It’s probably best to begin with small positions and increase the size as you gain confidence.

Did you know?

Seasoned traders risk no more than 1% of their account on a single trade. They open small positions and manage their risk with stop loss orders to limit the losses in the event the market moves against their speculation.

Choose how much time you want to trade for

If you have ample time, you can open many small positions in different currency pairs. If you will be trading for a limited period, you may wish to go with larger and fewer trades. While taking larger positions means more risk, trading many small positions requires a keen focus on market movements. Also, opening fewer positions means careful analysis to open a trade and waiting for the price to take its course.

5 Most Popular Forex Trading Strategies

Price action is a metric for trading in any financial market. FX trading requires you to study the price charts and use technical indicators to speculate on future movements and determine entry and exit points. Knowledge of currency fundamentals and an eye on the news and economic events gives a broader market perspective and helps make more informed trading decisions.

Did you know?

The US dollar is the most popular currency, comprising 81.8% of the global forex volume. The EUR/USD is the most traded pair, with a total trading volume of 22.7%.

Range Trading

This strategy requires traders to identify the support and resistance levels of the foreign exchange pair and place orders according to these key levels. This strategy is suitable for many timeframes. Risk management involves placing stop loss and take profit limits close to the key levels to limit losses in the event of a breakout. You can decide on entry and exit points with the help of oscillators, such as relative strength index (RSI) and stochastic.

Risk to Reward Ratio	Technical Analysis Skill Required	Number of Trading Opportunities
Favourable	Strong	Substantial – In periods of controlled volatility

 

Trend Trading Strategy

Trend trading is one of the simplest forex strategies and is based on exploiting the directional momentum of the market. Traders can take advantage of short-term trends by either riding on the trend or capitalising on a reversal, in oversold or overbought situations. Entry points are calculated with the help of oscillators and exit points are determined with the help of the risk-reward ratio. The goal is to maintain a positive risk-reward ratio.

Risk to Reward Ratio	Technical Analysis Skill Required	Number of Trading Opportunities
Favourable	Strong	Substantial – Depending on trend momentum

 

Forex Scalping Strategy

Scalping is one of the most used trading strategies in the forex community. The goal is to take multiple positions within a small timeframe and take advantage of price fluctuations. You would open many small positions repeatedly to accumulate small gains over a fixed period. A position lasts for a very short timeframe, ranging between 1 and 30 minutes. You decide the entry point with the help of a moving averages indicator, such as moving averages convergence/divergence (MACD), to verify a trend and RSI to determine its key levels in the longer timeframe. You can place stops a few pips away from the support and resistance bands.

Risk to Reward Ratio	Technical Analysis Skill Required	Number of Trading Opportunities
Lowest	Very Strong	Greatest

 

Swing Trading

Swing trading strategy allows traders to take advantage of range bound as well as trending markets. This strategy enables traders to take long and short positions by picking 'tops' and 'bottoms.' A position may be held for a few hours to a few days. You can use both oscillators and moving averages to make trading decisions.

Did you know?

Traders favour long-term trends when swing trading, to capitalise on multiple points along the trending market.

Risk to Reward Ratio	Technical Analysis Skill Required	Number of Trading Opportunities
Median	Extensive	Substantial

 

Day Trading Strategy

Day trading involves opening and closing a position on the same trading day. You can take a single or a few strategic positions and exit them before the market closes. M15, H1, and H4 are the most used timeframes in this strategy. You can enter when the price breaks through an 8-period exponential moving average (EMA), in the direction of the trend, and exit using a 1:1 risk-to-reward ratio.

Risk to Reward Ratio	Technical Analysis Skill Required	Number of Trading Opportunities
Median	Strong	Substantial

The Golden Rule of Forex Trading for Beginners

Trading forex requires practise and discipline. Hone these skills by opening a demo account and practising your strategy without using real money. Start trading on your live account only after you gain some confidence in your trading strategy and risk management techniques.

 

To Sum Up

• Begin by setting forex trading goals and assessing your risk potential to conclude a suitable forex strategy.
• Choose a trading strategy based on your preferred timeframe, trade volume, and position size.
• The simplest forex trading strategies are range trading, scalp trading, day trading, trend trading, and swing trading.
• Use price action and combine it with technical indicators to enter and exit a trade.
• Use stop loss and take profit to manage risk while trading forex.

 

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