Forex Trading Strategies for Advanced Traders
You already know that the first step in a forex trading strategy is creating a setup that includes both entry and exit signals. At the same time, you know that there’s no fool-proof strategy that guarantees success. Every trading strategy has its own set of risks. The key is to remember that it takes thorough fundamental and technical analysis, time and patience to navigate the volatile forex markets using advanced trading strategies.
Here's a look at some popular advanced strategies that could give you an edge in the markets.
1. Position Trading
Position trading represents a longer-term commitment to a trading decision, which is why it needs more careful market analysis. You will need a techno-fundamental strategy. You can use your preferred technical indicator to identify the trend and evaluate the fundamentals of the two currencies to predict their long-term qualitative moves.
The main advantage here is that you can ignore the short-term market gyrations. However, it will help to keep an eye on changes in economic conditions and the geopolitical situation.
Using Specialised Charts
Since the aim is to ignore short-term fluctuations and focus on the trend, seasoned traders often use specialised charts that cut out the market noise. For instance, Renko Charts eliminate minor currency corrections and highlight larger trends. Named after the Japanese term “renga,” which means brick, these charts focus on price changes rather than the actual price movements. A new brick appears when the price moves by a specified amount. Price rises are typically depicted by green bricks and declines by red bricks.
The current day's close being above the high of the previous brick by at least the size of one brick depicts an uptrend. The current day’s closing price lying lower than the low of the previous brick by at least the size of one brick indicates a downtrend.
Some traders use Heikin-Ashi charts instead of Renko charts to filter out market noise.
What Else to Consider
With position trading, you must consider any swap or rollover fees to estimate profitability, since your positions will be open overnight, maybe for several weeks. So, before opening a trade, make sure there are sufficient funds in your trading account to cover these fees and any short-term price swings. Regularly review your funds to avoid receiving a margin call, taking into account the swap fees.
Since the positions are held longer, experienced traders actively use averaging down. For example, you could open a long position on the EUR/USD if your analysis indicates that the pair is trending upwards. The price may decline temporarily, even during an uptrend. You can use this opportunity to add to your position. Since the price is now lower, you would be buying euros for fewer dollars. This brings down the average price of your total position.
To minimise risk while trading forex, you could open both long and short positions in the currency pair of your choice. Alternatively, you could open a long position in one currency pair and short position in another pair. However, this can be complicated and requires careful analysis while choosing the forex pairs.
Let’s understand hedging with an example. Suppose you wish to go short on the EUR/USD because your analysis shows that the pair has peaked. Now, economic releases in the Eurozone indicate that the pair might strengthen instead. To hedge your short position, you could look at other USD pairs, especially those that are inversely correlated with the EUR/USD.
The USD/CHF has historically exhibited a negative correlation with the EUR/USD, which means that when the EUR/USD rises, the USD/CHF tends to fall. So, you balance your position in the EUR/USD by going short on the USD/CHF.
This is a very short-term trading strategy, where seasoned traders use high leverage to make the most of small pip changes in their chosen forex pair. Positions are held for short timeframes, up to a few minutes, with the aim of making small profits through the day.
Scalping is usually conducted in combination with important news or economic releases, supported by strong technical analysis. The US nonfarm payrolls (NFP) data is the most market moving economic release, impacting almost every currency pair. The release can lead to wide fluctuations, of 50 pips or more in the US dollar.
Some of the most commonly used technical indicators are moving average to identify emerging price trends, Bollinger Bands to determine market volatility and the Stochastic Oscillator to compare the current price of the forex pair to its recent price range.
A Common Scalping Strategy
Use the 7-day and 14-day Exponential Moving Averages (EMA) to smooth out the volatility. Using different colours for the EMAs with different timeframes makes it simpler to spot signals. If the 7-day EMA cuts the 14-day EMA and rises, you can use that as a buy signal. The 7-day EMA crossing the 14-day EMA from above and falling is a sell signal.
You can set one chart to 1 minute and open a secondary chart and set it to 5 minutes. This helps you keep an eye on the overall market trends with the longer timeframe chart and spot small signals with the shorter one.
Risk Management with Scalping
Scalping is inherently low risk, as each position size is small and the time in the trade is very short. With this strategy, you can choose a basket of currency pairs that have negative correlation or combine forex and other assets that have historically been inversely related. For instance, crude oil and the US dollar share a negative correlation. Seasoned traders also use stop loss at two or three pips below the last lows of a swing.
To Sum Up
- Advanced forex trading strategies require careful market analysis, using both technical indicators and fundamental analysis.
- Position trading is a long-term strategy, where positions are held for weeks or even months. Unlike “buy and hold,” you can go both long and short in position trading.
- Advanced position traders use specialised charts, like the Renko or Heikin-Ashi charts.
- Hedging is a way to mitigate risks by taking opposite positions in a single forex pair or taking simultaneous positions in two inversely correlated pairs.
- Scalping is a very short-term trading strategy, where you try to make profits from small pip changes in a currency pair by entering and exiting multiple positions throughout the day.
- Use simple indicators, like moving averages and Bollinger Bands, to make quick decisions when scalping.
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