Forex trading has become extremely popular over the last few years. A growing number of people from all over the world are eyeing the opportunity to place their first trade. Unfortunately, newbies can easily find themselves trapped in the vicious cycle of long losing streaks. If you decide to trade, you should do it smartly and adopt a certain strategy that works for you.
Rookie investors might argue that regardless of the strategy you use, your success depends on the market. We must agree with this statement, but only to a certain extent. A proper Forex strategy will help you determine key price levels based on technical indicators. In addition to that, it will protect traders from suffering significant losses. This complete guide with strategies for trading will navigate you in the right direction.
We would like to dedicate this article to some proven Forex strategies that might help you enjoy a fruitful trading experience. Prior to choosing a strategy that will work for you, you need to consider your goals, how much time you can spend on trading, whether you are going long or short, and the size of your position. In the lines below, we will discuss some appealing Forex trading strategies.
As its name alludes, Bollinger strategy is based on the so-called Bollinger Bands - a technical indicator used to measure the market’s volatility and determine “overbought” or “oversold” conditions. When traders use Bollinger Bands as technical indicators, they rely on the mean reversion of the price. In other words, if the price deviates substantially from its average, eventually it reverts to its mean value.
The Bollinger Bands appear over the price on the charts and usually consist of 3 lines, including an upper band, a middle line, and a lower band. The upper and the lower bands are used to present the standard deviations above and below the mean price. This deviation is often referred to as a moving average.
Provided that the market is more volatile, the Bollinger Bands expand, while in a less volatile market, the bands shrink. There are different strategies based on the Bollinger Bands such as Bollinger Squeeze and Bollinger Bounce. Since we are discussing Bollinger Bands, we cannot refrain from noting that traders who are interested in the Bollinger’s strategy should know how to use Relative Strength Index.
The Momentum indicator is viewed as an “oscillator” technical trading indicator that is quite versatile. Generally speaking, it compares the current and the previous closing prices to determine the momentum of the price movements for a given currency pair over a certain period. It identifies how stable are the prevailing trends.
The momentum indicator consists of a single line that moves between a bounded range from 0 to 100. If the value of a certain currency pair rises from beneath 100, then traders are advised to buy. Provided that the value of a currency pair drops below 100 from above, investors need to sell.
It is important to mention that adding a second line on the Momentum indicator also known as a Moving Average will provide you with detailed information about the price movements for a set period of time. Most traders use a time setting of 9, 14, or 21. It is important to mention that the longer period you set, the better signals you get, while short periods can lead to false signals.
Fibonacci Retracements can help traders to identify support and resistance zones, and establish entry levels. Fibonacci Retracements consist of 6 lines. The first line is drawn at the highest point of 100%, the second line is drawn at the average level of 50%, and the third line is to be found at the lowest point of 0%. The other 3 lines are drawn at 61.8%, 38.2%, and 23.6%. Traders should keep in mind that the retracement levels are based on the previous move in the market.
Provided that the market witnessed a rise in the price (a bull market), traders will try to predict where the price might retrace to by measuring the move from bottom to top. If a certain currency pair loses value (a bear market), investors will take into account the move from top to bottom to determine where the price could retrace to. The main idea of the Forex strategy based on the Fibonacci Retracements is to place your entry and exit orders below the recent swing low or above the recent swing high.
Hedging strategy minimizes the risk of losses associated with the trade as it protects your position in a currency pair in the case of an adverse price move. Hedging is related to 2 main strategies, and more precisely placing a hedge while taking the opposite position in the same currency and buying Forex options. The first strategy is also referred to as “perfect hedge” as there is no risk of potential losses and profits. This strategy is based on holding both a short and a long position at the same time on a given currency pair.
The second strategy is also known as “imperfect hedge” because it does not eliminate the risk. If you want to use this strategy, you need to buy call option contracts to cut down the risk related to the upside price movement. Provided that you want to reduce the downside risk, you need to buy put option contracts.
Investors will come across a huge number of trading tips, but they should not trust them blindly. Provided that you are about to place your first trade, we would advise you to design your own strategy based on your personal preferences and experience. What is more, successful traders are disciplined and stick to their strategy instead of taking shots in the dark.