Forex trading can be a lucrative source of income, but only if you possess the right expertise to be successful. It is essential to understand how the market works and how to trade profitably.
However, if you're just starting out, it can get confusing. Especially since there are so many different strategies to try out there! So how do you know what's actually effective？ It is important to select trading strategies that have demonstrated success over time.
In this article, we'll get you up to speed with the 5 Best Forex Trading Strategies for Newbies!
What are Forex trading strategies？
Forex trading strategies are systems used by traders to determine whether they should buy or sell a currency pair. They also make trading more manageable by providing a clear structure for investing.
An ideal Forex strategy can help you analyze trends and anticipate possible maneuvers in various market behaviors. These strategies can help you minimize risk and also serve as a guide post to making key trading choices that affect the outcome of the trade.
Good trading strategies help traders execute trades with confidence and better risk management. Its essential to opt for a strategy that aligns with your investment objectives.
Some factors to consider are trading opportunities, time frame and position size.
Why use Forex trading strategies？
With the perfect trading strategy, you can achieve success in the Forex market. However, every trading strategy has its pros and cons. Lets take a look at the major general benefits of using Forex trading strategies as your guide.
Better Forex trading profits
Forex strategies help you get consistent profits. Thanks to a clear plan, you can make more informed investment decisions.
Reliability
Forex strategies are reliable in helping you understand the market. As a result, you know when to open positions and when not to. They also help you improve your trading skills over time.
Reduces trading effort
To become a successful trader, you must study charts and understand market trends. A Forex strategy cuts down on how much time you spend trying to figure things out.
Provides trading confidence
Most beginners in the Forex market are afraid of losing money. Forex strategies help in that aspect by reducing investment risk, making them a young traders best friend. They also help traders understand the risks that come with each trading strategy.
The best Forex trading strategies
Different Forex trading strategies can be used to minimize losses and make profits. These are:
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Day trading Forex strategy
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All positions are open and closed during the day. This guarantees youre protected from overnight market volatility.
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Day traders use short-selling trading strategies to take advantage of falling stock prices. This lets you make a profit even if the market is bearish.
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A day trader could be handling thousands of dollars every day. As a beginner, you could suffer huge losses if youre unfamiliar with the market.
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As a newbie, its easy to get overwhelmed by the fast pace of day trading. This would cause you to engage in more trades than you can handle, i.e., overtrading. Overtrading comes in two forms. It could be taking too many risks and making risky trades. It could also be trading shares that are too large.
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Position trading Forex strategy
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Position trading is less risky than swing trading and day trading. This is because traders can hold a position for the long-term with more profit opportunities.
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Position traders can take a hands-off approach while investing. This means you dont have to track price charts and trends always.
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Position trading requires long-term capital to sustain trading activities.
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Traders need to be skillful in analyzing the fundamentals of assets. Sadly, newbies dont have this capacity.
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Swing trading Forex strategy
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The strategy is effective in volatile markets, e.g., cryptocurrency.
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It relies on short-term profit potential by capturing the bulk of market swings.
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Traders can rely solely on technical analysis. This reduces how much needs to be learned to understand the market.
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There is significant exposure to overnight volatility and weekend price gaps.
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Its possible to miss out on quality stock options
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Scalping trading Forex strategy
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The strategy requires small amounts of trading capital.
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It's easier to get smaller price movements in the Forex market.
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Most scalping strategies can be automated.
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A large number of trades need to be executed to overcome transaction costs.
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Strategy is time-consuming.
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Scalpers need to use greater leverage to make a profit. If not, all profits can be wiped out in one losing trade.
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Carry trading Forex strategy
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You can profit from any price difference between two currencies in a pair
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You can gain interest from your active position
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Some currencies used in the strategy are very volatile
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The country's central bank decides interest rates
Day-trading is among the top strategies used by traders. It‘s perfect for investors who don’t want fast-paced or high-momentum trading.
Day traders also buy and sell many currency pairs within the same day. This is done to take advantage of small market movements. Consider that for your day trading strategy too.
Furthermore, Day trading requires focus and dedication to execute successful trades. This is because it involves making fast decisions and executing many daily trades.
When day trading, you need to consider the following factors that can affect intra-day market behavior:
Liquidity: Market liquidity determines how easily positions can be entered and exited. It is generally advised to have a high liquidity for day trading as It can help you open and close multiple positions throughout the day.
Volatility: The volatility of an asset determines how day traders conduct their business. The more movement happening during the day, the better. These movements can create opportunities for short-term profits if there's high daily volatility.
Trading volume: An asset's trading volume measures how often it's bought or sold. A high trading volume shows excellent interest and helps identify entry and exit points.
Pros of day trading
Cons of day trading
Unlike day trading, position trading involves holding a long-term position. It could be for weeks or years. This strategy is perfect for traders who dont want to deal with short-term price changes.
Position traders aim to trade at the best point of an asset's move in a long-term trend. But, some assets stay dormant for a long time before they decide to move. Any movement would be based on changes in the assets industry.
Types of position trading strategies
The best techniques to use in position trading include:
Technical strategy: This only uses price charts to determine the long-term trend of an asset‘s price. It analyzes the asset’s price, relative strength and volume. The position a trader should start trading when the asset price shows a long-term trend behavior.
Fundamental strategy: This focuses more on the basic factors that drive an assets price. It only looks at the structural change in an underlying business. This strategy also lets traders make deals using only technicalities.
Techno-Fundamental strategy: This combines both technical and fundamental analysis. It uses charts to study price behavior and verifies fundamentals to spot long-term qualitative change. The trade will be executed if the price is in sync with a change in fundamentals.
Pros of position trading
Cons of position trading
This strategy involves mid-term trading. Traders have to hold a position for several days and make a profit by swing highs and swing lows.
?If price makes a high and is followed by two consecutive lower highs, it is called a swing high.
?If price makes a low and then immediately makes two consecutive higher lows, it is considered a swing low.
With swing trading, the position has to be held for more than one trading session. Deals can happen during a trading session but only in very volatile situations.
Swing trading aims to capture a chunk of a potential price move. Some traders might seek out volatile stocks with lots of movement, while others prefer sedate stocks (Non-volatile in nature).
Regardless, swing trading involves knowing which direction the asset price will move. The trader uses this information to enter a position and turn a profit.
Types of swing trading strategies
The top swing trading strategies for newbie traders to be aware of include:
Breakout swing strategy: Breakouts happen when the price exceeds a defined price range. Traders using this strategy look out for price breakouts and open long positions at the start of an uptrend. To use this strategy, you need to enter a trade when you see your desired level of volatility.
Breakdown swing strategy: This is the direct opposite of the breakout swing strategy. In this case, traders make trades against the momentum. They open short positions when an asset‘s price is below the defined support level. To use this strategy, it’s best always to check the moving averages and oscillators.
❓Moving averages capture the average change over time in a data series.
❓An oscillator is a technical analysis tool that constructs high and low bands between two extreme values, and then builds a trend indicator that fluctuates within these bounds.
Fading trading strategy: This technique implies trading against momentum. A trader buys when the market is selling and sells when the market is buying. The idea here is to bet on a reversal and profit from the market corrections. A fading strategy can be very useful in the crypto market when volatility is frequent.
Pros of swing trading
Cons of swing trading
This involves making profits by utilizing small intraday price changes. With scalping, a trader needs to have a solid exit strategy. This is because one large loss could eliminate the many small gains the trader has built up.
Scalping is based on the assumption that most stocks will complete the first stage of a movement. But theres no way to predict where the stock goes after that. Some stocks stop advancing while others keep moving. The main premise for scalping is that smaller moves are easier to get.
Types of scalping trading
The best scalping strategies include the following:
Stochastic oscillator strategy: The term “stochastic” relates to the point of the current price concerning its range over time. By comparing the security's price to its recent range, the stochastic attempts to provide potential turning points. This strategy aims to capture moves in the trending market.
Moving average strategy: This technique involves using moving averages. Its usually done with two short-term averages and a longer one to indicate the trend.
Parabolic SAR indicator strategy: The parabolic SAR highlights where the market is moving. It also attempts to provide entry and exit points. The SAR indicator is a series of dots placed above or below the price bars. A dot below the price is bullish, while one above is bearish. Any change in the position of the dots suggests a trend change.
RSI strategy: The RSI can be used to find entry points that align with the prevailing trend. Traders need to buy dips in the trend so a possible entry point is created when the RSI falls to 30 and moves above this line. But, a selling point is created when the RSI moves to 70 and begins to decline within a downtrend.
Pros of scalping trading
Cons of scalping trading
This is one of the easiest strategies, to begin with.
A carry trade happens when you buy a high-interest currency against a low-interest currency. As a trader, you earn the difference of interest rates between the currency pair youve chosen. This happens as long as you are trading in an interest-positive direction.
For example, lets say Pound Sterling(GBP) offers a 5% interest rate while the U.S. dollar (USD) offers 2%. If you buy or go long on the GBP/USD, you will be making a carry trade.
For every day you make that trade on the market, the broker will pay the difference of 3% to you. This difference can add up as a sizable profit later on.
Types of carry trading
You can use carry trading in any of the following ways:
Positive carry trading strategy: This involves borrowing a currency with a low-interest rate and buying a currency with a high-interest rate. Its commonly used in the AUD/JPY currency. The trader will borrow Japanese yen at low interest and buy Australian dollars at high interest.
In a positive carry trade, youll receive an initial net gain as you are paid interest for holding the position. But, this could reverse if the interest rate of the base currency falls and the quote currency interest rate rises.
Negative carry trading strategy: This involves borrowing a high-interest currency. Its done on the assumption that the currency with the lower interest rate will appreciate.
A negative carry trade results in an initial net loss with potential gain. This is because you would be paying interest on your position until the interest rate on the base currency increases. In this case, it needs to go above the interest rate of the quoted currency.
Pros of carry trading
Cons of carry trading
Start Forex trading at Capitist
As a beginner, it's possible to get overwhelmed by the prospect of trading. In this article, we hoped to make your transition to a boss Forex trader easier.
To start trading Forex, you can join one of the most secure Forex trading platforms in the world. With the Capitist Marketsapp, you can access multiple financial markets including Commodities, Stocksand Cryptoall from a single dashboard.
You can start applying these strategies in your daily trading to see which one works best for you. You can also mimic real-time trades of your favorite investors to make profitable trades on the go!
Check out the benefits and power of meta trader 5 here!
So why wait？ Deposit your funds and start trading today!
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