Strategies to Consider in Your Forex Trading
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Looking for an efficient Forex trading strategy to make a potential return on your investment? In this article, we will discuss two Forex strategies that may improve your trading, with some practical examples that demonstrate how to use them.
Trading Strategies in Forex Trading
A typical Forex trading strategy includes some form of analysis, which day traders use when deciding whether to buy or sell a currency pair. Traders normally incorporate several of these signals into their trading strategy. Those looking to develop an effective Forex trading strategy can potentially rely on a pre-existing strategy, or they can build their own. Either way, diligence is crucial.
Traders should also keep in mind that a system won't do them much good if it is too complicated to follow. It's no good if you can't stick to it, and others have failed for not being able to do so. For example, Bruno Iksil, the former trader, was nicknamed 'The London Whale' because he lost no less than $6.2 billion in 2012, by using an overly complex trading strategy involving derivatives.
By sticking to more straightforward approaches, traders can increase the odds of favourable results. Fortunately, there is plenty of free trading education available online to help you, and there are loads of automated and manual trading strategies out there for you to choose from too. Why not consider checking out Admiral Markets' articles & tutorials? There are over 200 hundred different topics to choose from, covering all kinds of trading types, such as ETFs, bonds, stocks, and many more!
The SMA Forex Trading Strategy
One Forex strategy that you might like to try is based on a straightforward indicator known as the Simple Moving Average (SMA). The SMA Forex trading strategy aims to provide the highest possible return for the amount of risk assumed. The SMA measures a security's value during a specific time frame, to give traders a better sense of when to buy and sell a currency pair.
For example, if you set up a 12-period SMA with 15-minute intervals, any increase in the currency pair's value above the 12-period SMA could present a signal to buy. Likewise, should the currency pair's price fall below the 12-period SMA, it could be a signal to sell. This popular Forex trading strategy may be good for beginners as it can be used with any time frame, and with most trading instruments.
Additionally, you can combine the SMA with helpful tools, like indicators. Traders may choose to use the SMA as the foundation of their strategy, and then build from there. No matter what you do, remember to test all Forex trading strategies on a Demo Account first, before going live. One way beginners can develop their own approach is to test more understandable SMA-based trading strategies, and then add other indicators when and if consistently desirable results are achieved.
Optimise Potential Profit with Positional Trading
You cannot predict which strategy will provide you with the most success, or indeed any at all. However, positional trading could be a potentially profitable Forex strategy. Positional trading involves holding positions over the long term – usually, between one month and a year. It has the advantage of being largely hands-off. However, it requires a long-term plan, and the ability to predict future market direction. To get started with positional trading, you must first pick an asset. When determining which currency pair to use, there are three factors you need to consider:
High Long-Term Volatility
Volatility is crucial for turning a profit. You need to pay for 'SWAPs' every night in order to hold a trade open, and you could easily suffer a loss on any given night, unless your currency pair experiences some notable price movements within a few months. One way to increase the odds of success is to select currency pairs that may feel influence from:
- Upcoming political events
- Economic events in the near future.
Low Short-Term Volatility
A currency pair with low short-term volatility is more likely to move slowly in the direction of your trade, instead of experiencing sharp fluctuations that might prompt you to close your position.
Use Low Margin
While Forex traders frequently trade with very high leverage, this approach is not suitable for positional trading. When it comes to positional trading, keep one thing in mind – the less leverage you use, the better it may be. To determine how much margin to use for your Forex strategy, consider the following variables:
- The amount of money you have outside your trading account – remember to only trade with risk capital
- How much leverage will provide the best risk-reward ratio
Benefits of Scalping
Source: EURUSD Chart - Data Range: May 2016 - An example of scalping - Please Note: Past performance does not indicate future results, nor is it a reliable indicator of future performance.
While positional trading may (or may not) produce great benefits, trading can appeal to many different types of people, for different reasons. Some traders enjoy spending time watching the markets, as doing so gets their heart beating and their adrenaline flowing. One Forex strategy that may provide this adrenaline rush is scalping. The idea behind the scalping strategy is to complete a large number of trades that individually generate small rewards – between five to ten pips each.
Traders usually keep these positions for one to five minutes, and spend all day monitoring buy/sell signals. Some professional traders have generated great returns with this approach, including Paul Rotter. Mr. Rotter attained legendary status with scalping and earned the nickname 'The Flipper' for his quick trading actions. Rotter would open buy/sell positions simultaneously on the derivatives exchange 'Eurex'. When traders responded, he would quickly scalp profit from one alternative.
One crucial factor in Rotter's success was to closely watch the order book. To cultivate your own unique and efficient Forex trading strategy, consider these key variables:
- Your desired risk-reward ratio
- Your tolerance for stress
- How much time per day you want to spend trading
Most importantly, only use techniques you fully understand and never stop improving your strategy. A free Demo account is perfect for testing new things out risk-free, and for working on your overall performance.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.