Forex trading is often touted as an efficient way to make money online. Many people are of the view that it is really simple to trade forex profitably. However, in reality, in order to do succeed, you have to know the right strategies.
There are a number of strategies that professional forex traders use in order to generate consistent returns. These range from studying trends in assets to modelling underlying value.
Although they may seem like the realm of professional traders, it is certainly possible for new forex traders to learn these skills and hone their trading ability.
In this post, we will go over some of the simplest Forex trading strategies that a beginner trader can implement and learn from.
Using Candlestick Analysis
Japanese Candle Sticks provide a lot of information to the trader. They graphically represent the open, close, high and low of the forex pair over a predefined period. It is for this reason that they are able to provide an idea of trading direction.
Candlestick analysis is particularly useful when combined with other technical indicators such as Bollinger bands, other trends and indeed other candle sticks.
There are a number of different patterns which you can study for greater detail but the key is to understand whether the candle is demonstrating a bullish (positive) or bearish (negative) signal.
If a candle is green or white, this indicates that the asset has closed up during that time period. The opposite can be said for a Candle Stick that is either red or black. The size of the body of the candle stick gives an indication of how far the price has moved over the period.
Holding all other things equal, big green candles are seen as strong indications of possible bullish outbreaks. The same can be said for large red candles.
When the body of the candle is quite small but the shadows (or sticks) are quite large in comparison then this is an indication the market is still being indecisive with regards to potential direction. You should wait for the next indicator before placing a trade.
Scalping is an example of a Forex strategy that can indeed be used by all traders. There are some individuals who frown upon the practice of scalping as it is a sometimes considered a penny pinching strategy.
However, over the long run, those pennys add up to a considerable profits. Scalping is the practice of quickly entering and exiting a Forex trade. Buying and selling the Forex pairs numerous times throughout the trading day.
In order to run a successful Scalping strategy, you have to be able to read your charts correctly and properly identify the trends. This is because if a trend is not clear, a major reversal could be imminent just before you have entered the trade.
You also need to make sure that you have adequate trailing stops in place in order to quickly exit the trade if the trend goes against you. These stops should be set before the trade and left there with discipline.
You can also use forex signals provided by third parties to establish whether the direction you have traded for scalping is confirmed by general market indicators.
Trading Market Gaps
Gaps are large movements in the value of the asset during periods of limited market liquidity. This is usually in periods such as overnight or over the weekend. These large jumps are termed the gaps.
For example, let us assume that Gold closed up at $1,050 on a Friday evening. Then, on Monday morning the price drops to $1,000. This $50 move is termed the gap in the price of gold. The main reason that it opened down was because of the limited number of buyers early on the Monday morning.
The fact that an asset has a large gap is usually not down to fundamental valuation. It is mostly a mere anomaly in the price and can be exploited by the astute trader.
In our above case for example, the trader could have bought Gold at the relatively low level of $1,000. The price of Gold was more likely to have recovered by the end of the trading day which would allow the trader to have generated some profit.
Gap Trading can also be done throughout the trading day assuming that market liquidity drops considerably in one particular trading day. Gaps can also occur to the upside when there is a skewed buying pressure.
Price Action Trading
This is a trading strategy that falls under the guise of Fundamental analysis. More particularly, it is used when large economic announcements are being made that relate to a particular forex pair.
Price action trading tries to take advantage of large reactions in the price of the asset due to the release of economic information that is contrary to the market estimation.
For example, if the Bank of England (BOE) is about to make an announcement on interest rates, Pound traders will look to the current market expectation of the interest rate. If the BOE announces an interest rate level that is very far from the market expectation then the Pound will react.
Although Forex is able to react extremely quickly to these adjustments, there still exist opportunities for entering the trade post the announcement. The trader needs to know beforehand which way the market will move in reaction to the actual data release.
The moment the data has been released, the trader should ascertain whether it differs greatly from expectations and then enter the trade he formulated prior to the release.
In order to trade Forex Profitably, you need to have a solid strategy in order to maximise your chances. You also need to have a certain degree of education and training. Moreover, effective trading requires discipline and of course a little bit of luck.
Categories: Stock Market