A trading strategy is a set of objective rules designating the conditions that must be met for trades to occur. A trading strategy outlines the specifications for making trades and includes rules for trade entries, exits and money management.
When it comes to Forex, a trading strategy refers to a fixed plan that is designed to achieve a profitable return by going long or short in Forex markets. Employing trading strategies is important in Forex trading because it is consistent, objective and verifiable.
Trading strategies can be executed in two ways: A trader can manually enter or exit a trade in accordance with his trading strategy. Or he can activate an automated trade by entering it on his computer. Manual trading calls for a great amount of understanding of the Forex market and requires organization and discipline. It is tempting for the trader to deviate from his strategy and this usually results in a lower performance than if he had followed his custom developed trading system.
An automated trading strategy runs according to a
Novice Forex traders who lack the confidence of experienced traders often choose to use automated trading techniques rather than depend on their own trading skills. Still, even with automated trading strategies, a trader must be able to decide the parameters of his trades. In many cases, beginner traders opt to model their automatically set up trading strategy on already existing trading systems.
There are many trading strategies which can be used for Forex trading. Here are a few:
Some traders like to trade by using a trading edge, which can be described as a set of conditions that gives a higher probability of a trade working than not working. An example of an edge could simply be identifying when the market is trending, in which case you base your trades on the direction of the trend. If you take trades in the direction of the trend, you have a higher probability of producing profitable trades.
Another type of edge trading would be when you can recognize when the market is ranging so you can buy at the lower boundary and sell at the upper boundary of that range.
Day trading has become one of the most popular trading strategies in the market today. It is based on holding larger positions for very short periods and buying and selling in quick succession. You are looking for smaller moves in shorter time frames. With day trading, it is important to keep a tight stop as day trading strategy offers many opportunities for Forex to work. Profits in day trades are usually low but they add up.
With swing trading on the other hand, the positions are smaller as you are looking for a larger move. Your stop loss orders should be placed wider. With swing trading, your profits are farther away so patience is called for.
by Dan Gedim
Dan Gedim is a writes on trading strategies for FXAcademy.com, an educational facility for traders.