Most Popular Forex Trading Strategies
Some of the most popular forex trading strategies are described below, along with details about the techniques and trading objectives typically involved in their implementation. The order in which they are listed corresponds to the typical outlook time frame and holding period of the positions that traders take when employing these strategies.
Day Trading – As the name implies, a day trader takes on positions and closes them out within the same trading day. Because the forex market trades 24-hours-a-day from Sunday night to Friday afternoon, the day trader will typically trade during normal business hours in the time zone where they are located. The reasoning behind using a day trading strategy often involves minimizing overnight FOREX risk exposure, as well as avoiding liquidity problems that might occur in the overnight market.
The day trader generally maintains an alert demeanor during trading hours, keeping ready to execute trades while positions are open and then closing all open positions at the end of the trading day. In the past, most day traders used to be professional traders in the employ of banks or large financial institutions. Nevertheless, with the advent of online forex trading, and the availability of the different types of forex accounts, anyone with a high-speed internet connection and a few dollars can now begin day trading from home.
One of the strategies that some day traders use is called “scalping”, and it consists of attempting to buy on the bid side and sell on the offer side of the market. Scalpers do so to attempt to capture the spread, much like a professional market maker, just in a smaller size.
Momentum Trading – Also known as an impulse trading system, momentum trading identifies optimum entry points in the market and uses a combination of indicators such as exponential moving averages to determine the degree of inertia in the market and in which direction it is most likely to go. Another indicator that measures market momentum, called a Moving Average Convergence Divergence or MACD histogram, is usually subsequently evaluated.
The MACD is an oscillator indicator which means it will vary between two extremes that indicate either a preponderance of buyers or an excess of sellers in the market. If the indicator shows a rising slope, that would reflect more buyers but if it demonstrates a downward slope, that would indicate more sellers. Trade signals are generated when both the moving average and the MACD indicator move in the same direction. Divergence between the indicators would signify an exit point for the trade.
Trend Trading – “The trend is your friend” goes the trading maxim which aptly describes the attitude of the trend trader. Trend trading, when implemented correctly, often produces the largest gains over time. Nevertheless, it requires considerable patience on the part of the trader.
Typically, a trend trader will first identify a medium or long-term trend and then wait for an optimum entry point to take a position in the direction of the trend. Technical analysis techniques, usually involving drawing trend lines and channels from which break-outs might occur, are often used to signal when to initiate and close positions.
Once the overall trend has been confirmed and the trader has established a position, the trader will hold the position for as long as the trend is in place. Trailing stops are frequently used by trend traders as profits accumulate in order to protect them from any sudden pullbacks in the market.
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