Foreign exchange (forex) trading is, in simple terms, the trade of one national currency against another, with the aim of making a profit on the exchange rate. The value of a currency is determined by directly comparing it against another, and this is known as currency pairing.
Forex trading can provide you with some attractive opportunities to profit because the market is highly volatile and its landscape can change dramatically within a short period of time. This volatility also presents the risk of making losses, so it’s important that you conduct thorough research prior to opening a position in the market.
To give your trading approach some direction and consistency, it’s a good idea to employ a trading strategy. There are a multitude of different approaches you can use and you’ll want to implement the strategy that best suits your trading style. On an online trading platform like Skilling, for example, you could open a demo account and practice trading in the forex market using one of the most popular trading strategies.
This article will inform you about the top forex strategies, to help you to decide which could be best for you to use when trading.
Day Trading
The process of making all of your trades in one trading day is known as day trading. This means that you’ll have to monitor market activity throughout the course of the day, and open and close all of the trades that you make within this timeframe.
A day trader will rely heavily upon an economic calendar to make market decisions, since this resource plots specific dates in the year that could affect the financial markets. This includes meetings between the world’s Central Banks, as well as national elections, as these can affect national economies and consequently, their exchange rates.
To manage the risk of their trades, day traders will place a risk limit on the specific positions that they make, in addition to a daily risk limit. Typically, a day trader will set their limit to 3%, protecting their capital.
Swing Trading
If you’re wanting a medium-term trading style, then you may want to consider swing trading. This is the process of identifying price swings in the market and manipulating them in an attempt to make profits on your investment.
Unlike day trading, this approach will require you to hold a position in the market for a minimum of two days and this can extend to several weeks. This means that this will best suit a trader who has a patient disposition.
As this strategy will see you trade over a more flexible time period, it would suit those who don’t have time to monitor the markets throughout the day, and you could dedicate a few hours per night analysing the charts.
Scalping
The process of opening multiple trades within a short period of time is known as scalping. Traders who use this approach hope to make lots of small profits frequently, limiting their losses by entering and exiting their trades quickly.
This is one of the shortest-term approaches and will require you to hold a position for a matter of minutes. This strategy is well suited to the forex market because of the high levels of volatility that it experiences. By acting quickly, you can take advantage of short-term price movements in the market.
Because of the speed and frequency of trades, scalping will require you to constantly analyse data and charts, to identify and take advantage of short-term price movements.
Position Trading
Position trading is a long-term strategy. Traders will aim to identify changes in the market over an extended period of time. This means that traders will aim to hold a position for weeks, months or even years, and will wait for the currency pair’s price to increase over this period in order to make a profit.
This particular strategy is best suited to experienced traders who have a deep understanding of the market and don’t want to dedicate hours each day to analysing data.
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There is no ‘one size fits all’ strategy when it comes to forex trading, and the success of the approach that you take will depend upon how well suited it is to your trading style. Of course, as a beginner, you’ll need to decide what your trading style is, and research the market extensively before you open a position in the forex market.