In the forex market, it is often understood that a beginner trader has more chances of becoming a successful trader than a trader who has been trading unprofitably for years. This is due to the fact that beginner traders do not have the time to develop any bad trading habits. On the other hand, a trader who has been struggling to trade for years does not find what works best for him and her. Such traders, not only have to develop a framework but have to do away with any bad habits and negative feelings that may have affected them till this point.
This is where strategies come into play. Trading strategies are a collection of some fundamental rules that traders can apply to trade profitably. While some are pretty complex and hard to grasp if you are a novice trader, there are some that are easily implemented and understood.
In this guide, we feature 5 easy strategies which you can use to profit from the forex market.
Carry trading refers to a type of forex trading where traders profit from interest rate differentials between the currencies of two nations. It is both a popular, as well as risky strategy. Traders are primarily paid the interbank interest rate of the country whose currency was bought, just by holding it overnight. To carry trade, find a low-interest-rate currency to borrow from to fund the purchase of a currency having a higher rate.
Your main aim from carry trading should be to profit from the difference between the rates, which can pay huge dividends if the right amount of leverage is used. Common trading pairs being used with this strategy include the New Zealand Dollar/Japanese Yen and the Australian dollar/Japanese Yen, as the interest rate spreads of these pairs are on the higher side. The daily interest from a carry trade is calculated as: [Interest rate(long currency)- Interest Rate(short currency)]/365 * notional value.
In momentum trading, traders use the strength of price movement to enter and exit positions. Price momentum in forex is determined by trade volume and price change rates in the market. So to use this strategy, you have to primarily rely on the concept that if the price is moving strongly in one direction, it will continue to do so until a certain point when the trend loses momentum. Alternatively, weakening movements are an indication that the trend will lose strength and a reversal is imminent.
To deploy a momentum strategy, you need to understand how to read candlesticks as they are the basis of estimating price action. This is determined by the length of the opening and closing prices of the candlestick. Price action signals provide you with an indication of whether momentum is decreasing or increasing.
Range trading is based on the idea that prices are confined within a steady, predictable range for a given period. You can use it in the best way possible in markets with stable and predictable economies. The currencies involved are often subject to surprise news events from around the world. As the name suggests it works best in range-bound markets.
You can implement Range trading in any market condition, but it works best when the market lacks direction with no chances of a long-term trend. On the other hand, range trading is most ineffective during a trending market, especially if you do not account for the market’s directional bias. Identifying the trading range is the first and most important step in this strategy. You can locate this when the currency has recovered from the support area.
Moving Average Crossover
Moving Average Crossover is a technical analysis tool you can use to smooth out price data and create a constantly updated average price. You can choose your period while taking the average, anything from 20 minutes to 30 weeks and beyond. They are popular as anyone can tailor them to any time-frame, which suits both short-term traders as well as long-term investors. Moving averages can help you to the direction of the trend as well as determine support and resistance levels.
The main aim of the strategy is to find the middle of the trend, which defines the price action in which prices move in a specific direction over a period. They can be either upward or downwards. To catch short-term trends, use short-term moving averages. You have to look for periods where a short-term moving average crosses above or below the long-term moving average. However, traders should be aware that moving average crossovers can produce several false signals. To weed these signals out, you can use an additional tool such as a Bollinger Band.
Trend trading is a beginner-friendly trading strategy that involves identifying an upward or downward trend in a currency price movement. Based on this you choose your entry and exit points. The entry and exit points also depend on the relative strength of the trend as well as the currency’s price within the trend. Trend traders use different tools such as the moving average, relative strength indicators, volume measurements, stochastics, and directional indices.
Traders like to take advantage of a strong trend if they believe there is an upside-down line. If you have access to 100 times leverage (for example), you could easily double their account balance in a single trade if they spot trends early on. These opportunities come very rarely, such as the British pound move post Brexit.
Whatever strategies you ultimately pick, you must always follow those rules regardless of what the condition of the market is. Many traders make the mistake of not following their strategies and trade the market based on their assumptions. They invariably end up making disastrous trading decisions which ultimately ruin their trading account. Remember, one particular strategy may not be enough to profit all the time, so you have to be able to adapt to certain market conditions and change the way you trade accordingly.