Within price action, there is range, trend, day, scalping, swing and position trading. These strategies adhere to different forms of trading requirements which will be outlined in detail below. The examples show varying techniques to trade these strategies to show just how diverse trading can be, along with a variety of bespoke options for traders to choose from.
Range trading includes identifying support and resistance points whereby traders will place trades around these key levels. This strategy works well in market without significant volatility and no discernible trend. Technical analysis is the primary tool used with this strategy. There is no set length per trade as range bound strategies can work for any time frame.
Managing risk is an integral part of this method as breakouts can occur. Consequently, a range trader would like to close any current range bound positions. Oscillators are most commonly used as timing tools. Price action is sometimes used in conjunction with oscillators to further validate range bound signals or breakouts. Range trading can result in fruitful risk-reward ratios however, this comes along with lengthy time investment per trade.
Use the pros and cons below to align your goals as a trader and how much resources you have. Trend trading is a simple forex strategy used by many traders of all experience levels. Trend trading attempts to yield positive returns by exploiting a markets directional momentum.
Trend trading generally takes place over the medium to long-term time horizon as trends themselves fluctuate in length. As with price action, multiple time frame analysis can be adopted in trend trading. Entry points are usually designated by an oscillator RSI, CCI etc and exit points are calculated based on a positive risk-reward ratio. Using stop level distances, traders can either equal that distance or exceed it to maintain a positive risk-reward ratio e.
If the stop level was placed 50 pips away, the take profit level wold be set at 50 pips or more away from the entry point. The opposite would be true for a downward trend. When you see a strong trend in the market, trade it in the direction of the trend. Using the CCI as a tool to time entries, notice how each time CCI dipped below highlighted in blue , prices responded with a rally. Not all trades will work out this way, but because the trend is being followed, each dip caused more buyers to come into the market and push prices higher.
In conclusion, identifying a strong trend is important for a fruitful trend trading strategy. Trend trading can be reasonably labour intensive with many variables to consider. The list of pros and cons may assist you in identifying if trend trading is for you. Position trading is a long-term strategy primarily focused on fundamental factors however, technical methods can be used such as Elliot Wave Theory. Smaller more minor market fluctuations are not considered in this strategy as they do not affect the broader market picture.
This strategy can be employed on all markets from stocks to forex. As mentioned above, position trades have a long-term outlook weeks, months or even years! Understanding how economic factors affect markets or thorough technical predispositions, is essential in forecasting trade ideas.
Entry and exit points can be judged using technical analysis as per the other strategies. The Germany 30 chart above depicts an approximate two year head and shoulders pattern , which aligns with a probable fall below the neckline horizontal red line subsequent to the right-hand shoulder. In this selected example, the downward fall of the Germany 30 played out as planned technically as well as fundamentally.
Brexit negotiations did not help matters as the possibility of the UK leaving the EU would most likely negatively impact the German economy as well. In this case, understanding technical patterns as well as having strong fundamental foundations allowed for combining technical and fundamental analysis to structure a strong trade idea. Day trading is a strategy designed to trade financial instruments within the same trading day.
That is, all positions are closed before market close. This can be a single trade or multiple trades throughout the day. Trade times range from very short-term matter of minutes or short-term hours , as long as the trade is opened and closed within the trading day. Traders in the example below will look to enter positions at the when the price breaks through the 8 period EMA in the direction of the trend blue circle and exit using a risk-reward ratio.
The chart above shows a representative day trading setup using moving averages to identify the trend which is long in this case as the price is above the MA lines red and black. Entry positions are highlighted in blue with stop levels placed at the previous price break. Take profit levels will equate to the stop distance in the direction of the trend.
The pros and cons listed below should be considered before pursuing this strategy. Scalping in forex is a common term used to describe the process of taking small profits on a frequent basis. This is achieved by opening and closing multiple positions throughout the day.
The most liquid forex pairs are preferred as spreads are generally tighter, making the short-term nature of the strategy fitting. Scalping entails short-term trades with minimal return, usually operating on smaller time frame charts 30 min — 1min. Like most technical strategies, identifying the trend is step 1. Many scalpers use indicators such as the moving average to verify the trend. Using these key levels of the trend on longer time frames allows the trader to see the bigger picture.
These levels will create support and resistance bands. Scalping within this band can then be attempted on smaller time frames using oscillators such as the RSI. Stops are placed a few pips away to avoid large movements against the trade. The long-term trend is confirmed by the moving average price above MA. Timing of entry points are featured by the red rectangle in the bias of the trader long.
Traders use the same theory to set up their algorithms however, without the manual execution of the trader. With this practical scalp trading example above, use the list of pros and cons below to select an appropriate trading strategy that best suits you. Swing trading is a speculative strategy whereby traders look to take advantage of rang bound as well as trending markets.
Swing trades are considered medium-term as positions are generally held anywhere between a few hours to a few days. Longer-term trends are favoured as traders can capitalise on the trend at multiple points along the trend. The only difference being that swing trading applies to both trending and range bound markets. A combination of the stochastic oscillator, ATR indicator and the moving average was used in the example above to illustrate a typical swing trading strategy.
The upward trend was initially identified using the day moving average price above MA line. Stochastics are then used to identify entry points by looking for oversold signals highlighted by the blue rectangles on the stochastic and chart. Risk management is the final step whereby the ATR gives an indication of stop levels. The ATR figure is highlighted by the red circles.
This figure represents the approximate number of pips away the stop level should be set. For example, if the ATR reads At DailyFX, we recommend trading with a positive risk-reward ratio at a minimum of This would mean setting a take profit level limit at least After seeing an example of swing trading in action, consider the following list of pros and cons to determine if this strategy would suit your trading style. Carry trades include borrowing one currency at lower rate, followed by investing in another currency at a higher yielding rate.
This will ultimately result in a positive carry of the trade. This strategy is primarily used in the forex market. Carry trades are dependent on interest rate fluctuations between the associated currencies therefore, length of trade supports the medium to long-term weeks, months and possibly years. Strong trending markets work best for carry trades as the strategy involves a lengthier time horizon. Confirmation of the trend should be the first step prior to placing the trade higher highs and higher lows and vice versa — refer to Example 1 above.
There are two aspects to a carry trade namely, exchange rate risk and interest rate risk. Accordingly, the best time to open the positions is at the start of a trend to capitalise fully on the exchange rate fluctuation.
Given smaller profit targets, wider spreads and slippage, a higher success rate is needed to sustain profitability while overcoming these drawbacks. Example of Range Trading. Momentum Trading. Momentum trading and momentum indicators are based on the notion that strong price movements in a particular direction are a likely indication that a price trend will continue in that direction. Similarly, weakening movements indicate that a trend has lost strength and could be headed for a reversal.
Momentum strategies may take into consideration both price and volume, and often use analysis of graphic aides like oscillators and candlestick charts. Implementing momentum trading strategies is relatively easy and affordable. Robust trends are obvious on any timeframe, making spotting setups routine. Capital outlays are reduced as the success or failure of a specific trade is known quickly. This strategic functionality is ideal for cutting losing trades off while letting winners run.
The momentum of price action can be fickle, often receding unexpectedly. Also, accurately timing the market is problematic as strong moves typically come on quickly. To trade momentum strategies, discipline is needed as the temptation to "chase" a missed entry can lead to unwarranted losses. Example of Momentum Trading. Swing Trading. Swing trading is customarily a medium-term trading strategy that is often used over a period from one day to a week.
Swing traders will look to set up trades on "swings" to highs and lows over a longer period of time. This is to filter out some of the "noise," or erratic price movements, seen in intraday trading. It's also to avoid setting narrowly placed stop losses that could force them to be "stopped-out" of a trade during a very short-term market movement.
Swing trading strategies afford the trader with an opportunity to stay in the market despite intraday volatility. This eliminates many unfortunate market exits and promotes a higher success rate than various short-term methodologies. Also, profits from swing trades can be large, as getting in on a trend is more likely due to being active in the live market. Executing swing trades is more expensive, as stop losses are much greater than in intraday strategies.
Additionally, holding open positions for extended periods in the live market exposes the trader to a higher degree of systemic risk. Depending on the pair and position size, there may also be substantial costs attributable to forex rollover. Example of Swing Trading.
Breakout Trading. A breakout strategy is a method where traders will try to identify a trade entry point at a breakout from a previously defined trading range. If the price breaks higher from a previously defined level of resistance on a chart, the trader may buy with the expectation that the currency will continue to move higher. Similarly, if the price breaks a level of support within a range, the trader may sell with an aim to buy the currency once again at a more favourable price.
Breakout trading strategies can lead to big profits, as breakouts often turn into strong trends. Further, a breakout trade's success is determined rapidly. If there isn't ample order flow to support a directional move in price, the trader is able to exit the market and quickly mitigate losses. While they do occur, true breakouts are not all too common on the forex. Unfortunately, breakout traders frequently deal with false signals as market participation isn't strong enough to move price definitively.
In addition, breakouts can be tough to capture as they come on and develop exceedingly fast. Example of Breakout Trading. Forex Day Trading Strategy. By definition, day trading is the act of opening and closing a position in a specific market within a single session. Although it is sometimes referenced in a negative connotation, day trading is a legal and permitted means of engaging the capital markets.
In fact, it benefits practitioners in several ways: Limited Risk: Day trading is a short-term strategy that does not require the trader to hold an open position in the market for an extended period. Subsequently, exposure to systemic and market risks are greatly reduced. Decreased Opportunity Cost: The trading account's liquidity is ensured due to the intraday durations of trade execution. Risk capital is not committed to a single trade for a long period of time; this element frees up the trader to pursue other opportunities.
Regular Cash Flow: Day trading allows for a regular cash flow to be generated. As a result, gains are realised much faster in comparison to more traditional investment strategies. A forex day trading strategy may be rooted in either technical or fundamental analysis. Some of the most common types are designed to capitalise upon breakouts, trending and range-bound currency pairs. Compared to other markets, the availability of leverage and diverse options make the forex a target-rich environment for day traders.
In addition, one has the flexibility to benefit from being either long or short a currency pair. When taken together, these three factors effectively open the door to myriad unique forex day trading strategies. Day trading limits the trader's exposure to broader systemic risk.
Also, there are no rollover costs as positions are not held through the daily forex close. Executing day trading strategies is more affordable as stop losses are vastly reduced from multi-day strategies. In addition, opportunity cost is mitigated as capital is not tied up for long periods in the market. When day trading, the trader is exposed to intraday noise. Breaking news items or scheduled economic reports can skew short-term volatility, leading to unexpected losses.
Moreover, slow market conditions can undermine favourable risk vs reward ratios, making it a challenge to sustain long-term profitability. Example of Day Trading. Forex Scalping Strategy. Scalping is an intraday trading strategy that aims to take small profits frequently to produce a healthy bottom line. Trades are executed according to a rigid framework designed to preserve the integrity of an edge.
Through applying a viable edge repeatedly on compressed timeframes, capital exposure and systemic risk are limited. The success of a forex scalping strategy is dependent upon several key factors: Valid Edge: In order to make money scalping, one must be able to identify positive expectation trade setups in the live market.
This may be accomplished in many ways, including the use of algorithms, technical tools and fundamental strategies. A strong edge is statistically verifiable and potentially profitable. Discipline: Scalping requires the execution of a high volume of trades. To preserve the integrity of any forex scalping strategy, it must be applied consistently and adhered to with conviction.
Low Costs: In scalping, profit targets are smaller than those of swing trades and long-term investment. Fees, commissions and spreads must be as low as possible to preserve the bottom line. Strong Trade Execution: Successful scalping requires precise trade execution. Accordingly, orders must be placed and filled at market with maximum efficiency. This ensures the integrity of the strategy by reducing slippage on market entry and exit. Due to the greater number of trades being executed, currency pairs that offer both liquidity and pricing volatility are ideal.
Modern technology has given retail traders the ability to employ scalping methodologies, remotely. Many brokerage services offer low-latency market access options and software platforms with advanced functionality. Whether your forex scalping strategy is fully automated or discretionary, there is an opportunity to deploy it in the marketplace.
Scalping strategies require the use of tight stop losses, which eliminates the chance of experiencing financial catastrophe. Due to the fact that trades are executed on compressed time frames, exposure to systemic risk is vastly limited. Also, risk capital is allocated for brief periods of time allowing the trader to remain flexible in the market.
The utilisation of small profit targets and tight stop losses enhance the negative impacts of order slippage. Scalpers rely on executing an abundance of trades on a daily basis, and it can be challenging to find enough setups to sustain profitability.
Example of Scalping. Retracement strategies are based on the idea that prices never move in perfectly straight lines between highs and lows, and usually make some sort of a pause and change of their direction in the middle of their larger paths between firm support and resistance levels. With this in mind, retracement traders will wait for a price to pull back, or "retrace," a portion of its movement as a sign of confirmation of a trend before buying or selling to take advantage of a longer and more probable price movement in a particular direction.
Buying or selling retracements is an ideal way of entering trending markets. Thus, potential big profits are possible through the implementation of positive risk vs reward setups. Additionally, positions are opened in concert with a prevailing trend, which typically leads to higher success rates than counter-trend strategies.
Trend reversals are often misconstrued as being retracements, which can lead to substantial capital loss. Frequently, a market pulls back before entering a rotational phase, effectively reducing a retracement trade's profit potential.
In trending markets, periodic ranges can be significant, requiring a large capital outlay to trade retracement strategies properly. Example of Retracement. Reversal Trading. As the name implies, reversal trading is when traders seek to anticipate a reversal in a price trend with the aim to guarantee entrance into a trade ahead of the market. This strategy is considered more difficult and risky. True reversals can be difficult to spot, but they're also more rewarding if they are correctly predicted.
Traders use a variety of tools to spot reversals, such as momentum and volume indicators or visual cues on charts such as triple tops and bottoms , and head-and-shoulders patterns. Reversal trading can lead to potential profits and optimal market entry for a new trend.
There are a multitude of tools for identifying reversals, such as stochastics or the MACD. Stop losses can be affordable as a trade's effectiveness is determined in relation to the market's periodic extreme; the trend either changes direction from this point, or it doesn't. Identifying market reversals can be problematic as trending markets frequently produce many false signals.
In the live market, differentiating between a retracement and reversal is challenging as the structure of both is initially similar. Further, although a trend may become exhausted, markets often lack ample follow through to fully change direction. Example of Reversal Trading.
Position Trading. Position trading is a long-term strategy that may play out over periods of weeks, months or even years. Position traders often base their strategies on long-term macroeconomic trends of different economies. They also typically operate with low levels of leverage and smaller trade sizes with the expectation of possibly profiting on large price movements over a long period of time. These traders are more likely to rely on fundamental analysis together with technical indicators to choose their entry and exit levels.
This type of trading may require greater levels of patience and stamina from traders, and may not be desirable for those seeking to turn a fast profit in a day-trading situation. Position trading can potentially generate gains as the trader is in position to capitalise on strong trends. In addition, the trader is not concerned with short-term market volatility, only the macro direction of the market.
When position trading, one does not need to be precise in market entry or exit to maintain profitability. Position trading strategies require the trader to hold open positions for extended periods of time. This ties up risk capital, directly increasing the trade's opportunity cost.
Also, the exposure to systemic risk is vastly greater than shorter-term strategies. Losses from position trading can be large, as stop loss locations are much wider in relation to macro market conditions. Example of Position Trading. Carry Trade. Carry trade is a unique category of forex trading that seeks to augment gains by taking advantage of interest rate differentials between the countries of currencies being traded. Typically, currencies bought and held overnight will pay the trader the interbank interest rate of the country of which the currency was purchased.
Carry traders may seek out a currency of a country with a low interest rate in order to buy a currency of a country paying a high interest rate, thus profiting from the difference. Traders may use a strategy of trend trading together with carry trade to assure that the differences in currency prices and interest earned complement one another and do not offset one another. In a stable global economic environment, carry trades have a robust success rate.
Carry trades are ideal diversification tools as they may appreciate in comparison to separate stock or commodity positions. Further, the functionality of the carry trade is straightforward and can produce regular cash flows. The adoption of low interest rates by central banks can make the upside of certain carry trades negligible.
Also, carry trades come with the added risk of being exposed to the economic underpinnings of countries with "higher" interest rates. If central bank policy suddenly shifts, or an unfavorable economic report surfaces, the effectiveness of any carry trade may be immediately compromised. Example of Carry Trading. Pivot Points. Pivot point trading seeks to determine resistance and support levels based on an average of the previous trading session's high, low and closing prices.
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