There are many forex trading strategies out there, and each of them is lauded as “the best forex strategy” by whoever is trying to convince you to use it. However, fact and fiction are not necessarily the same, and trading strategies are no exception. In order to find the right trading strategy, one needs to consider goals and possibilities. Among those few trading strategies that can be successfully applied on currency trading, there are two types that stand out the most: trend trading and range-bound forex trading strategies.
Trading Trends
As you may have noticed, price movements of currency pair are not exactly hectic; they generally follow a certain direction, forming a so-called trend. Trend trading is one of forex trading strategies that exploit various movements in order to turn profit. Needless to say, if this forex strategy is to yield any significant results, the underlying trend needs to last for a while. Identifying these trends is the trickiest part about currency trading, at least for this forex strategy. If the momentum doesn’t hold out, it could result in some serious financial losses for the trader in question.
On the other hand, it is possible to underestimate a trend as well, which is perhaps even more detrimental in the long run. If a trader beats a hasty retreat and sees a trend continuing for some time, they will wonder how much they would have earned had they stayed committed. This might make them more careless and greedy in the future. Also, if you plan to rely on trends when planning which forex trading strategies to use, keep in mind that no trend will last forever. No matter how strong, it has to reverse at some point. In other words, you have to be prepared for a quick bail out.
Risks and Rewards of Trend Trading
The most effective users of this strategy are the ones who have a knack for identifying trends, so they can get in on the action ahead of everyone else. That way they have the biggest advantage and the most time until the inevitable reversal happens. Remember, if you see a trend making a reversal, you are already running late. It should be clear as the day that there is no place for emotions in any of the forex trading strategies. Once the goal has been achieved, there is no reason to hold on to the currency pairs. The good thing about forex markets is that there is usually more than enough action going on, so even the most exotic of pairs should be liquid enough to make a speedy transaction.
Keep in mind that trend trading is not for everyone. Despite being one of the more successful forex trading strategies known to the trading world, trend trading still has a negative track record and more people have lost their money than profited from it. There are two reasons for this: one is that many traders start trading trends before they are ready and do not pay attention to the advice they were given. The other is that predicting trends is extremely difficult, even for seasoned traders, so there is always some degree of risk involved.
Trading Range
The second type of forex trading strategies is called range-bound trading. When applied on forex trading, the range part is actually the price spread of the currency pair in question. The spread is between the highest and the lowest price over a certain time period. The trick here is to identify channels that currencies are being traded in. From that point on, things get pretty simple: you buy at the bottom (where the price is lowest) and sell at the top (when the price peaks).
The mechanics behind these channels is directly tied to support and resistance levels. At the bottom of the channel, the support kicks in and at the top the resistance does its thing. The thing is, like trends, these ranges don’t last forever either. Once the price range has been successfully breached, this can be either a very good or a very bad thing, depending on the direction. If the top of the channel is breached, this is a good thing as the price will skyrocket. On the other hand, if the bottom end fails, traders are facing some serious financial consequences.
The (Never)ending Seesaw
Currencies generally trend in loops, which is the foundation for most of forex trading strategies. The ones who identify these opportunities early on are the ones who will get the most out of them, while those who arrive late… Well, there is no prize for a second place – not here, anyway. Even after the range is eventually breached, a new one forms and the game begins anew. Arguably, the biggest downside of this strategy is that it requires a tremendous amount of capital required to not only make it worth your while, but also to cover any losses that probably will occur eventually. When range-trading, the premise is that the price will ultimately reach your comfort zone, but costs will need to be covered in the meantime. This requires a hefty stash on hand. One way to beat this is to trade smaller lots and find a dealer with low commission, or no commission at all.
Final Word
There are many types of forex trading strategies, but they are only as effective as the traders who use them. Whether you rely on trends, ranges or instincts, there is a degree of circumstances that are also at play. Being able to calmly analyze the market situation and adapt to any new developments is the key to success. Just stay focused, prepare yourself for the losses that will happen from time to time and pick one of forex trading strategies that suits your interests, and stick to it.