3 Best Forex Trading Strategies for Beginners
The forex trading market is huge—larger even than the stock market. Its daily trading volume is a whopping $6.6 trillion, making it the largest financial market in the world. Those who understand forex trading strategies have the potential to make millions in returns.
But what is forex trading, exactly?
Trading forex, or foreign exchange, means buying and selling currencies. Traders earn profit by speculating on the price of currencies. Forex can be traded worldwide, five days a week, 24 hours a day.
With so much money flowing through the market, forex trading can be extremely profitable. However, it requires a good understanding of forex trading strategies. Make no mistake—it’s not a “get rich quick” niche. In reality, the majority of day traders lose their money.
Trading is risky, as every trade involves significant complexity and speculation. Learning forex trading strategies will help you beat the odds.
Types of Forex Trading Strategies
It’s important to understand your temperament before you begin trading. What is your risk appetite? How much time are you willing to spend every day tracking charts? Do you want to plan daily or weekly forex trading strategies?
Based on this, pick the time frame most appropriate for your needs. A time frame is the amount of time a trend lasts in the market. This could be a few seconds, minutes, or weeks. Your trading strategy will depend on which time frame you prefer.
Here are three strategies you can choose based on your time frame:
Scalping means taking advantage of small intraday price changes. Scalpers usually focus on specific currency pairs such as EUR/USD. This is because scalping requires a razor-sharp focus to track price fluctuations. Scalpers need to make quick decisions under pressure. They also need to do a deep analysis of specific pairs to predict price changes.
Scalp trading happens in minutes. With this strategy, you don’t have to worry about overnight or week-long fluctuations. However, scalping has a high margin of error, as traders can make mistakes and react hastily when trades run in minutes. It’s not one of the best forex trading strategies for beginners.
2. Day Trading
Day traders hold a trade longer than scalpers. However, they also focus on specific sessions or times of the day. While scalpers tend to make 10 or more trades daily, day traders usually search for only two or three good opportunities per day.
Scalping is high-pressure. Day trading, on the other hand, gives you time to think and plan. For this reason, several retail traders prefer day trading.
3. Swing Trading
Swing traders hold their positions open for several days. You’ll need patience and discipline if you choose this strategy because it might take time for a good trade to show up. Sometimes, you may even have to hold a trade open for days while running a loss.
Often, traders don’t have the patience for swing trading and close their trades early. Swing traders study the market deeply and conduct fundamental analysis when evaluating currency pairs.
Approach to Forex Trading
Of course, it won’t matter which forex trading strategies you choose if you don’t conduct analyses before buying or selling. An analysis can be technical, such as reading forex charts. It can also be fundamental, such as understanding the economic indicators of a currency or following political events.
Fundamental analysis measures a currency’s intrinsic value. Factors such as the economic and political climate and the rate of inflation play a huge role in the currency's movement.
Follow these trends to conduct a fundamental analysis:
- Economic Indicators: Markets often show major movement after important economic announcements. Economic reports and policy announcements are a direct measure of a country’s economic health. They’re good indicators of whether a currency is expected to improve or decline.
- Geopolitical Climate: Geopolitical tensions or conflicts adversely impact the economy. Following the news will help you predict which way a currency pair might move based on global or local events.
- Weather: Even weather-related events can cause price fluctuations. For example, a snowstorm can drive up the cost of gas, just as hurricanes and floods can affect the supply of tradable goods. While these events are mostly unpredictable, sometimes there’s a pattern to the weather events. Pay close attention to these patterns to uncover trade opportunities.
Technical analysis is data-driven. It’s the analysis of market activity and price fluctuations of forex pairs, stocks, or cryptocurrencies. Technical indicators can be complex algorithms or simple trendlines, which show the upward or downward trend of a currency. Trendlines help retail traders identify opportunities for profitable trades and show warning signs to avoid.
To do a technical analysis, you’ll need to study charts, candlestick patterns, and other data to forecast future price movements. It’s a good strategy for those who prefer not to make decisions based on emotions or market sentiment.
Forex Trading Strategies for Beginners
Without a system or plan in place, forex trading can be highly risky. The market is constantly evolving, so you need a strategy to decide what to do when market conditions change.
A good strategy will tell you when to enter or exit a trade and how to minimize risks. These are some features of effective forex trading strategies:
Breakout Trading Strategy
A “breakout” happens when the price of a forex pair moves out of a consolidated range. This means the currency pair has crossed the levels of support and resistance. If you use technical analysis to analyze price movements, you’ll be able to note when a currency is moving to new highs or lows.
Breakout signals mean a new trend has started. The market often reacts quickly after a breakout. This is one of the forex trading strategies where traders can make large profits in a short period.
Moving Average Crossover Trading Strategy
A moving average indicator is a formula used to calculate the average market movement over weeks or months. It’s one of the most common types of technical analysis used to identify market trends.
A moving average crossover happens when two different moving averages cross each other. This can help you identify entry and exit points for a trending trade. Moving averages are part of many forex trading strategies because they’re easy to use.
Tips from the Trading Pros
Here are a few tips from the pros at The Funded Trader that can help beginners minimize risks and losses:
- Pick a single currency pair in the beginning, but be sure to diversify and balance out your portfolio.
- Whether you choose to do a technical analysis or a fundamental analysis, keep your methodology consistent.
- Research, research, research.
- Avoid making trading calls based on hype or bandwagons.
- Follow economic news even if you don’t use fundamental analysis as your trading strategy.
- Avoid entering the market during high-volatility news events. That’s when the price moves up and down very abruptly due to lack of liquidity. Instead, wait for a brief period until the price stabilizes so you can reassess the situation.
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