Types of Forex Trading Strategies

If you’re new to trading, you have probably tried several strategies without finding the one that fits you, and it can be frustrating to watch other traders make money with a method while your own attempts fall short. You may also want to read about Trusted Forex Brokers in Saudi.

To get past this, you need to know the types of trading strategies, the advantages and drawbacks of each, and then pick the one that suits you.

This article covers the four main types of forex trading strategies.

1. Long-Term Trading Strategies

This type of forex trading strategy works on timeframes ranging from a day up to weeks, and sometimes months.

If you choose this type, you need a full understanding of fundamental analysis: reports released by central banks, political events, and other factors that affect national economies and each country’s GDP.

You also have to consider the technical side of the analysis, but the main reliance is on fundamental analysis.

For example:

If we want to enter a long-term position on a particular currency pair, we need to know the pair’s current trend, and that is the job of fundamental analysis.

Once we know the trend, we need a strong entry area such as support and resistance or other technical analysis tools.

Pros:

This type of trading strategy can suit people who take an investment approach and act with patience. Its advantages include:

• It doesn’t require spending much time trading, because your trades run over the long term.
• Less pressure in your trading, because you’re not concerned with short-term price swings.
• A low risk relative to the reward, which can reach 1:5.

Even so, long-term trading may not be the best option for everyone because of its drawbacks.

Cons:

• It requires a strong grasp of the fundamentals that drive the market.
• It needs a large capital because your stop loss is wide.
• You may not make a profit every year given the low number of trades.

There is another type of trading strategy called Trend Follow. The only difference between Trend Follow strategies and the type we’re discussing now is that Trend Follow strategies take a purely technical approach that uses nothing from fundamental analysis.

2. Swing Trading (Medium-Term Strategies)

Medium-term trades usually run on medium timeframes, that is between one hour and four hours, and the trade often lasts several days.

In this type of trading, traders focus on catching opportunities that usually range between one hundred and two hundred pips. This is perhaps the most popular type of strategy among traders because it combines the advantages of long-term trading with those of scalping.

The main tools medium-term traders rely on are:

• Buying at support
• Selling at resistance
• Waiting for breakouts
• Trading with the moving average

So it’s important to learn technical concepts such as support and resistance, Japanese candlestick patterns, and the moving average.

Every type of trading strategy has pros and cons, and for medium-term trading they are as follows:

Pros:

• You don’t have to leave your full-time job, because you won’t be forced to sit in front of the chart for long; a few hours are enough.
• It increases your chance of making a profit every year because you have plenty of trading opportunities.

Cons:

The only drawback of this type is that you won’t be able to enter a trend from its very start.

3. Day Trading Strategies

Day trades are considered short-term trading strategies, lasting minutes or even hours (similar to medium-term trading but at a faster pace).

The timeframes you trade are usually 5 minutes or 15 minutes.

The day trader focuses on catching quick opportunities of between 25 and 100 pips.

As noted above, day trades are like medium-term trades but at a faster pace, so they share the same technical analysis tools:

• Buying at support
• Selling at resistance
• Waiting for breakouts
• Trading with the moving average

In day trading you don’t have to be proficient in fundamental analysis and you don’t have to follow the trend; simply keeping a basic eye on important political and economic events is enough. If you’re not aware of current events, you can stay out of the market when this news is released to avoid the price slippage that can result from it.

Now let’s look at the pros and cons of day trading.

Pros:

• With a good day-trading strategy, the large number of trades can add up over the month.
• No risk of leaving trades open to the next day, because you close all trades before the day ends.

Cons:

• Day trading is tiring because you monitor the markets constantly.
• You are more exposed to losses if the news reverses expectations.
• Commissions may be high at some brokerage firms, and because of the many trades, transaction costs can eat up most of your profits.

4. Scalping Strategies

Scalping is a very short-term type of trading strategy where trades are carried out on the one-minute timeframe or even seconds.

This type of strategy often relies on fast signals such as Japanese candlestick patterns or a signal from an oscillator such as the Stochastic, MACD, and others. Scalping can be profitable if you master it, but it can be hard to apply, so you should practice well on a demo account before you start trading a real account. [AFF-CTA: pending]

Now let’s look at the pros and cons of scalping.

Pros:

• You have many trading opportunities every day.
• It can generate a good income from trading if you have a good strategy.

Cons:

• High financial cost (paying commissions to brokerage firms and so on).
• You have to sit in front of the screen for several hours a day.

Which Type of Trading Strategy Suits Me?

To answer this question, you should ask yourself two questions:

1. What is the goal you’re trading for?

Is it generating income, or building wealth?

If the goal is income, that means you have time to trade and can sit in front of the screen for several hours a day, so you’re looking for a large number of trades. In that case the strategies that suit you are day trading and scalping.

But if the goal is building wealth, then you follow a long-term investment approach, and the trading type that suits you is long-term trading, with medium-term trades available at times.

2. How much time can you dedicate to trading?

If you have a full-time job, or you can’t spend long in front of your screen, then scalping or day trading strategies are not for you, since as you know they require a lot of screen time.

But if you have enough time, then short-term trading is the best option for you.

Conclusion

• Long-term trading strategies follow an investment rather than a speculative approach, and rely mainly on fundamental analysis.
• Medium-term trading strategies can suit people who don’t have large capital and don’t have much experience in fundamental analysis, but who in return have a good knowledge of technical analysis.
• Day trades are very similar to medium-term trades but at a faster pace.
• Scalping trades require dedicating a lot of time to trading.
• Before choosing your type of trading strategy, you should know the goal you’re trading for and how much time you’ll have available for trading.

Many forex traders focus on long-term price movement and look for the maximum potential gains from major price shifts, so trades generally extend over weeks, months, or even years.

Forex traders also tend to use weekly and monthly price charts to analyze and assess the markets, using a set of technical indicators, fundamental analysis, and trading strategies to identify potential entry and exit levels.

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