Strategies

In the world of forex trading, the term strategy refers to a set of analyses that forex traders use to tell them if they should buy or sell a particular currency pair at any given point in time. Most forex trading strategies hinge on either news trading (fundamental analysis) or technical trading (technical analysis). Typically, a forex trader’s strategies relies on a great variety of signals, which lead them towards making buy or sell decisions.

There are two main types of forex trading strategies: manual or automated. A manual system can be thought of as an active one, which involves a trader look at a computer screen and monitoring real-time price graphs, waiting for a signal which they can then interpret and use to inform their decision to buy or sell a particular currency pair. Conversely, an automated system can be thought of as a passive one, where the trader “teaches” the software to study the price graphs and detect signals, which it will then interpret on behalf of the trader and make decisions for them. Trading strategies can be applied to both conventional forex trading andFX Derivatives trading, and in this section, we will be looking at a few of the most common strategies.

Scalping is a trading strategy that hinges on making profits based on narrow price fluctuations. Traders who adopt this strategy are known to place trades in the range as low as 10 to as high as a 100,000 in a single day. The primary belief is that tiny fluctuations in stock price are easier to catch than large ones, and traders who adopt this strategy are known as scalpers. Should a strict exit strategy be used to prevent large losses, many small profits can easily compound into substantial returns.

At a basic level, scalping makes use of larger positions sizes for narrower price gains within the smallest period of holding time. This is performed within a single day, and the primary objective is to buy or sell a number of shares at the bid price and immediately sell them off a few cents higher, or lower, for a profit. As far as holding times go, these can vary within the range of several seconds up to several hours.

Key Features of Scalping

As scalping relies so heavily on short buy/sell intervals, it is a fast-paced strategy and requires precise timing and execution. Many scalpers use day trading buying power of a 4:1 margin to maximize their profits with the greatest possible number of shares within the shorted possible amount of holding time. This strategy relies on the trader monitoring narrower timeframe interval charts such as the one-minute and five-minute candlestick charts. Momentum indicators such as the relative strength index are commonly used. Additionally, price chart indicators such as moving averages and Bollinger bands are used as points of reference for price support and resistance levels.

When it comes to momentum trading, traders pay close attention to stocks which are moving considerably in one direction on high volume. It is common for momentum traders to hold their positions anywhere from a few minutes up to several hours, or even an entire trading day. All this depends on how rapidly the stocks move and the point in which it reverses its direction.

The primary technical indicator of interest to a momentum trader is the momentum indicator, or the accumulated net change of a stock’s closing or ending price over a series of pre-determined time periods. The momentum line is plotted as a tandem line to the price chart, and it shows a zero axis. It also displays positive values denoting a sustained upward movement and negative values denoting a possibly sustained downward movement.

This upward or downward momentum indicator often points to a breakout for the stock, which means that even a period or two of prolonged momentum will drive that stock along the direction of the breakout. As all this is happening, the momentum trader will stay on the lookout for signs pointing towards a push, where bids start to line up and offers begin to dissolve.

Even at the point when the momentum trader is confident he has identified a breakout, it does not mean he has to react to the stock straight away. It is alright for him to miss the first couple of breakout ticks as long as he is ready for the buy trigger (or sell trigger in the case of a short sale) for one of the next momentum periods. Most of the time, he does not need to be too occupied with hitting the bid, for he will have an easier time entering at the market price.

After he has entered into his position, all that is left is to wait. Whether the momentum ceases instantaneously thereafter or continues to intensify, the trader has to monitor the price graphs in search of a saturation point, the point in which orders begin stacking up on the offer and bidding slows down or things at the market price a few levels back. This saturation point, however, does not mean that the momentum has ended immediately, but it may signal that the top is right around the corner. It is at this point that the momentum trader sells his position (or covers it in the case of a short sale) and reaps his returns.

A fade is a strategy employed to trade against the existing trends. Generally, “fading the market” is deemed relatively high risk, thus requiring traders to have a high risk tolerance. A fade trader will adopt a contrary mentality to typical trading behaviors, selling when a price is going up and buying when it is going down.

“Fading the market” involves shorting stocks after the price graphs reflect rapid moves upwards. This is based on three assumptions. Firstly, that early buyers are ready and waiting to begin raking in their returns. Secondly, that these stocks in an upward trend are over-bought. Thirdly, that existing buyers may be scared out. Despite its inherent risks, fading is seen by some as an immensely rewarding trading strategy. For fade traders, the price target (the projected price level of a financial security stated by a trading analyst or advisor) is when buyers are beginning to step in again.