Free Forex Trading Strategies That Work
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Forex trading strategies define the system that forex traders use to determine when to buy or sell currency pairs. There are various forex strategies that traders can use including technical analysis or fundamental analysis. A good forex trading strategy helps traders analyze the market and execute trades with good risk management techniques.
Forex strategies can be divided into different organizational structures that can help traders in finding the most suitable strategy. The diagram below shows how each strategy falls into the overall structure and relationship between forex strategies.
Forex trading requires combining many factors to create a trading strategy that works for you. There are countless strategies that can be followed, however, understanding and comfort with the strategy is essential. Every trader has unique goals and resources, which must be considered when choosing the right strategy.
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To easily compare forex strategies in three terms, we have placed them in a bubble chart. On the vertical axis is the ‘Risk-Reward Ratio’ with strategies at the top of the graph having higher rewards for each trade risk. Position trading is usually the strategy with the highest risk reward ratio. On the horizontal axis is the time investment that represents how much time to actively monitor the trade. The most demanding strategy in terms of your time resources is trading scalps because of the high frequency of trades being placed on a regular basis.
Price action trading involves studying historical prices to create technical trading strategies. Price action can be used as a stand alone technique or in conjunction with indicators. The base is rarely used; However, it is not uncommon to include economic events as a key factor. There are many other strategies that fall within the price action bracket outlined above.
Price action trading can be used in different time periods (long term, medium and short term). The ability to use multiple time frames for analysis makes price action valuable by many traders.
Within price action, there are ranges, trends, days, scalping, swing and position trading. These strategies follow different patterns of trading requirements which will be detailed below. Examples show different techniques in trading these strategies to show that a variety of trades can be possible, along with a variety of options for traders to choose from.
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Range trading involves identifying support and resistance points where traders will place trades around these key levels. This strategy works well in the market without significant fluctuations and no obvious trends. Technical analysis is the main tool used with this strategy.
There is no set length per trade as the range strategy can work for any time frame. Risk management is an important part of this method because breakouts can happen. Therefore, the range trader needs to close the bound position of the current range.
Oscillators are most commonly used as timing tools. Relative Strength Index (RSI), Commodity Channel Index (CCI) and stochastics are some of the more popular oscillators. Sometimes price action is used in conjunction with oscillators to further detect range signals or breakouts.
USD/JPY has shown a long range of price bounds over the past few years. The chart above shows the clear support and resistance bands that traders use as entry/exit points. RSI oscillator shows the period of entry / exit points highlighted by blue and red boxes – blue: overbought and red: oversold.
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Range trading can result in a higher risk-to-return ratio, however, this comes with a long-term investment per trade. Use the pros and cons below to align your goals as a trader and the resources you have.
Trend trading is a simple forex strategy used by many traders of all experience levels. Trend trading tries to give positive returns by exploiting the market according to direction.
Trend trading generally takes place over the medium to long term as the trend itself changes in length. As with price action, multiple time frame analysis can be adopted in trend trading.
Entry points are usually determined by an oscillator (RSI, CCI etc.) and exit points are calculated based on a positive risk-to-reward ratio. Using stop-level intervals, traders can equal that interval or exceed it to maintain a positive risk-reward ratio e.g. If the stop level is placed 50 pip away, the take profit level will be set at 50 pip or more away from the entry point.
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In the simple example above, EUR/USD shows an upward trend that is verified by higher highs and lower lows. The opposite will be true for a downtrend.
When you see a strong trend in the market, trade it in the direction of the trend. For example, the strong trend in EUR/USD above.
Using (CCI) as a time entry tool, notice that each time the CCI drops below -100 (highlighted in blue), the price responds to a rally. Not all trades will proceed in this way, but because the trend is followed, each drop brings buyers into the market and pushes the price higher. In conclusion, strong trend identification is essential for a fruitful trend trading strategy.
Trend trading can be quite labor intensive with many variables to consider. A list of pros and cons may help you determine if trend trading is for you.
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Position trading is a long-term strategy mainly focused on fundamental factors, however, technical methods can be used such as Elliot Wave Theory. Smaller market fluctuations are not considered in this strategy as they do not affect the broader market picture. This strategy can be used in all markets from stocks to forex.
As mentioned above, position trading tends to be long-term (weeks, months or even years!) reserved for very patient traders. Understanding the economic factors affecting the market or technical intentions in detail, is essential in predicting trade ideas.
Key levels on longer-term charts (weekly/monthly) hold valuable information for position traders because of their comprehensive view of the market. Entry and exit points can be decided using technical analysis based on other strategies.
The German 30 chart above shows the two-year pattern of the head and shoulders, which corresponds to a possible decrease under the neck (horizontal red line) followed by the right shoulder. In this selected example, the decline of Germany 30 was carried out according to technical as well as fundamental planning. At the end of 2018, Germany went through a technical recession along with the US trade war. And China has attacked the automobile industry. The Brexit negotiations did not help the problems related to the possibility of the UK from the EU will have a negative impact on German economy as well. In this case, an understanding of technical patterns as well as having a strong background that allows combining technical analysis and fundamentals to structure strong trading ideas.
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A list of Pros and Cons based on your goals as a trader and how many resources you have.
Day trading is a strategy designed to trade financial instruments within the same day. That is, all positions are closed before the market closes. This can be a single trade or multiple trades throughout the day.
Trading time ranges from very short term (minutes) or short term (hours), as long as trades are opened and closed within the trading day.
The trader in the example below will look to enter the position when the price breaks through the 8 period EMA in the direction of the trend (blue circle) and exit using a 1:1 risk reward ratio.
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The chart above shows a representative day trading setup with a moving average to identify a long trend in this case as the price is above the MA line (red and black). Entry positions are highlighted in blue with a stop level placed at the previous price. Take the profit level