If you are a novice trader planning some Forex Trading Strategies for the first time, there are various things you should consider if you hope to make money and minimize your potential losses. First, what kind of position and risk outlook are you planning? Long-term (inter-day), medium term (intra-day) or short term (scalping)? Second, which is the best strategy for you? Example strategies include gap trading, breakout trading and swing trading, all of which have their own advantages and disadvantages. Finally, do you have everything you need in order to actually trade the markets? Do you have for example, reliable access to the Internet, adequate capital that you can afford to lose and an account with a suitable bank or broker? By thinking all of these things through before you start trading, there is less chance that you will end up broke and disillusioned!
Forex Trading Outlook
The first thing you need to consider when learning how to trade forex is your trading outlook, i.e. how long do you expect hold on to your positions. This will impact both your potential profits and your risk of loss. If you plan to trade long term and hold you positions for days, weeks or even months, you will need a strong stomach. Think of whether you can handle the emotional impact of holding on to a position that you believe will be right for you in the long term, while seeing prices move against you in the short term. Can your nerves handle this?
Intra-Day & Day Trading
Many novice traders (and many seasoned traders too!) prefer to go for the intra-day approach, where positions are always opened and closed out on the same trading day. The advantage of this approach is that it is somewhat less risky in that positions are not held overnight, but the risk of losses still (as always!) exists. There are a number of forex day trading systems on the market designed specifically for this type of trading, giving short-term signals when to buy and sell specific currency combinations. Always tread carefully when using a forex day trading system. Although you may be able to make money with them some of the time,there is always the possibility that you may lose more than you make. Off-the-shelf systems and so called “automated forex trading systems” are no substitute for experience, research, intuition and discipline, the marks of a successful trader.
Short-term Trading & Scalping
If the thought of holding on to a trade for a few hours fills you with dread, the answer could lie in short-term trading, or “scalping”, which involves only holding on to a position for a matter of minutes. The advantage to this kind of trading is that there is less anguish involved, but scalping is notoriously difficult to do unless you have excellent, fast access to the markets and a good broker account with low commissions. Because the profit potential of each trade is small, you have to be careful that the actual costs of doing the trade, or the latency in getting your orders into the market, are not wiping out those profits.
Now you’ve established your trading outlook, you need to consider what kind of currency trading strategies you could actually adopt. A common trading strategy for long-term traders is the Gap Strategy. Although the Forex markets trade 24 hours a day, some traders establish a “closing price” and an “opening price” based upon their location and the currencies they are trading. A “gap” occurs if the market closed at that day’s high and then opens higher, of if it closed at that day’s low and then opens lower. This is seen as an opportunity to open a long-term trade in the direction of the gap.
Breakout Strategy
Intra-day traders use a variety of forex day trading strategies, one of which is the Breakout system. This uses technical analysis indicator such as weighted moving averages to determine “support” below the current price and “resistance” above it. If the price breaks out of this range, a trade is entered and then held throughout the day, as long as the price is trending in the direction above the resistance or below the support. Various methods are used to establish whether to close out the position during the day or at the end of the session.
Swing Trading Strategy
Traders who “scalp” the market obviously have a much shorter-term view and generally use some form of the Swing Trading method. Like the intra-day breakout traders, swing traders monitor things like support and resistance, but will generally buy when the price approaches support (below) and sell when it approaches resistance (above) the current trading range. “Stop-loss” orders are usually placed just beyond those support and resistance levels in case a breakout does occur.
Trading Requirements
Whichever outlook and trading strategy you adopt, in order to trade the Forex markets you will need access to the Internet, sufficient funds to trade with and an account with a broker or bank who can offer you access to the markets. If your outlook is long-term, then high-speed Internet access is less important than it is for intra-day or short-term trading. Regarding sufficient funds, you probably will need to place a higher deposit with your broker than if you plan to close your position out every day. And when setting up your account, make sure that you build the cost of trading (commissions etc) into your profit & loss targets, particularly important if you plan on adopting a scalping strategy.
And as good and as comprehensive as many forex trading systems are, it’s only when you start using them in the real world with real money that you discover which is the best forex trading strategy for you.
To recap, by establishing your trading outlook, deciding on what kind of trading strategies you plan to follow based upon that outlook and making sure you have the necessary resources in place, you will be in a strong position to go out and make the most of your Forex Trading System. Good luck!