Forex trading strategy

In order to succeed in trading, you need to strictly follow a set of effective trading strategies (also known as trading plans) and reliable risk management rules for trading. Whether you are a novice or an experienced trader, you can follow the following 5 steps to establish and test the profitability of your foreign exchange trading strategy.

  1. Understand technical analysis

Technical analysis refers to the analysis of market trends through price charts and indicators. Technical analysis can help you determine the specific opening and closing price points.

Contrary to fundamental analysis, technical analysis mainly studies market patterns and prices. Fundamental analysis is mainly to study the external factors that dominate market prices. These two analysis methods can be used alone or in combination.

Since technical analysis focuses on historical prices and patterns, it is often considered a neutral tool. When looking for foreign exchange trading opportunities through technical analysis, you need to analyze the current market price and identify the target price that may be reached in the future. Although technical analysis cannot provide a definite price trend, it provides a calculation of various possibilities for market movements.

  1. The importance of technical analysis

Most traders use technical analysis to determine the expected market direction. Because market volatility is not without rules. When traders discover a price pattern that is forming, it is likely that many others are also aware of this pattern. When everyone thinks that the form is very likely to form, it is very likely to form. You can think of this trend as almost self-fulfilling. In this sense, you can think of traders who helped create the market price pattern.

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  1. Understand fundamental analysis

In the previous content, you have learned that the essence of technical analysis is to study market trends and price behavior. In contrast, fundamental analysis is a completely different market evaluation method, which provides an overall picture of market strength.

A fundamental analyst will focus on key events that may affect the strength of a particular currency. These key events are most likely political and economic data, or they may be natural disasters.

In short, a fundamental analyst will use all the information available to gauge the trend of a currency. The most attention-grabbing events include key economic reports and data, such as GDP and unemployment data, production data, and interest rate statements.

Analysis of 5 commonly used foreign exchange trading strategies

1: Position trading

Position trading refers to the longest-term trading model, ranging from several months to several years. For position traders, the most important basic skill is the analysis of fundamentals, such as analysis of policy trends, views on economic trends, keen control of market news and dynamics, etc.; in addition, traders can also use Technical analysis to control the length of the transaction duration.

Traders who are proficient in position trading tend to get higher returns than other traders. For example, if you analyze the fundamentals of EUR/USD and decide that it is bullish, then you can enter in advance and wait until the price reaches a certain position. Other traders get more benefits.

E.g:

advantage:

  ■ Long-term transactions do not need to spend a lot of time.

  ■ Short-term price fluctuations have little effect on the long-term, and traders’ trading pressure is reduced.

   Disadvantages:

  ■ Need a deep understanding of the basic principles driving the market.

  ■ Due to the wide range of stop loss, the capital base requirements of traders are relatively high.

  ■ Due to the small number of transactions, annual profits cannot be guaranteed.

  #2 swing trading

   Swing trading is a medium-term transaction, ranging from a few days to a few weeks. As a swing trader, the most important thing is to pay attention to the trend of the swing points in the market trend. Traders have the following skills for swing trading.

  ■Buy on the support line basis

  ■ Sell on the resistance line basis

  ■ Trading on the breakthrough foundation

  ■ Trading on a retracement basis

  ■ Trade when the moving average rebounds

E.g:

advantage:

  ■ There are many trading opportunities and great opportunities for profit

  ■ Being a swing trader will not occupy your working time

   Disadvantages:

  ■ Unable to follow the general trend

  ■ There is an overnight risk

  #3 Write off on the same day

Same-day write-off is a short-term trading strategy, that is, a trading strategy that holds a position for a short period of time and does not keep the position overnight. The trading time generally ranges from a few minutes to a few hours. The most important thing for traders is to pay attention to price fluctuations within a day. Unstable periods tend to have higher returns. Like swing traders, traders have the following skills to trade.

  ■Buy on the support line basis

  ■ Sell on the resistance line basis

  ■ Trading on the breakthrough foundation

  ■ Trading on a retracement basis

  ■ Trade when the moving average rebounds

   The requirement for the analysis of fundamentals and long-term trends for the day’s write-off is lower. Instead, traders should pay more attention to the analysis of trends at different time points, and the judgment of technical indicators.

   Example 1: The picture below is a 4-hour frame chart with resistance at 115000. If the price cannot break through this price, the price will fall today.

Example 2: In the figure below, we can notice that within the 15-minute time frame, there are meteors representing the strength of the seller, and we can conduct short-term transactions on the basis of the support line, which is the blue area in the figure.

advantage:

  ■ If used properly, there is a greater chance of profit

  ■ As traders carry out intraday offsets, there is no overnight risk

   Disadvantages:

  ■ Traders need to invest a lot of time to pay attention to market changes.

  ■ If an unexpected event occurs, the loss may be even greater.

  ■ There is a large opportunity cost

  #4 Super short-term trading

Ultra-short-term trading refers to a transaction with a very short order execution time and profit time within a day. The transaction time is usually a few minutes or even a few seconds. However, it should be noted that retail traders do not recommend ultra-short-term transactions. Transaction, because transaction costs tend to be higher than profits.

  As a short-term trader, the most important thing is to pay attention to the current situation of the market and how to make better use of it. The most important tool a trader can use is trading order flow.

E.g:

advantage:

  ■ More trading opportunities

  ■ Stable income can be obtained through trading

   Disadvantages:

  ■ Higher capital cost

  ■ Need to invest a lot of time to pay attention to the trend for trading

  ■ High pressure, higher demands on traders

  #5 Transition transaction

  Transition trading refers to the original intention of trading in a relatively short period of time, but if we find that the market trend will be beneficial to us, we can increase the trading time to increase profit or trailing stop loss.

   Example 1:

If you trade at the breakout point, the price will rise quickly, which is beneficial to the trader and can appropriately increase the holding time.

   Generally speaking, the main ideas of transition trading have the following two points:

   1. Find a trading time point in a short time frame

   2. If the price trend is beneficial to traders, consider extending the holding time to obtain higher benefits.

   Advantages:

  ■ High risk reward can be obtained

  ■ can lower the risk in a short time

   Disadvantages:

  ■ It is necessary to understand multiple time ranges,

  ■ A small amount of transactions by traders may be disadvantageous for traders