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Home Forex Education Forex Basics

How Trading Strategies Influence Results

by Richard Brase
September 17, 2020
in Forex Basics
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How Trading Strategies Influence Results
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To put it simply, day trading is when a trader buys and sells financial instruments within the same day. They can also buy and sell multiple times in a day and benefit from small price movements. To do this kind of trading, you need skill and discipline. 

So, if you can commit to the markets fully, this strategy is ideal for you. Various types of strategies and approaches are used by forex traders for identifying the best entry and exit points to purchase and sell currencies. By doing this, they can get the best possible ROI. 

The best trading strategies include –

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Trend Trading

Trend trading is a strategy where traders take positions based on the direction of price movements that can be either upwards or downwards. In this strategy, you have to buy or take a long position in an upward trend and sell or go short in a downward trend. Trend trading can be a short-term or long-term strategy. Traders can keep their positions open as long as the trend lasts which can range from a day to a longer period. Hence, this strategy is not exclusive to day traders. It is not easy to identify a trending market, but you can use various key indicators to identify patterns and price direction. The indicators include –

  • Moving Averages – It shows previous performances of the currencies in various time frames.
  • The Relative Strength Index (RSI) – A momentum oscillator to measure the change and speed of price movements. 
  • The Average Directional Index (ADX) – It determines the strength of the trend. 

By using these indicators, you can apply a trend trading strategy easily:

News Trading

News trading is a fundamental component for a lot of investors, regardless of their range of investment. While day traders trade news twice during the day, the rest of the investors frequently do news trading for a longer timeframe. As suggested by the name of the strategy, traders tend to go long on news releases. They also ride a trend until the signs of reversal are demonstrated by it. Any of the currency pairs may move up or down rapidly before or after a release or announcement of economic news. It means that the trades are receptive to increased volatility. In return, the probability of slippage to take place is higher. 

Scalping

Scalping is a popular strategy among day traders who benefit from small moves in currency prices to earn multiple profits. It is probably the shortest among all trading strategies. Traders employing this strategy can place any number of trades in a single day; be it ten trades or a hundred trades. Scalpers mainly determine their trading decisions by using technical analysis and technical indicators like moving averages. Scalping appears easy at first sight because the traders can make an entire day’s profit within a few minutes only. However, to be a scalper, you have to be very disciplined so you can make decisions without hesitation because there is no room for a mistake. 

Position trading

Position trading is a strategy where traders hold the trade for a long period. It can be for months or even years. They do it for capitalising on intermediate trends. Position traders depend on long-term charts, as well as macroeconomic factors for identifying trends. They are not very concerned about price movements, but when the positions are held for as long as strong trends last, it is important to plan on entering and exiting the market by implementing a useful risk management strategy. 

Reversal trading

An upwards or downwards change in the price direction of a currency is represented by a market reversal. You should already know that markets change direction frequently on an intraday, daily, or weekly basis. The change can happen within seconds, or it can develop through several days or weeks. No matter what, reversal traders need to be alert always so they can react to the market movements immediately. It is essential if you want to open a position while the price is at an advantageous level. Similarly, you need to exit the market during a downward movement in price. To predict market reversals, traders consider technical features such as pivot points, support and resistance levels, momentum oscillators, and moving averages. Fundaments factors like geopolitical events, supply and demand of currencies, and national monetary policies are also considered. 

Mean Reversion

Currency prices move back towards the historical mean in the mean reversion trading approach. Traders usually measure the mean price by applying moving averages to the charts. Traders who apply mean reversion strategy capitalise on abnormal activity, like extreme changes in currency prices, assuming its reversion to the previous state. You can apply this strategy to both instances of buying and selling. 

Swing Trading

The concept of this type of trading is that price fluctuates and does not go in one direction in a trend. Hence, swing traders benefit from small reversals in the price movement of a currency. It is the opposite of trend traders who usually earn profits from long-term market trends. Swing traders use several technical indicators including the support and resistance lines, the Fibonacci retracement patterns, and the MACD crossover. These are mainly used for identifying trend direction, patterns, and potential short-term changes. 

Breakout Trading

A breakout represents a currency’s price movement exceeding the predetermined support and resistance levels because of an abrupt shift in supply and demand. Breakout traders enter the market when the currency price breaks above the resistance level, and they exit when it breaks below the support level. It is a type of momentum trading. It means that traders can take advantage of a breakout that takes place after an increase in volume. 

Conclusion

Day trading is a great way of income, and it offers many opportunities for traders to make profits, but you need to know how to apply the trading strategies the right way. So, it is better to start by learning the trading strategies mentioned above before you get into trading.

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