There are a number of strategies used in forex trading. Forex trading strategies can be classified according to the mechanical approach, fundamental approach, or behavioral approach. Mechanical trading strategies involve setting a stop loss and take profit triggers, as well as taking other related actions. Fundamental trading strategies on the other hand, deal with the economic conditions that affect currency prices. Behavioral trading strategies are based on the strategies traders use in day to day forex trading.
A common strategy in forex trading strategies is known as the swing or reversal trading strategy. This strategy involves taking a look at the price action, making a forecast of price movement, taking a position, then getting out of the position once it breaks through a resistance level or a support level. Swing trading strategies can either be long term or short term, with the long term versions known as scalping, or short term versions known as momentum trading, which essentially involves trading for only a few minutes each day.
Another one of the forex trading strategies is called the stochastic overbought/oversold strategy. This is a simple version of the technical analysis method known as technical analysis, which is used by professional traders to predict where the market will go next. The advantage of using stochastics, as opposed to other trading strategies such as momentum or breakouts, is that it is less sensitive to outside forces. What this means is that it makes better use of natural market fluctuations rather than guesswork. The signals generated by the strategy are said to be more reliable than other types of signals because they are “informed”, or based on more reliable data.
One of the more complex trading strategies is called the carry trade, which is a fundamental strategy that uses technical analysis of support and resistance levels to try and determine currency pairs to enter and exit the market. In order for the carry trade to work, there must also be a strong relationship between the support and resistance levels. Once entered into the market, this results in an overbought condition which can result in a short term loss in the value of the currency paired with the entry. Conversely, an oversold condition can result in a short term gain. It is important to note that these types of situations can occur simultaneously and can even occur in tandem if the overbought condition is triggered by a fundamental policy change.
One of the more sophisticated trading strategies is called the divergence trading strategy. This is not actually a strategy per se, but rather a type of technical analysis. Divergence occurs when two waves, usually in the form of a triangle or a horseshoe shape, meet at different times. If the two waves don’t exactly parallel, there is a trend. If they do converge, there is usually a strong pullback because the profit potential is much greater.
Another type of trading strategy is to use technical analysis and look for trends in the market. This requires the use of a number of forex trading indicators as well as some historical data to determine what the prevailing market trend will be. There are many types of forex trading indicators including the Simple Moving Averages, the MACD, the Stochastic, the moving average convergence divergence or MACD, the momentum indicator, the volume indicator, the symmetric time axis forecast, the RSI, and the strength index. The key indicator that is most often used or applied is the MACD.
There are a number of technical analysis charts that can be used to determine these trends. The MACD, for example, is based on moving averages. These moving averages are commonly used by technical analysts to determine where the market will go next. The use of MACD signals can help traders eliminate bad patterns and find profitable trends. Traders can also use other types of forex trading indicators, such as the Stochastic, the divergence, the time component, the moving average convergence divergence or MACD, the momentum indicator, and the strength index.
As mentioned, there are a number of trading strategies that can be used to profit in the forex market. However, not all strategies work the same for every trader. Some traders use indicators exclusively and others combine indicators with manual trading. All traders should have a good grasp on the basics before they start experimenting with forex strategies. If traders do their homework, they will be able to determine which forex strategies are the best for them and their goals.