Forex trading strategies are groups of analysis that are being used by foreign exchange traders to ascertain when to buy or sell a given currency pair at a given time or place. Foreign exchange trading strategies are based on a number of tools like technical, fundamental, chart and news inclined events. These currency strategies function by providing forex traders with forex signals that bring about a buy or sell decision. For forex traders, these trading strategies can be either based on technical analysis which makes use of chart analysis or fundamental analysis which is primarily based on news and events.
Every Forex trading strategies are made up of various trading signals that activate buy and sell verdicts. They can either be developed by the forex traders or downloaded online. Forex trading strategies can be generated manually or automatically. Manual generation of forex trading strategy involves a forex trader using a computer to adequately search for trade signals and making decisions on whether to purchase or sell while automatic generation of forex trading strategies involves a process whereby the forex trader generates an algorithm that identifies forex signals and carries out trades on its own.
DEVELOPMENT OF A FOREX TRADING STRATEGY
SELECTING THE FOREX MARKET
The process of selecting the forex market is a very important step to creating a good forex trading strategy. Forex traders must determine the type of currency pair they want to trade with and also become experts at reading the currency pair.
Every forex trader must engage in position sizing. Here, forex traders must determine how large each trade position is to control in equivalent to the amount of risk taken into consideration by each.
ENTRY AND EXIT POINTS
Every forex trader in the forex market must generate rules and guidelines governing when to enter a long or short trade position in a given currency pair, when to exit a long or short trade position and when to exit from a losing position.
Every forex trader should have set rules and guidelines on how to trade forex generally. How to buy and sell currency pairs, choosing the adequate trade execution technology, adequate development of forex trading programs and platforms like MetaTrader that easily includes an automatic rule following and includes back-testing that reflects past performance.
CHANGING A FOREX TRADING STRATEGY
Most times, forex trading strategies that function perfectly today may not produce the same result tomorrow. A forex strategy is not always seen as a one that fits all forex trading approach. When a forex strategy is seen not to generate adequate trading results and increased profitability, a forex trader can take note of the following before changing the strategy
A forex trader should always match the risk management with the trading style and determine if the risk Vs. the profitability ratio is suitable or not. If it isn’t suitable, a change of forex trading strategy may be needed.
Most forex strategy depends on specific forex market trends and when trends changes, the forex trading strategy used may become outdated. At this point, modification of the forex trading strategy should be done by the forex trader in other to achieve adequate trading results.
The development and use of forex trading strategies involve adequate comprehension. If a forex trader doesn’t understand the strategy used for trading, it won’t possibly work.
FEW EXAMPLES OF BASIC FOREX TRADING STRATEGIES
FOREX BREAKOUT TRADING STRATEGY
A trading breakout is said to be when a forex market moves outside the boundaries of its merging to new highs or lows. A breakout usually occurs when a new trend occurs. This means that breakouts are signals of new trends. The only disadvantage here is that all trends are indicators of the beginning of a new trend. Therefore, a breakout above the highest high or lowest low for a lengthier period indicates a longer trend while a breakout for a short period shows a shorter trend.
This simply means that a breakout trading strategy can be turned to react more rapidly or more slowly leading to the production of a trend.
MOVING AVERAGE CROSSOVER TRADING STRATEGY
The moving average crossover trading strategy is said to be a platform that makes use of a simple moving average which is a lagging indicator that use mature price data and strategy by moving slower than the current market price. The more extended the simple moving average is averaged, the slower it’s movement. In forex trading, forex traders uses a longer simple moving average in combination with a shorter simple moving average.
In conclusion, basic forex trading strategies can either be purchased or developed. In the development of these trading strategies, forex traders should make sure that they back test them in other to ascertain the effectiveness of their functionality. After the development, forex traders should also paper trade them in other to ensure they function in real life trading situations.