If you are a new forex trader, then chances are you might be lost trying to figure out which Forex trading strategy to use.
In fact, you might not even know the different types of Forex trading strategies out there.
Should you be a day trader?
A swing trader?
Or a position trader?
In today’s post, I will share with you the 3 types of forex trading strategies that work and hopefully help you find one that suits you perfectly.
Here’s a breakdown of what I will cover in this article:
1. Forex Trading Strategies that Work #1 – Day Trading
2. Forex Trading Strategies that Work #2 – Swing Trading
3. Forex Trading Strategies that Work #3 – Position Trading
4. Which Forex Trading Strategies is Right for You?
5. Conclusion: Choosing the Right Forex Strategy for You
Let’s begin and go through the first forex trading strategy that works.
Forex Trading Strategies that Work #1 – Day Trading
Day trading is a short term trading strategy which involves holding your trades anywhere from minutes to hours. As the name suggest, the trade is usually exited within the day.
When day trading, the timeframe that you will most likely trade on is the M15 (15 minutes) or M5 (5 minutes).
Your goal in day trading is to capture the volatility of the day or otherwise known as the intraday volatility. And because you are trying to capture the intraday volatility, then your focus should be on the 2 major trading sessions; Euro trading session and the US trading session.
In day trading, you will be likely be looking for one of the following:
- Buying at support
- Selling at resistance
- Trading breakout of consolidations
- A trading pullback to prior support and resistance levels
When it comes to day trading, you shouldn’t concern yourself with the long term fundamentals of a country since you are just focused on capturing intraday volatility.
You should focus on identifying what your bias is for the day and look for trade setups that are in alignment with the bias you have.
If you need a day trading strategy that works, make sure you check out our free day trading guide here.
Still not sure if day trading is for you?
Here are some pros and cons of day trading:
- You can compound and grow your money really fast if you are good
- No overnight exposure and swap incurred
- It can get really stressful as you have to make a lot of decisions quickly
- You will need to spend more time monitoring the forex market
And if you think that Day Trading isn’t right for you because of these, then perhaps swing trading might be a better fit for you.
Forex Trading Strategies that Work #2 – Swing Trading
Swing trading is a mid-term trading strategy where trades are held anywhere from a couple of days to even weeks. When you are swing trading, you are trying to capture the major “swings” in the market.
In swing trading, you will be likely be looking to buy or sell a pullback into support and resistance. Essentially, you are trying to capture a swing low/high and hold it till the currency makes another significant turning point.
The time frames that you will want to focus on will be the H4 (4 hour) and D1 (daily).
Here are some pros and cons of swing trading:
- Not much screen time needed, easy to juggle between working and trading
- Less stressful as you make less decisions
- Overnight/weekend exposure which may result in significant losses if market gaps far away from your stop loss
- Patience is needed
Doesn’t sound like you? Not to worry, because there is the third forex trading strategy that works; position trading.
Forex Trading Strategies that Work #3 – Position Trading
Position trading is a long term trading strategy where you hold trades for weeks to months. It involves sitting tight on a position and allowing the fundamentals of the currency to play out.
As a position trader, you will rely on long term fundamental analysis of the currency to make a decision. Of course, you can also use technical analysis to time your entry and exits but your bias is mainly derived from fundamental analysis.
The time frames that you will want to focus on will be the D1 (daily) and W1 (weekly).
Here are some pros and cons of position trading:
- Very little time needed because you will only take a couple of trades a year
- Very little stress involved as you will ignore short term price fluctuations and volatility
- Potential to capture big trends since you are incorporating the fundamentals of a currency
- Requires you to study fundamental analysis and understand what drives a currency
- Need a bigger capital since you will need to have wider stop losses
- May not have many opportunities
Which Forex Trading Strategies is Right for You?
When it comes to choosing the right forex trading strategies, it is important to understand that everyone is different. I’ve seen traders who see others making a killing in day trading and jump into day trading when day trading wasn’t ideal for them.
So to prevent that from happening to you, I’m going to provide you 3 factors to consider to help you save time, money and effort when it comes to choosing the right forex trading strategy.
1. What is your outcome? Grow wealth or make a monthly income trading?
If you are trying to grow your wealth, then you can afford to have fewer trading opportunities. This means sticking to swing trading or position trading; basically moving towards the higher timeframes so that you do not need to keep staring at the screen.
If you are trying to make a monthly income trading, then it is mandatory to use a trading strategy that provides you with more trading opportunities ie day trading or short term swing trading. This would require more screentime so do be prepared for this.
2. How much time can you commit to your trading?
This one is pretty obvious. If you have children to take care of and are working 3 jobs, then obviously day trading isn’t going to cut it for you. But if you have the time to stare at charts all day (and probably love to!), then day trading will be suited for you.
3. Does this Forex trading strategy suit you psychologically?
Asking yourself this question is very important because it will determine whether you will be effective in executing the trading strategy. Suppose you are very impatient (like I am) when it comes to trading, then trying to do position trade will simply not cut it. You will not have the discipline to sit through 4 months just to see the trade stop you out at a loss.
Most trading strategies will fall into 2 probable outcome:
1. A high win rate but low reward to risk ratio
2. A low win rate but high reward to risk ratio
If you are comfortable with the 1st option, then go for day trading or swing trading.
Alternatively, if you are comfortable with the 2nd option, then go for position trading.
Just because Joe your friend made a killing day trading doesn’t mean that day trading is the right forex trading strategy for you. Always remember to consider your own psychology and personality when it comes to selecting a forex trading strategy that is right for you.
Conclusion: Choosing the Right Forex Strategy for You
This has been a rather long article so here’s a brief recap of the 3 different forex trading strategies that work:
Day trading: For those who can spend the whole day in front of the screen and are comfortable with high win rate but low reward to risk ratio
Swing trading: For those who can only spend a few hours each day trading and want to grow their wealth
Position trading: For those who already have a sum of capital that they wish to grow at a moderate rate with little effort involved.
Remember considering your outcome, how much time you have and your own trading personality.
Has this been useful to help you choose the right forex strategy?
Let me know your thoughts or any questions you have in the comments below.