The forex market offers nearly endless opportunities to investors who have the time and discipline to trade regularly and consistently.
Many people who day trade on the forex market do so as a way to supplement their income or eventually replace their regular job. If you have such ambitions, or you are only curious about forex trade options, you may want to learn trading strategies.
As is the case for the stock market and crypto, having a strategy ensures that you can buy and sell forex in a profitable way. While no trading method is foolproof, and there is always the possibility that a trade may go sideways, there are some strategies that give you a better chance of success than others.
Below is our rundown of five tips that will help you create simple and successful forex trading strategies.
1. Breakout Trading
If you are new to the world of forex, or you generally prefer to keep things simple when you are buying and selling any financial instrument, the Breakout Trading strategy may be appealing. Such a technique is based on breakouts or any price movement outside of a defined support or resistance zone.
When the price of a currency pair rises above its resistance area, as defined by your research, then you are experiencing a bullish breakout pattern. There are also bearish breakout patterns that occur when the price goes below its resistance area.
The resistance zones are usually defined by the typical movements of the currency pair over the past few days or weeks. A breakout shows a trader that market volatility is present, which is often an opportunity to invest if you can successfully predict which direction the currency pair will fluctuate in over the coming hours.
2. Moving Average Crossover
Another interesting tool used by forex traders is the moving average or MA. The MA is useful for smoothing out price data by creating an average price that constantly updates.
Traders can take the average price from any given time period, depending on their trading strategy. For instance, you could assess the average price of a currency pair over 20 minutes, 20 days, or 20 weeks.
Why are moving averages such popular tools for trading strategies? Because they allow for tailoring to your specific short or long-term trading method. If you are a day trader, the average price over one hour may be more useful than the average price over one week.
Anytime an asset price crosses over its moving average, it can serve as a trading signal. Traders may choose to sell if the price bounces off or crosses the moving average from above, as an example.
3. Carry Trading
Another interesting method of trading forex is the carry trade strategy, where you are looking to profit by taking advantage of interest rate differentials between two nations.
Keep in mind that while carry trading is popular, especially among day traders, it does come with risks. Such a strategy can work when you are buying currencies and then holding them overnight.
A trader “borrows” a low-interest-rate currency to fund the purchase of a currency with a higher interest rate. They are aiming to profit from the difference in interest rates, while traders commonly use currency pairs such as the Australian dollar and Japanese yen or the New Zealand dollar and Japanese yen.
4. Fundamental Analysis
Another important tool in the arsenal of any forex trader is the ability to analyze the economic fundamentals of a country and then decide how to best invest in its currency. Such analysis can be as surface-level or complex as you desire but is often more accurate when you do a deeper dive into a nation’s political and economic circumstances.
As an example, anyone assessing the United States would note that experts believe the Federal Reserve will continue to raise interest rates in 2023 in a bid to curb inflation. Such a move is bound to continue raising the value of the United States dollar relative to other currencies.
5. Trend Trading
One of the most effective ways for beginners to learn the ropes in the world of forex and familiarize themselves with trading currency pairs is through trend trading. The concept of trend trading is to identify a currency price movement, choose an entry and exit point, and then watch as the trade unfolds.
For instance, you may notice the USD/EUR pair is rising in value on Monday morning. You would buy the pair and then put in an exit strategy for both an upper and lower price level, allowing you to automatically close out the trade when the price reaches either of those marks.
The issue with trend trading is that you do not want to buy into a currency pair when the present trend is nearing its conclusion.
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