Forex Trading strategy is what forex traders do to buy or sell financial instruments at a given time to generate profits. Forex Trading strategies are nowadays done, either manually or automatically. A trader is using a manual strategy when he interprets the trading signals and, as a result, decides to buy or sell. The automated method is where a trader develops an algorithm that studies the trading signals and executes trades independently.
Before choosing a Forex Trading strategy, it is essential to identify which of these four trading styles fits your personality:
1. Day Trading
Day trading is a short-term trading style designed to buy and sell financial securities within the same trading day. That is closing all positions by the end of the trading day. In
Day Trading, you can hold your trades for minutes or even hours. Day traders deal with financial instruments like options, stock, currencies, and contracts for difference.
Many day traders are investment firms and banks. Day traders use technical analysis to make trading decisions.
- Day traders are not affected by unmanageable risks and negative price gaps because all positions are closed by the end of the trading day.
- There are a substantial number of trading opportunities
- Traders can be highly profitable due to the rapid returns
- Traders can be highly unprofitable due to the rapid returns
- You don’t have to be concerned with the economy or long-term trends
- Huge opportunity cost
- Day traders have to quickly exit a losing position to prevent a more significant loss.
2. Swing Trading
Swing trading is where a trader holds an asset between one and several days in an attempt to capture gains in the financial market. This type of trader doesn’t monitor the screens all day, and they do it a few hours a day. Swing traders usually rely on technical analysis to look for trading opportunities. Swing trading is held longer than day trading position but shorter than buy and hold investments.
They have larger profit targets than day traders.
- Swing traders can rely solely on technical analysis, which simplifies the process
- Requires less time to trade compared to day trading
- Swing traders are exposed to overnight and weekend risks
- Generally, swing trading risks are a result of market speculation
- It isn’t easy to know when to enter and exit a trade when swing trading
3. Scalping Trading
Scalping is the fastest trading style where traders hold positions for a concise time frame. Traders here gain profits due to small price changes. The scalpers have apposition for a short period to achieve profits. Traders with large amounts of capital or bid-offers spread narrowly prefer scalping. Scalping follows four principles:
- Small moves are more frequent – even when the market is quiet, scalpers can make hundreds or thousands of trades
- Small moves are easier to obtain – small activities happen all the time compared to large ones
- Less risky than more significant moves – scalper’s only held positions for short periods; therefore, because they have less exposure, the risk is also lower
- Spreads can be both bonuses and costs. Spread is the numerical difference between the bids and ask prices. Various parties and different strategies view spread as either trading bonuses or fees.
- Positions can be liquidated quickly, usually within minutes or seconds
- Very profitable when used as a primary strategy
- It’s a low-risk strategy
- Scalpers are not exposed to overnight risks
- Requires an exit strategy, especially during significant losses
- Not the best strategy for beginners; it involves quick decision-making abilities.
4. Position Trading
Position trading involves holding a position open for an extended period expecting it to appreciate. Traders here can hold positions for weeks, months, or even years. Position traders are not concerned with short-term fluctuations; they are keener on long-term views that affect their jobs.
Position trading is not done actively. Most traders place an average of 10 trades a year.
This strategy seeks to capture entire gains of long-term trading, which would result in an appreciation of their investment capital. Position traders use fundamental analysis, technical analysis, or a combination to make trading decisions. To succeed position, traders need plans in place to control risk and identify the entry and exit levels.
- Traders have a more extended period to reap fruits.
- Trader’s time is not on demand. Once the trade has been initiated, all they can do is wait for the desired outcome
- Traders may fall victim to opportunity costs because capital is usually tied up for more extended periods.
- Position traders tend to ignore minor fluctuations, which can turn to trend reversals, a change in the price direction of a position.
Now we have introduced you to all four trading styles. Just write us a comment about which trading style you have chosen.