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Chapter 6: The Basic Forex Trading Strategy
The basic Forex strategy that is used by many traders of all experience levels, is Trend Following. This strategy is widely followed because of its simplicity to identify and trade and many times, strong trends can bail you out of an imperfect set of buy and sell rules.
A popular trading express is “the trend is your friend.” This expression has stood the test of time because many traders find it to be a critical building block of a trading plan. Before we delve into the basics of Trend Following, it is important to first explain why trend trading is a popular strategy used by many new and experienced traders.
Do you have the perfect Forex trading strategy? I have not found it. To me, a perfect strategy is the one that wins all of the time and has minimal trade drawdown. I hate to burst your bubble but a 100% win ratio strategy does not exist.
Therefore, learning how to trade in an imperfect world is very important. Trend following is a simple way to cover up some strategy imperfections by identifying the strongest trends in the market.
For example, if the market is moving up in a strong trend, it isn’t as important what the strategy is used to time entries, you simply need to be buying. When you trade in the direction of the trend, the rest of your trading approach can fall right into place. This doesn't mean that all your trades will be winners. It does mean that you don't have to be exact in your entries and exits once you find a strong trend to trade.
Now how do you know when a trend starts and when it is going to end? this is the $64,000 question. Since this is a beginners guide I will not elaborate on the various techniques that traders use to identify trends as this is beyond the scope of this book. I will however touch on several techniques in later chapters but note that these will be just in an introduction level without going too much deeper.
Any trader either a newbie or a pro should develop his own style of trading. There are several trading styles that you can adopt. You will choose your style based on your personality and financial capacities.
Many traders make the mistake of adopting a trading style that is unnatural for them. A trader may adopt one of the following two main trading styles: Day Trading and Intraweek trading. Let's discuss each of them;
Day trading on Forex means that one or few trades are conducted within one trading day. As a rule, the time intervals between the opening or the closing of trades may take from several minutes up to several hours.
Despite some difficulties of day-trading, this type of trading is very popular among the newcomers as well as among experienced traders. Day trading allows for the opportunity to make a profit in a short time with a small amount of funds.
In order to achieve favorable results in an intraday trading it is essential that you make the right forecast as to the price movement, as there are many external factors that cause high volatility in the currency market. So to make your day trading beneficial you have to track the market situation, collate facts and make conclusions about the price behavior of currencies, it is also important to be able to react fast so that you will find entry and exit points quickly at the opening or the closing of trades.
Combining knowledge of technical analysis (to be discussed in a later chapter) with patience and observance a trader has good chances to earn well with a relatively low risk.
There are several strategies of day trading. The most widespread among them is Scalping - a strategy that is offering a fast opening or closing of several day positions. The trader closes trades while making just a few profit pips on each trade while the earnings come from the accumulation of a large number of successfully completed short term trades.
Another popular day trading strategy is news trading. Traders, who choose news trading, monitor the market events permanently, analyze the currencies behavior in different cases. Usually news trading requires an insight learning of market development and a proper trade experience accumulation.
Day trading can be a source of a nice income through the readiness to devote most of your free time to trading.
Now here are the advantages and disadvantages of day trading.
* doesn't require large sums of money;
* Trader may stop trading at any time;
* Minimal risk.
* High emotional pressure;
* Lack of time during a trading session.
This style is suitable for traders with endurance and quick reactions.
Intraweek trade has no such furious market movements as in intraday trade. It may seem that the market is motionless. But it is just at the first sight. Intraweek trading has the following characteristics:
* A trade can remain opened for ten days;
* All trades are counted on taking the most part of profit on market movement;
* As a rule, not more than 2 positions are opened during a week;
* Requirements for invested funds are usually higher than for intraday trading;
* The work time is multi-hour charts.
Intraweek pros and cons:
* Not too much pressure;
* High profitability;
* There is free time during a trading session.
* larger volume of funds is required;
* Trader may be outside the market during a trend correction;
* Impossibility to stop trading at any moment;
* Necessity to hold opened position for 24 hours.
Probably, every trader can find additional styles, but the two that we've mentioned here are probably the most common.
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