2 Common Strategies for Trading FX
by Jeremy Wagner, CEWA-M , Head Forex Trading Instructor
Swing trading, chart patterns, breakouts, and Elliott wave.
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- Range trading strategy is popular for buying low and selling high
- Trend following strategy is one of the most widely used strategies
There are many benefits to trading FX such as a tremendous amount of liquidity with low transaction costs and margin requirements. The 24 hour nature of FX trading opens the door to a variety of strategies from day trading to position trading to range trading to trend trading .
There are so many different styles and flavors of FX traders , that they truly are too many to discuss each one . For now, we’ll start off with the two strategies that are the most common. The reason they are the most common is because they are opposite of one another…range trading and trend trading.
Range trading is a simple strategy where a trader will buy a currency on sale with the expectation that the valuation will come back towards a longer term average. This strategy may also be referred to as mean reversion and is similar to value investing.
Forex Strategy: How to Trade Ranges
Created by J. Wagner
One key to this strategy is identifying those price points that are more favorable for you. That means identifying a price level to enter where sellers stop selling and buyers are more likely to start buying. These price points are generally obtained by identifying levels of supply (resistance) and demand (support). Support and resistance levels can be easily obtained by performing technical analysis on the chart. Indicators and oscillators can help you time entries as well.
For more on how to trade ranges , check out James Stanley recent publication.
The second main strategy is trend following.
One of the most common strategies used by new and experienced traders is a trend following strategy. Trend following simply means identifying the direction prices have generally been moving, then place trades in that same direction.
Trend following is popular because strong trends tend to produce the largest results. Many times, those strong results came from moves in the direction of the preceding trend. Though there are several benefits, here are two benefits of trend trading .
Forex Strategy: Trading Strong Trends
Created by J. Wagner
Fortunately, trading trends is simple. The ease of identifying trades is in large part why new and experienced traders utilize some form of trend analysis in their trading plan.
If you are interested in trying out trading trends, but are unsure where to start, find out which of the three ways to trade a strong forex trend fits your personality the best.
---Written by Jeremy Wagner, Head Trading Instructor, DailyFX
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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
Day Trading Strategies for Beginners
Day trading – the act of buying and selling a financial instrument within the same day, or even multiple times over the course of a day, taking advantage of small price moves – can be a lucrative game if played correctly. But it can be a dangerous game for those who are new to it or who don't adhere to a well-thought out method. What's more, not all brokers are suited for the high volume of trades made by day traders. Let's take a look at some general day trading principles and then move on to deciding when to buy and sell, common day trading strategies, basic charts and patterns, and how to limit losses.
10 Basic Day Trading Tips
1. Knowledge is Power
In addition to knowledge of basic trading procedures, day traders need to keep up on the latest stock market news and events that affect stocks – the Fed's plans for interest rates, the economic outlook, etc. Do your homework. Make a wish list of stocks you'd like to trade and keep yourself informed about the selected companies and general markets. Scan business newspapers and visit reliable financial websites.
2. Set an Amount Aside
Assess how much capital you're willing to risk on each trade. Most successful day traders risk less than 1%–2% of their account per trade. If you have a $40,000 trading account and are willing to risk 0.5% of your capital on each trade, your maximum loss per trade is $200 (0.005 x $40,000). Set aside a surplus amount of funds that you can trade with and are prepared to lose (which may not happen).
3. Set Aside Time, Too
Day trading requires your time – most of your day, in fact. Don’t consider it if you have limited hours to spare. The process requires a trader to track the markets and spot opportunities, which can arise any time during trading hours. Moving fast is key.
4. Start Small
As a beginner, it is advisable to focus on a maximum of one to two stocks during a day trading session. With just a few stocks, tracking and finding opportunities is easier.
5. Avoid Penny Stocks
Of course, you're looking for deals and low prices, but stay away from penny stocks. These stocks are illiquid, and chances of hitting a jackpot are often bleak.
6. Time Those Trades
Many orders placed by investors and traders begin to execute as soon as the markets open in the morning, contributing to price volatility. A seasoned player may be able to recognize patterns and pick appropriately to make profits. But as a newbie, it is better to just read the market without making any moves for the first 15-20 minutes. The middle hours are usually less volatile, and then movement begins to pick up again toward the closing bell. Though the rush hours offer opportunities, it’s safer for beginners to avoid them at first.
7. Cut Losses With Limit Orders
Decide what type of orders you will use to enter and exit trades. Will you use market orders or limit orders? When you place a market order, it is executed at the best price available at the time; thus, no “price guarantee.” A limit order, meanwhile, does guarantee the price, but not the execution. Limit orders help you trade with more precision, wherein you set your price (not unrealistic but executable) for buying as well as selling.
8. Be Realistic About Profits
A strategy doesn't need to win all the time to be profitable. Many traders only win 50% to 60% of their trades. The point is, they make more on their winners than they lose on their losers. Make sure the risk on each trade is limited to a specific percentage of the account, and that entry and exit methods are clearly defined and written down.
9. Stay Cool…
There are times when the stock markets test your nerves. As a day trader, you need to learn to keep greed, hope and fear at bay. Decisions should be governed by logic and not emotion.
10. And Stick to the Plan
Successful traders have to move fast, but they don't have to think fast. Why? Because they've developed a trading strategy in advance, along with the discipline to stick to that strategy. It is important to follow your formula closely rather than try to chase profits. There's a mantra among day traders: "Plan your trades, then trade your plan."
Now that you know some basic principles, let's move on the in and outs of day trading.
Deciding What and When to Buy When Day Trading
Day traders seek to make money by exploiting minute price movements in individual assets (stocks, currencies, futures and options), usually leveraging large amounts of capital to do so. In deciding what to focus on – in a stock, say – a typical day trader looks for three things:
- Liquidity:Liquidity allows you to enter and exit a stock at a good price (i.e., tight spreads, or the difference between the bid and ask price of a stock, and low slippage, or the difference between the expected price of a trade and the actual price).
- Volatility:Volatility is simply a measure of the expected daily price range – the range in which a day trader operates. More volatility means greater profit or loss.
- Trading volume: This is a measure of how many times a stock is bought and sold in a given time period (most commonly, within a day of trading, which is known as the average daily trading volume). A high degree of volume indicates a lot of interest in a stock. Often, an increase in the volume in a stock is a harbinger of a price jump, either up or down.
Once you know what kinds of stocks (or other asset) you are looking for, you need to learn how to identify entry points – that is, at what precise moment you're going to invest. Tools that can help you do this include:
- Real-time news services: News moves stocks, so it's important to subscribe to services to tell you when potentially market-moving news comes out.
- ECN/Level 2 quotes: ECNs are computer-based systems that display the best available bid and ask quotes from multiple market participants, and then automatically match and execute orders. Level 2 is a subscription-based service that provides real-time access to the Nasdaqorder book composed of price quotes from market makers registered in every Nasdaq-listed and OTC Bulletin Board securities. Together, they can give you a sense of orders being executed in real time.
- Intraday candlestick charts:Candlesticks provide a raw analysis of price action (more on these later).
Define and write down the conditions under which you'll enter a position. "Buy during uptrend" isn't specific enough. "Buy when price breaks above the upper trendline of a triangle pattern, where the triangle was preceded by an uptrend (at least one higher swing high and higher swing low before the triangle formed) on the 2-minute chart in the first two hours of the trading day." This is much more specific and also testable.
Once you've got a specific set of entry rules, scan through more charts to see if those conditions are generated each day (assuming you want to day trade everyday) and more often than not produce a price move in the anticipated direction. If so, you have a potential entry point for a strategy. You'll then need to assess how to exit those trades.
Deciding When to Sell
There are multiple ways to exit a wining position, including trailing stops and profit targets. Profit targets are the most common exit method, taking a profit at a pre-determined level. Some common price target strategies are: