Each year many new investors participate in the fight between the bulls and bears in the financial market. A huge contribution adds volume and volatility, which can be capitalized on using indicators and other forms of analysis. Trading strategies are vital tools to make money in currencies or other instruments. A proper game plan will ensure that you stay in the game for the long run and do not end amongst the losers. Our article will list all the essential constituents of forex strategies and how a trader can formulate one that fits their needs.
Important Points to Note
Before making a solid strategy, it is vital to understand the following points.
- Risk management takes utmost importance while speculating the markets. The use of larger lot sizes will add significant risk to your account. A good strategy will only work if you use proper money management.
- The mindset of a trader can determine the potential outcome of a trade. Psychology can make up 80% of the total trading regime. If greed, fear, and happiness interfere with your decisions, then a strategy won’t be as helpful as it is supposed to be. Using stop losses can help you get out of the trades when needed.
- A strategy can work well with specific market conditions and fail with others. It is the job of a trader to tweak it to adapt it to new environments.
Fundamental or Technicals?
There are three different ways to analyze the markets:
- Fundamental. This involves using economic events such as news and releases to predict the future. Traders using these techniques usually swing trade as it takes time for such proceedings to settle.
- Technical. Technical analysis includes scanning the charts and reading the price action. This involves using support/resistance lines, supply/demand zones, key levels, Fibonnaci intervnals, trend lines etc.
- Sentimental. Traders understand the market aroma and analyze the general sense of the price, which is called sentimental analysis. This form of market prediction is less common than the other two.
There are a few strategies that are common amongst many traders. They have been developed previously and are under the daily use of big institutions such as banks. Let us go through a few of them as follows
Divergence trading involves using technical indicators such as RSI to find out potential movements in price. To find out the negative divergence, traders have to take note of the instrument when it is making higher highs and lows while the indicator is giving lower highs and lows. This gives us a good shorting opportunity. Positive divergence is the opposite of the said phenomenon.
Image 1. The trader spots divergence using the RSI indicator. On the 5 minute chart at EURUSD, they find out that the price is moving towards the top while the indicator is in going opposite. The divergence is negative for a good shorting opportunity.
Price action trading is also a hot topic amongst many. Using such a form of trading, an investor reads the chart and makes the corresponding analysis using trend lines, resistance levels, Fibonacci’s, etc.
Image 2. The trader plots the individual key levels for the daily and weekly time frames highlighted in red and black. Notice how the price bounces of these levels or shows some hesitation before moving forward.
It is possible to combine technical and fundamental analysis to get more confluence in trades. For example, the central bank is increasing interest rates to attract investors. Predicting the move, traders can enter the trade using charts to find a good entry.