Forex Trading Strategies - An Introductory Guide

If you are relatively new to the forex (foreign currency exchange) markets and have only been trading for a short time, the world of Forex Trading Strategies might still be a little unclear to you. The purpose of this article is to provide an introductory guide to forex trading strategies, so that when you trade you have a better idea of what you are doing, which in turn should result in you making money from your trading adventures rather than losing it.

One of the first things you should consider is your trading outlook. How do you feel about risk? How long do you want to hold your positions for? If you are quite risk averse, then some sort of day-trading (or intra-day) strategy may suit you best, whereas if you are prepared to hold on to a position and ride through the ups and downs, then a longer-term (or inter-day) strategy might be more your thing.

Once you've decided on your trading outlook, you will want to investigate the various types of strategy that suit that outlook. There are many to choose from, some of the more popular of which include scalping (extremely short-term), swing trading (short to medium-term) and breakout trading or gap trading (medium to long-term). There are pros and cons to all of these approaches.

Of course, you will want to make sure that you have everything you need physically and logistically to actually trade the forex markets. You should ensure that you have a good, fast, reliable and secure Internet connection, that you have enough money to risk being able to lose some (not every trade will be a winner!) and that you have an appropriate account with a bank, a broker or a financial services firm that will give you access to the markets that you want to trade.

If you think all of this stuff through before risking any real money, you should be in a much stronger position than the majority of novice traders out there! The goal here is to make money not lose it, and adequate preparation can make all the difference to your success or failure as a trader.

So let's take a look in a bit more detail at your trading outlook, i.e. what is your attitude towards risk and how long do you feel comfortable holding on to a position? Long-term trading is not for everyone. Sometimes you need nerves of steel to hold on to a position with a long-term view when in the short-term it is moving against you. And if you are a bad sleeper anyway, then having a position open overnight probably won't help things as you might lie awake wondering what's happening in the far east which could affect your position!

Long-term trading, particularly based on trend-following strategies, can lead to substantial profits, but there may be a good deal of worry and lost sleep along the way. You need to be able to detach yourself from all of that if you want to be a successful long-term forex trader.

A good alternative, and one followed not just by many novice traders but also countless experienced traders, is to focus on intra-day trading (or day trading for short), where positions are not held overnight, but instead are opened and closed out again on a single trading day. This approach suits traders who do not want to carry any risk overnight. Of course, there is still risk involved but the fact that positions are always closed out and the trader is always square at the end of the day means that the risk of losses (and all the the associated emotions that go along with that risk) is limited to the trading day. Much better for your sleep patterns!

Even holding on to a position for a few hours can fill some traders with dread, so those who just want to dip in and out of the market aiming to make small regular profits are known as scalpers. However, scalping is very difficult to do successfully as you are competing with the “big boys”, i.e. the banks who make the market. Because they are the ones who quote the “spread”, they are able to buy at the bid price (low) and sell at the offer price (high), whereas you have to do the opposite. So the market needs to move a few pips more in your direction for you to make a profit than it does for the bank. Often the costs of doing the trade outweigh any potential profits when you are trying to scalp the market.

So you now have a brief introduction to forex trading strategies from a 180 degree perspective. This should give you some idea of what kind of trader you are, and whether a short-term, medium-term or long-term strategy is best for you. But whichever method you follow, always remember: never risk more than you can afford to lose. Happy trading!