One of the most important parts of your journey in trading the forex market is figuring out your trading style. The more comfortable you are with a trading style, the better.
When choosing a forex trading strategy that suits you, you need to think about what type of person you are, and where your skills lie. Some important personal attributes to think about are:
- Risk appetite
Risk appetite is essentially how much risk you as a trader are willing to take on as a trader and for how much reward. For example, some traders may have a low-risk appetite and take lots of low-risk trades, winning often, but only making small profits. Other traders may prefer higher risk-reward ratios and be willing to accept losing on trades more often. This is also likely to have an effect on the types of position sizes you take. Those with higher risk appetites will likely be using larger positions – risking more per trade – whereas forex traders with lower risk profiles will likely have more conservative position sizes.
- Skills & knowledge
While you don’t need any specific skills to get into forex trading, some skills may be helpful in your style of trading. For example, those who have backgrounds in fields such as mathematics may find concepts found in technical analysis much easier or those with a good understanding of economics may find fundamental analysis easier. Or perhaps you have a background in programming and want to get involved with automated trading strategies.
Knowing how much time you can commit to trading is important to factor into your strategy, some strategies will require a lot of time committed, while others may require much less. Usually, this will have a large effect on the timeframes that you are trading. For example, those who can commit a large amount of time may want to trade short-term timeframes as they may offer more trading opportunities, however, those who only have time to trade twice a day may be looking at longer timeframes, trading less, but holding for longer periods and looking for larger gains per trade.
When trading the forex market or any other financial market, your trading strategy will be based on the conclusions of your analysis, of which there are 3 main types:
- Technical Analysis
Technical Analysis involves looking at patterns in price action and coming to conclusions about what the market might do based on price movements rather than underlying fundamentals, or sentiment. This is because technical traders believe that everything about an asset is reflected in the price. Technical traders may use different technical indicators such as the RSI and moving averages, or trade patterns like Fibonacci and pivot points. Your trading system may use solely technical analysis, or you may use it to help find good entry and exit points for trades based on other types of analysis, you may even use some mixture between different types. How you use technical analysis is up to you.
- Fundamental Analysis
Fundamental Analysis is the process of analyzing the strength of an underlying asset based on what makes the security valuable. In the case of currency trading, you are largely analyzing the economies of the currency pair, as well as their monetary and fiscal policies. Fundamental analysis is one of the most rigorous forms of analysis, as there are many factors going into what makes an economy strong or not. Usually, fundamental analysts will base their analysis on major news or statistics releases such as inflation, employment, or GDP numbers as well as political news.
- Sentiment Analysis
Sentiment analysis is based on how traders feel about a particular asset and how that affects the buy/sell decisions of traders. Sentiment traders may use tools such as the bullish percent index or moving averages.
Aside from analysis, there are trading styles where the frequency, timeframe, and risk profile differ.
Some trading styles to consider:
Scalping is the fastest trading style, holding positions for mere minutes or even seconds making very small profits per trade but making lots of trades, and often switching directions from long to short or vice versa. Scalping requires focus, quick decision-making. Scalpers thrive on volatility and fast-moving market conditions. Scalping is a very time-consuming strategy, as you must make many trades to be profitable. When using scalping strategies, it’s common to use tools such as EAs and it is most commonly used with technical analysis.
2. Day trading
Day traders open and close intraday positions, never holding positions overnight or exposing themselves to “overnight risk”, although not as fast-paced as scalping this is still one of the shorter-term trading styles out there. Day trading is one of the more time-consuming strategies as it involves being heavily involved in the market for most or all of the trading day. Usually, day trading strategies use technical analysis to profit from short-term trends.
- Swing trading
Swing traders generally hold positions for a few days or weeks at a time, trying to catch large price “swings” or breakout patterns. This strategy takes less time than day trading, as you do not need to be involved in the market as much. However, swing trading exposes traders to overnight and weekend risk, where there could be large and potentially unfavorable movements between market open and close.
- Position trading
Position trading is the longest term of these trading strategies, where traders will hold a trade for months or even years. Position traders aren’t concerned with the short-term fluctuations of an instrument and are more interested in following the long-term trend. position traders often favor trend-following technical analysis, as well as fundamental analysis, and trade trending markets, to catch long-term movements in their favor.
While this may give you some things to consider, and styles to try.
The best way to figure out what works best for you is to open a demo account on your preferred trading platform and start trading the currency market, figuring out which type of trading works best for you, and creating a trading plan before you trade real money in a live trading account.