Forex Trading Strategies GuideForex Trading Strategies Guide

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Forex Trading Strategies

Understanding strategies for forex trading and the most commonly used forex indicators

Trading is risky. Your Capital is at risk.

What is a trading strategy?

Plan your trade and trade your plan

Your gut feeling is no expert when it comes to trading stocks, currencies, etc. But you can trade like a pro by learning & experimenting with different trading strategies.

How to use trading strategies

Expert traders are well-versed in the art of carrying out extensive technical analysis. They may have a working knowledge of different trading strategies, but they usually settle on a few strategies that they have found to be successful on a consistent basis.

You should approach trading the same way. Having well-laid out rules that govern when you enter and exit trades keeps you from making emotional decisions. Remember, gut decisions bring the highest losses as trading is never a sure game. Even after using trading strategies, the outcomes may at times go against you.

Put your strategy to the test in a risk-free environment

You’ll have varying levels of success when you implement any new strategy. If you put real money on the line with an untested strategy, it can result in losses. That’s why the best approach is testing out strategies in a demo environment.

Trading with a demo account may be devoid of the emotional highs or lows that come with losing or making real cash. However, it’s still the best way to know if strategies might work in a real-life scenario.

Some strategies are advanced and require some practice. Another advantage of trading in a demo environment is that you have access to historical market movements. You can apply a strategy and see what the outcome would have been.

Strategies and Demo Trading

Some strategies are advanced and require some practice. Another advantage of trading in a demo environment is that you have access to historical market movements. You can apply a strategy and see what the outcome would have been.

Types of Trades

Different forex trading styles

Forex Trading Strategies

Common trading strategies

The Bolly Band Bounce Trade

The thinking behind this well-known strategy is that prices will return to their mean average. It requires the use of the Bollinger Bands and is applied in stable markets moving at a steady range.

The Forex Overlapping Fibonacci Trade

If you have a good working knowledge of the Fibonacci retracement lines, this will be a less challenging strategy to implement.

Traders who use this elaborate strategy often swear by it and use it exclusively. When combined with other indicators, such as pivot lines, it provides a stronger signal.

London Hammer Trade

This is quite simple to execute, as it revolves around volatile price movements during the open of the London market or as it draws to a close.

The market volatility increases based on more traders becoming active. Many traders use it whilst trading the gold market.

Trading the Forex Fractal

You use fractals to identify a reversal and confirm its existence in very volatile or chaotic markets. Fractals appear at swing highs or swing lows.

Forex Dual Stochastic Trade

This strategy is mostly applied to trading the major currency pairs but can be applied to other assets. Its purpose is to reveal when the trend is most likely to reverse. With the early tip-off, you prepare to change your position.

The Pop ‘n’ Stop Trade

The Pop ‘n’ Stop Trade allows you to take advantage of a sudden price breakout from a tight range. There is the danger of missing the breakout and entering the trade too late. The price breakout may be prompted by a news release, rising volumes, or at the opening of the market.

The Drop ‘n’ Stop Trade

The Drop ‘n’ Stop Trade is the reverse of the Pop ‘n’ Stop trade. It’s applied when the price breaks below a range, in what is referred to as a bearish breakout.

Simulated Forex Trading

Testing strategies on our demo account

Forex Simulator

Test different trading strategies with our free demo account

FXTM gives clients the opportunity to test strategies in a risk-free environment. With our Forex simulator, you don’t have to risk your capital until you’re confident in your ability to make successful trades.

Although the FXTM demo account utilizes a simulator, you’ll be trading under normal market conditions. The price movements are real and the indicators you have learned above are applicable. You’ll be trading with simulated money, but under genuine market conditions.

*Trading involves risk. You may lose your capital.

Trading simulator - Trading CFDs on our demo account

CDFs are “contracts of differences.” When you trade CFDs, you don’t own the underlying assets such as commodities, shares, or major indices.

These typically require a sizable capital to trade. However, when you trade CFDs, you’re just speculating on their price changes. You can

  • Lower/tight spreads
  • Flexible leverage that may increase based on your experience or knowledge*
  • Very fast execution on orders

start out with a small capital, and use the power of leveraging.
Pros of our trading simulator and Forex demo accounts:

  • Fast registration and verification of new accounts.
  • Swap-free accounts *suitable for persons who don’t pay or accept interest

FXTM boasts flexible leverage* to give you the competitive edge you need.

Forex Indicator

Important indicators for forex trading

MACD indicator

Moving Average Convergence Divergence.

It’s one of the most used indicators because it’s easy to understand, and gives the trader information on whether the price movement is bearish or bullish, and the strength of this movement. The MACD also provides information about the duration and momentum.

How to use the MACD indicator

The MACD indicator consists of two lines and a histogram plotted against a time axis. First, we have the MACD line that’s obtained by finding the difference between the 12-day exponential moving average (fast) and the 26-day EMA (slow). The signal line is a 9-day simple moving average of the MACD. It’s usually colored red and appears above the MACD. The histogram represents the distance between the two lines.

More forex indicators

Crossovers

When the MACD line crosses above the signal line, traders deduce that an upward trend is likely to form, and the action to take is buying the asset. If the signal line crosses under the MACD line, the indication is that a downward direction may form, and therefore you should sell.

The MACD may also go under the base-line to a negative value, and this points to the likelihood of a downtrend forming.

Divergence

The price line may diverge from the MACD, suggesting that a trend may reverse.

The Stochastic Oscillator Indicator

The stochastic oscillator indicator is a must-have tool in your trader’s toolbox

This is a momentum indicator obtained by comparing an asset’s close price and its price range over a given period. It produces better results with higher time frames such as the daily chart.

How to use the Stochastic Oscillator

Its chart has two lines, the slow %D and the fast %K. The default look-back period is 14 days, but you can vary this parameter to increase or decrease the indicator’s sensitivity. The stochastic oscillator tells you when to enter into a trade. While it was developed to track momentum and velocity, it now indicates if the market is overbought or oversold.

You look at the 80-line and 20-line. If the %D and %K lines cross the 80-mark, the asset has been overbought. Some buyers may start selling and take profits, which causes the trend to reverse. Now if both lines fall below the 20-mark, the asset is oversold, and more traders will choose to buy, driving the prices up.

Relative Strength Index

The RSI shares the same function with the stochastic oscillator as it can help you identify an overbought or oversold market. It’s a range-bound momentum oscillator obtained by comparing the average gain prices with the average losses over a given period. It also tracks the rate of price change.

The RSI shares the same function with the stochastic oscillator as it can help you identify an overbought or oversold market

The RSI shares the same function with the stochastic oscillator as it can help you identify an overbought or oversold market. It’s a range-bound momentum oscillator obtained by comparing the average gain prices with the average losses over a given period. It also tracks the rate of price change.

There is only one line to track, and it produces an overbought signal when it crosses the 70-line or an oversold signal when it goes under 30. The RSI may show the formation of an uptrend if its RSI value moves from a low position, crosses the centerline (50) and moves to the 70-mark.

If it moves from a higher position past the 50 centerline towards the 30-mark, it may confirm a bearish trajectory. During an upward trend, the RSI value may stay above the 60 range with the 40-50 zone acting as the support. In a bearish market, the RSI value remains within the 10-60 range, and the 50-60 zone serves as the resistance.

Ichimoku Hyo Indicator

The indicator was developed by a Japanese newspaper writer, and it’s a combination of several indicators meant to give traders all the information they need in one glance. It’s no surprise that it consists of up to 5 lines. Since it’s made up of multiple lines, it can be hard for novice traders to read it.

How to use Ichimoku Kinko Hyo

Without getting into the technicalities, this indicator helps traders determine resistance and support levels. It may reveal the price momentum, possible reversals and help traders place a stop loss.

Some of its lines include the kijun-sen and tenkan-sen that are derived by averaging the highest prices and lowest prices of different lookback periods. For instance, the tenkan-sen line has a lookback period of 26. The senkou span A, another line, is the average of the kijun-sen and tenkan-sen.