Forex Trading Strategies

To be a successful forex trader on Dominion Markets, you must develop a suitable trading strategy. Below, you will get an idea of what a good strategy contains.

Introduction To Forex Trading Strategies

Forex trading strategies are just guidelines you follow when trading forex markets.

They determine how a trader engages with the marketplace. A "strategy" incorporating technical analysis, fundamental analysis, market psychology, and risk management is necessary to handle volatility in the market.

These strategies enable traders to recognize opportunities, navigate market price fluctuations, and make well-informed decisions.

Technical Analysis Strategies In Forex

Technical analysis in forex is the study of the market using indicators and chart patterns to try and predict its movement. Below is how to use technical analysis to develop a trading strategy.

1. Identify The Market And The Type Of The Trade

Of course, the first step in technical analysis is determining which market you want to trade. The second thing you must do is choose how long to stay in the trade. Which charts will you be using? Will there be hourly or monthly trades? Traders that trade monthly should not concern themselves with the hourly timeframe movements. If your monthly strategy says to enter a trade, then it doesn’t matter what the hourly timeframe says.

However, suppose the trade is to be short-term. In that case, you may study longer-term charts to understand the market better and get the bigger picture. This might help you determine whether your trade is in the direction of the longer-term trend.

2. Using Technical Indicators

You need to select a technical indicator that suits the kind of market you choose. An excellent example of a widely used indicator is the RSI. The RSI shows whether the market is overbought or oversold. The price will likely reverse if the RSI registers an overbought value above 70. You can take a sell position and exit the trade when the RSI registers an oversold value below 30.

When the RSI gives an oversold signal, the market will likely reverse on the upside. You can take a long position and exit the trade when the RSI gives an overbought signal. However, you should use technical indicators like the RSI with other tools to get better entry and exit signals.

3. Using Chart Patterns

Traders use many chart patterns to get entry opportunities in the market. One common chart pattern is the head and shoulders pattern. A head and shoulders pattern forms when the price reaches three high points in an uptrend: the second high is higher than the first, and the third is nearly identical to the first (shoulders). A neckline connects the lowest points of the troughs the pattern created. When the price breaks below the neckline, you take a short position. Place your stop loss slightly above the highest peak of the head and shoulders. Place your take profit to a risk-to-reward ratio of 1:1.

Double tops and bottoms are another chart pattern you can use to enter trades. They form after the price makes two peaks or valleys after a strong trending move. They signal price exhaustion and a desire by the market to reverse the current trend. When trading double tops and bottoms, price targets equal the same height as the pattern.

Fundamental Analysis Strategies In Forex

Fundamental analysis in forex involves the study of economic indicators. Economic indicators are a government's reports that describe a nation's economic performance. These reports directly measure several aspects of a nation's economic health. However, many circumstances and policies influence a country's economic performance.

Economic reports show traders whether a country's economy has grown or shrunk, and the government releases them regularly. The forex market constantly experiences significant price and volume fluctuations due to changes in a country’s economy.

Major economic indicators include inflation, GDP, employment figures, and central bank policy meetings. These are known to cause a lot of volatility in the market and can, therefore, create great trading opportunities. Some of these economic reports are familiar to most traders. However, others, such as housing statistics, are covered less.

Using Economic Indicators

Therefore, changes in economic conditions will immediately affect the price and volume of a currency. This is because economic indicators determine a nation's economic state. But it's crucial to remember that there are other factors besides the indicators above that influence a currency's value. Various factors, including technical aspects and third-party reports, can significantly impact a currency's value. When trading foreign exchange using fundamental analysis:

  • Have an economic calendar with the indicators and their release dates readily available. Additionally, watch the future; markets frequently move in anticipation of a particular indicator or report scheduled for release later.
  • Take note of the economic indicators the market reacts most to at any given time. These kinds of indicators bring about the largest fluctuations in volume and price. For example, inflation is one of the most closely watched indicators when the US dollar weakens or strengthens.
  • Trading the news is quite tricky. You need to mark the news events that greatly impact the market. The market can react anyway, so you should consider all options. Before news releases, you should set stop orders above and below the current price. You should then place profit targets on the nearest support or resistance. Once the news is released, the price will trigger one order. You should cancel the other order and place a stop loss a few pips away from your entry point.

Risk Management Techniques

The foundation of any successful trade is proper risk management in forex. To lock in profits, reduce losses, and prevent losing all of your capital, you must understand the significance of position sizing and where to set your stop-loss orders.

Position Sizing

Deciding how much capital to risk on a single trade is part of proper position sizing. Generally, you should not risk more than three percent of your trading capital in any trade. Most traders choose to risk between one and two percent.

Assuming 1000 dollars is in your trading account, you must ensure that your stop loss will result in a maximum loss of 10 dollars if you risk 1% of it. Finishing your trading capital would take an extremely unusual occurrence, a run of 100 consecutive losses.

It's crucial to size your positions to avoid losing all your money in a single or few trades. You should ensure your position size can weather a losing streak without losing the balance of your trading portfolio on Dominion Markets.

Price Action Trading Strategies

Another major strategy traders use in the forex market is price action trading. This involves studying the naked charts to see what the price has done, is doing, and might do in the future. Here, traders mainly focus on candlesticks and support and resistance.

A. Candlestick Patterns

A candlestick reduces data from several times into a single price bar. Because of this, they are more beneficial and straightforward than conventional line charts. Candlesticks create patterns that, when finished, can be used to forecast price direction.

Candlesticks are traditionally best used on the daily chart. The theory is that each candle represents a complete day's worth of news, information, and price movement. This means that swing or longer-term traders benefit more from candles.

You can use candlestick patterns to enter trades. One of the most common candlestick patterns is the engulfing pattern. An engulfing pattern involves two candlesticks and occurs when the second candlestick is bigger and wholly engulfs the first candlestick. If the bigger candlestick is green, this represents a bullish engulfing pattern. This means the price is likely to move upward.

If the bigger candle is red, this is a bearish engulfing pattern. This means the price is likely to move downward.

B. Support And Resistance Trading

Support is an area on a price chart that indicates traders' desire to buy. Demand will typically outweigh supply at this point, stopping the price from dropping lower and turning it around.

The opposite of support is resistance. The reason for price increases is more demand than supply. There will come a time when the desire to sell will outweigh the desire to buy as prices rise. There are several reasons why this occurs. Traders may have realized they have reached their target or that prices are excessively high. Moreover, buyers are less likely to open new positions at such high prices. There could be many other causes. However, an experienced person can quickly identify the point on a price chart where supply starts to outweigh demand. This level is called a resistance. It might be a level or a zone, just like support.

These levels are key market reversal points. When the price gets to a support, take a long position in anticipation of an uptrend. When the price gets to a resistance, take a short position in anticipation of a downtrend.

To become a successful trader in the forex market, you need a good strategy, as highlighted above, and a good place to execute it. Join Dominion Markets today and test out your new strategy.