Forex Trading Strategies
                     Forex Trading 
Strategies
Forex trading, as we know, is the trading of foreign currencies. It is the most 
traded  market globally. The currencies are bought and sold by traders using 
various financial  instruments. These could be options, futures contracts or 
CFDs etc. Foreign currencies  are significant for any trade as they allow the 
purchase and sale of goods and services  across borders and nationally. 
Therefore, the exchange of foreign currencies is  necessary for foreign trade.
Some major currencies are mostly used as the base currencies; USD, EUR, 
GBP, JPY  and AUD. However, trading of the currencies requires plans and 
adequate analysis of  the forex market. For that, traders use foreign 
exchange trading strategies. These guide  them to make decisions and 
predict market fluctuations—an excellent way to analyse  the market and 
earn high profits.
Forex Trading
Forex trading has been around the world for a decade in the form of barter 
systems or  services for the exchange of money. However, forex trading is a 
new invention or, better  to say, the new version of trading where the old 
system has been modified with the  technology. The continuous and non-
stoppable market of trade, where the traders keep  engaging in the process 
of foreign exchange.
The trade was earlier financial institution oriented, but it has become more 
of a retail  trade now. All investments are feasible with forex trading, where 
traders of large and  small investments can trade in the exchange market. 
The most interesting fact of the  trade is its operation which is totally 
online having no particular place. Traders can  exchange currencies 
through computer networks and electronic systems that connect  everyone 
online.
Moreover, the market is highly liquid, i.e. the currencies are always 
available for trade  and could be converted into cash anytime. It is traded 
on over-the-counter(OTC), and  the economic conditions of the market or 
the countries affect its trading.
Ways of trading forex
Forex trading could be carried out with three main methods. These include 
spot market,  forward market and futures market. Here we have discussed 
the three with their  functions:
Spot Market
Spot market trading in the forex market has boosted with the electronic 
changes and  trading and the snowballing of the forex brokers. The spot 
market is quite big and due to  the trade of the underlying assets of forward 
and futures markets. Spot market trading is  used with investors of all kinds, 
from companies, institutions to banks and humans. The  other two are 
suitable for companies who require hedge against the risks.
In the spot market, the currencies are purchased and sold in the market at 
the trading  price. The price of the currencies or products is determined by 
the demand and supply  factors. Other factors that aid in calculating the 
price are interest rates, economic  impacts, political situations and the 
predictions of the currency in the near future. The  final deal between 
traders is called the spot deal.
In spot deals, the two parties of trade exchange the currencies at an agreed 
exchange  rate. Once the positions are closed, the trade is settled in cash. 
The spot date is the  future date on which the trade is settled, and it is 
mostly two to three business days. So,  it is primarily trade in the present 
rather than the future.
Forward and Futures Markets
A forward market is a contract where two parties of the trade agree to 
trade the  currency on a future date. The price of the trade is 
predetermined as per the OTC  markets. On the other hand, futures 
contracts are the exchange of currencies on a  future date between two 
parties on a future date at a decided price.
The trade of future and forward contracts are not based on the real-time 
price of the  currencies but a claim of the certain currency on a future 
date at a specific price.
However, the two markets differ in their way of trade. Futures market 
trades in the
currencies upon a standardised size and settle date of the trade is as per 
the public  exchange markets. In contrast, forward markets bought and sold 
the currency on OTC  between the parties of the trade. They regulate the 
agreement terms as per their  needs.
The two contracts are binding and are settled in cash. However, if the trader 
purchases  and sells the currency before the contract expiry date, there’s no 
cash exchange  requirement. Thus, the contracts act as a hedge against the 
forex market risks.
Forex Trading Strategies
Forex trade has ample opportunities for the traders, where they can earn 
profits using  certain strategies. But, as it is traded on global markets, the 
risks are also high. Forex  trading is complex and competitive, therefore 
requires traders to use effective trading  strategies. For regular success in 
the forex trade, investors must polish their trading  skills from time to time 
and understand the market thoroughly.
Forex trade is implemented in a variety of ways, and thus, a suitable 
strategy will only  benefit a trader. Traders should consider all the factors of 
past trade, experience level  and goal etc., to be profitable. Therefore, a 
trading strategy should be chosen, keeping  in mind the purpose and trade 
instrument.
We have discussed some of the significant trading strategies:
Trend Trading
The simplest and preferred trading strategy of the forex market is trend 
trading. In this,  the trader follows the current price trend or direction of the 
instrument. A reliable trading  strategy requires traders to have complete 
information about the instrument and the  market. Investors should be aware 
of the duration, trend, and strengths of the  instrument. The knowledge of 
the market factor-like these guides in analysing the  present trend, currency 
market price and when the reversal of the trend will take place.  Traders of 
the trend trading strategy must know about the factors need not be exact,  
however. The essential thing is when they can exit the current market 
position to limit  the loss and lock in the profits.
The trend trading supports long term trading as there are many small 
fluctuations  against the prevailing trend even when the market is growing. 
However, traders of trend  should be ready to face small losses as they will 
have greater profits in the long run.
Trend trading uses tools to determine the trend, such as:
 Simple Moving Averages
 Exponential Moving Averages
 Moving Averages Convergence/Divergence (MACD)
 Average Directional Index (ADX)
The trend tools of moving averages is a great indicator using the previous 
prices for  getting current market trends. In addition, these also furnish 
the traders with support  and resistance levels that aid to decide on the 
entry and exit of the market positions.
Other indicators could be used for predictions like relative strength index and 
oscillators,  etc.
Pros:
 Reliable
 Consistent strategy
 Momentum trading strategy
 Identifies entry and exit
 Slow-paced
 Lower transaction costs
Cons:
 False breakouts
 Low hit rate
 Requires continuous following
Position Trading
Position trading is another forex trading strategy that traders use in order to 
have high  returns. The strategy is related to the position held by traders in 
the market. It could last  for a few days, weeks or a year. The position is held 
for a long time period where  traders need a micro view of the market. They 
even have to sustain small market  fluctuations.
Tools used:
 Analytical data
 Fundamental analysis
 Trend trading
 Moving Averages
The position trading follows the approach of trend trading to know about 
the market  changes. With this, they take the help of indicators of moving 
averages to know about  the entry and exit positions—the tool aids in 
minimising the loss and securing the  profits. Analytical and fundamental 
analysis are also important factors for trading on  positions. These provide 
data and analyse the market for changes.
Pros:
 Less stress
 Mitigates noise
 Low maintenance
 Trend capitalisation
 Immune to market fluctuations
Cons:
 High capital requirements
 Account liquidity
 Low Compounding
Range Trading
Range trading is the most suitable strategy to use for forex trading. It lets 
the investors  know about the price fluctuations through chart patterns and 
indicators. Basically, a  support and resistance trading strategy. It identifies 
the highest and lowest prices of the  instruments on the chart before the 
reversal takes place. Thus, creating range trading  through floor and ceiling 
levels.
Support acts as the floor of the price levels, and resistance acts as the 
ceiling. The  market is uncertain, and it keeps breaking the previous 
resistance levels. Thus, creating  new support and resistance levels. 
However, the price moves in a sideways direction in  range trading and 
remains enclosed between the support and resistance.
In range trading, when the price reaches the point of resistance, traders 
expect a  reversal of the trend. It brings the trend of overbought and thus 
sales in the market.  Whereas support is the oversold situation where the 
traders buy. However, when there  is a breakout, a new trend starts with 
new support and resistance.
Tools used:
 Support and resistance levels
 Stochastic Oscillator
 Relative Strength Index
Pros:
 Small starting fund
 Charts and patterns
 Support and resistance levels
 Entry and exit
 Price fluctuations
 Clear stops and targets
Cons:
 Needs understanding of the market
 Reading of charts and patterns
 False breakouts
 High costs
 Rapid decisions
News Trading
The importance of news alerts in the forex market is the topmost priority. 
As the forex  market gets affected by the economic, political and other 
factors of the countries. It  becomes pretty essential to know the 
happenings of the world. The news is the only  source of information and 
knowledge about such impacts. Therefore, news trading is  necessary for 
forex trading.
Forex market is a multinational market that deals in all types of currency 
pairs.  Therefore, understanding their potential impact on trade and 
economies will help traders  in making better investments.
Factors to know in the news are:
 Economic reports of unemployment, inflations etc.
 Interest rates
 Business surveys
 Reports on financial markets
 Trends of the market
All the factors of the market carry equal importance, and traders 
should be alert  regarding the changes.
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