Preferred Forex Trading Strategies
If you are new to Forex trading and want to ensure that your trading experience is successful, there are a number of tools and strategies that you can use to help you. While in your early stages of learning, it may all seem like a lot of technical information, it can be invaluable in improving the success of your trades.
Among the tools available are trading strategies. As with anything having a strategy will help you to achieve your goals, which in this case, is becoming a successful trader. While a Forex trading strategy seems like a great idea the next question is which one to use. There are a number of tried and tested strategies but which one will help you the most?
Of these many trading strategies, some which are more commonly used than others, there is nothing to say that you have to use one or all of them. The most successful Forex traders will find those that they can work with and that produce the best results for them. That may be one, two or more.
Which Forex trading strategies should you be using? in this article you will learn more about:
- The Hedging strategy and how it can reduce your risks
- How to draw trend lines to help you make accurate trades
- What is the Pinocchio strategy and how can it help?
The Hedging Strategy
When it comes to Forex trading, ‘hedging’ is a way to protect yourself from the risk of Forex by placing an additional trade to counteract any losses from an earlier trade. You’ve all heard the saying ‘hedging your bets’? Essentially you buy one currency pair and then at the same time place a trade to sell the same pair. It’s a kind of insurance that means you don’t lose.
The downside of this particular strategy is that you don’t really make a profit unless you time the entry of your trade just right. If you are placing a second trade because the initial trade is not performing as you had hoped, while you don’t have to close the initial trade, some would suggest that it is better to close it and take the hit then place a second trade in a better position.
Of course, this is the simplest form of a hedging strategy. There are more complex solutions which require perhaps more knowledge and experience. Of these complex hedging solutions ‘multiple currency pairs’ are an effective choice.
The Trend Line Strategy
The trend line is a commonly used technical Forex trading strategy which requires you, the trader, to draw your trend lines based on the data available. Trend lines are a common form of analysis in Forex and can be used for any currency pair and any time frame. A trend line is a line that connects any two lows or any two highs with its lines projected into the future.
The trend lines can be uptrend, downtrends and sideways trends. Uptrends are higher lows, downtrends are lower highs and sideways trends are ranging. You need to draw your own trend lines based on specific time frames but once you have them they can be very effective in helping you to realise what trades to place and when for the best results.
When using this strategy, it is important to understand what you are drawing and how many points you should be using. you also need to understand how to take this data and use it to accurately predict your next move. Put more simply you need to understand how to connect the dots.
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The Pinocchio Strategy
The Pinocchio strategy uses data in a specific format to analyse what is happening with a particular currency pair. The data is presented as individual bars which represent a pair. Each bar has a small body with a long wick. As the price increases the wick gets longer. The longer the wick the more likely that the pair is going to turn so, waiting for it to get too long puts you at an increased risk of losing your money as the wick will soon start to go in the opposite direction.
The Pinocchio strategy gets its name from the puppet. The more lies the puppet told, the longer his nose grew. Well this is the same with this particular strategy. It wants you to place a trade with the direction of the wick when you should be trading against it. The longer the wick grows the more likely the information it is providing is incorrect.
The Pinocchio strategy has reported to have a 70% win rate for Forex traders with 1:2 risk:reward ratio although, as with any strategy, it should be used wisely taking into account the risks of loss.
The Stop Loss Strategy
If you are trading for fun or as a second income, and find that you can’t commit all of your time to trading, or if you have several interests that keep you busy, then stop loss is a fantastic tool to allow you to manage your trades effectively. Many Forex brokers offer the stop loss function for those who can’t be online to monitor their trades all of the time.
Let’s say you enter a trade and want to leave it for a few hours but find you don’t have time to go back in later and close the trade, the stop loss strategy will do this for you. Like an alarm clock you simply set the time that you want to exit the trade and the computer does the rest for you. That way you can go about your business while your Forex trading is taken care of.
While using a stop loss trading strategy won’t allow you to reach the full potential of a pair’s performance, it does protect you against reaching a good position and then losing when it starts to fall in the opposite direction.