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A Beginners Guide to Forex Trading Strategies

If you have decided to start trading the forex markets, you should first know this – day trading or any type of trading is not easy. If you enter into the forex market without a trading plan or a strategy – you’ll be losing your money. Frankly, no one guarantees that such a trading system ensures you’ll be making money as a forex trader. After all, psychology and discipline play a big role in forex trading and quite often are considered to be the main factors for a trader’s success.  

Still, you want to do the best of your ability to increase the chances of success. Or, in other words, you need to find a trading strategy or your own trading style that you feel comfortable with and that works for you. So, in this article, we introduce you to some of the basic forex trading strategies for beginners and help you find ways to analyze the markets. 

Key Points to Take Away

  • Technical and fundamental analysis are the primary techniques to analyze FX currency pairs
  • There are five simple forex trading strategies for beginner and experienced traders – supports and resistance levels, moving average indicators, breakout trading, range trading, and scalping trading strategy.
  • Besides developing a successful trading strategy, psychology also plays an important role in an investor’s trading experience. 

Ways to Analyze FX Currency Pairs

First, you need to recognize the methods used by traders to analyze the currency market. For that matter, the two techniques to analyze currency pairs (or any other financial instrument) are technical and fundamental analysis. Simply put, these techniques enable traders to get some clue about a certain market, either by using a chart showing prices or by reading the news and analyzing economic data. While some traders use only one method of analysis, some prefer to combine fundamental and technical analysis to determine entry and exit levels. 

No matter what, you need to at least have a basic understanding of both methods. In the best scenario, you can become an expert at one of the techniques or find the ideal way to combine the two. 

Technical Analysis 

In simple terms, technical analysis is a trading technique that attempts to help a trader to predict the price movement of an asset by using historical data and technical indicators displayed on charts. The theory of technical analysis is that past trading activity can help a trader to predict future price movement as the markets move in a repetitive pattern. Also, according to technical analysis traders, all the data is displayed in the chart and if a trader knows how to effectively read a trading chart, it is enough to be able to analyze the market and determine entry and exit levels. 

Fun Fact

Charles Dow, who allegedly introduced the theory in the early 18 century, is known as the inventor of the technical analysis theory. According to other sources, however, Homma Munehisa was the first person to use technical analysis in the Asian markets.

Fundamental Analysis

Unlike technical analysis, a fundamental analysis attempts to measure the intrinsic value of a currency pair based on economic factors and financial outputs. Consequently, a trader that analyzes a currency pair based on this approach will look at economic data published on the economic calendar, political events, market news, central banks announcements, and changes in interest rates. 

5 Forex Trading Strategies for Beginners

Only a few forex traders are able to find the right trading strategy and the right mindset straight from the first days of trading. In some ways, trading is a process of trial and error, which means you sometimes need to try, fail, and then try again another strategy. 

But no matter what your vision and goals for trading currencies, there are several basic trading strategies you need to be aware of. In some cases, even if you are not going to use a particular strategy, it is still crucial to know how the strategy or indicator works. Perhaps you’ll see a market forecast from an analyst with a certain strategy, so you want to know how to use it. Or, you might want to combine several trading strategies until you find the one that is right for you.

With that in mind, let’s take a closer look at some of the simple and highly effective beginners FX trading strategies:

1. Support and Resistance Levels

Using support and resistance level can simplify your trading and significantly help you find entry and exit points. It is one of the most common and effective strategies out there and is very often used by all types of traders. The reason is that because many traders look at the same levels, then some points in a certain market become crucial and indeed have some meaning.

Bear in mind that there are many ways to use support and resistance levels in trading, with some of the most popular include round numbers, Fibonacci levels, range trading support and resistance levels, and swing highs and lows.  

For example, in the image below you can see the EUR/USD chart forming a range trading formation with support and resistance levels. 

On the chart below, we have drawn Fibonacci retracement levels. For that matter, an investor needs to define a time period and draw the lines from the lowest level to the highest level in the specified period of time. 

2. Moving Average

Moving Average (MA) is a simple yet very powerful technical analysis indicator used by day traders and long-term investors. In simple terms, this market trends indicator shows the average price of a currency pair over a specified period of time and helps traders to identify entry and exit points. 

Once again, there are lots of types of moving averages including the simple moving average, exponential moving average, weighted moving average, etc. Also, there are different ways in which a trader can use this indicator – crossover, different lengths, combining moving average indicator with Bollinger bands indicator, etc. 

Generally, the MA is an excellent method to get an indication of the next price movement of a certain financial asset. According to this indicator, a trader buys the asset when the MA line crosses the price of the asset and vice versa.

3. Scalping Trading

There’s a rule in trading – The shorter the trades you make, the less exposure you have to market movements. Makes sense. The idea of a scalping trading strategy is that an investor tries to obtain small price movements in very short periods of time. For that matter, the forex trade could be seconds, or minutes but not longer than that. 

How to do that? That depends on the type of trader you are and whether you prefer to trade in times of high volatility or in times when the markets are calm. Regardless, it is an exciting way to trade FX currency pairs and is particularly used by forex traders due to the high leverage ratio provided by forex brokers (For example, SwitchMarkets offers a leverage ratio of up to 500:1 on FX currency pairs).

4. Breakout Trading

If you love action, then this is the right trading strategy for you. Breakout trading is a trading technique in which a trader is basically trading breakouts of support and resistance levels or high and lows (of the day, weekly, monthly, and all-time). For example, if the USD/JPY is trading during the day near the high level, a trader simply waits for the breakout and buys the pair once it breaks above the highest level of the day. 

It would be fair to say that breakout trading is essentially ‘trading the momentum strategy’ as you basically trade with the trend. Still, it’s a relatively difficult strategy as in many cases a false breakout occurs, meaning prices break above or below the identified level and reverse back to the contrary direction. 

5. Range Trading

Range trading is sort of the opposite of breakout trading (although it is certainly possible to combine the two). In basic, it is a trading strategy that involves buying and selling an asset inside a predefined range, meaning you buy the asset at the bottom support level and sell the asset at the high resistance level.

There are various ways to trade ranging markets and it usually works well in less volatile assets or in times when the markets are in a state of consolidation. For some people, this trading strategy is just more suited for their personality as it requires a lot of patience and discipline. Learn more from our Range Trading guide.

More Trading Tips and Tricks for Beginner and Experienced Traders

Apart from the five forex trading strategies and indicators above, there are more tools and tricks you can use to maximize your trading success. These include:

  • Using the Risk-Reward Ratio
  • Trading the News and Macroeconomics Data
  • Use Stop-Loss and Take-Profit Orders
  • Carry Trade Trading Strategy
  • Start with a Small Initial Investment
  • Focus on 1-3 Currency Pairs
  • Always know the Currency Trading Costs
  • If you’re Having a Bad Trading Day, Don’t Trade

The Psychology of Trading in the Forex Market

Let’s assume you have developed the perfect trading strategy and gained the necessary experience in the foreign exchange market. Unfortunately, that still does not guarantee your success as a trader. Trading is, more than anything else, a mind game. 

Much like individual and team sports, in trading, there are good and bad days. It’s a challenging profession, and in most cases, those who have mental toughness are able to become profitable traders. But, no one can really teach mental toughness and you’ll probably have to get into the forex markets and find out on your own if you have it. Still, what you can do to get some basic tools and understanding is to take online courses about psychology in trading, read books, and trade the markets with real money that you can afford to lose. 

FYI

There are remarkable similarities between poker and trading. As a matter of fact, because of the similarity, many proprietary trading firms are looking for successful poker players to join their teams.  

Summary

To sum up, the same way you do not want to get into a new adventure in life without a plan, you also cannot trade the FX market without having a trading strategy. And, even if you are not going to use the first trading strategy you have chosen at the beginning, it’s still better for you to start trading with a plan. If it doesn’t work, then simply change it and try another one instead. 

As a starting point, we suggest that you start with the tools and strategies that we have mentioned in this ultimate beginners guide. They are simple to utilize and widely used by other traders so you’ll be able to find lots of information on how to use them in your forex trading journey. 

FAQs

What are the best forex trading courses to find online?

Basically, there are plenty of online forex trading courses available. One online website that we highly recommend is HowToTrade – they provide extensive forex trading courses and cover all aspects of trading as well as the basics of the forex market. 

What are the best forex volume indicators?

Generally, volume is a vital indicator in trading, however, because of the way the forex market works (not via a centralized exchange), it is quite difficult to get information about the volume of FX currency pairs. Yet, if you wish to combine forex volume indicators when you trade forex, some of the best indicators include the Volume Zone Oscillator (VZO), the Chaikin Money Flow indicator (CMF), and the on-balance volume indicator. 

What are the trading mistakes beginner and experienced traders do?

Well, everybody makes mistakes. However, in trading, mistakes cost money so you need to try to avoid any mistake that might lead to a losing trade. Some of the mistakes beginner and experienced traders do are overleveraging their positions, trading with emotions, trading without a strategy/plan, revenge trading, trading multiple markets simultaneously, and not knowing when to take a break.

How to read currency charts?

A forex chart shows the exchange rate of two currencies trading one against the other. Each bar or candlestick shows the price change over a specified period of time, meaning you can analyze the currency pair by seeing its historical behavior. For technical analysis, candlestick charts are the best type of trading chart and provide a lot of information.

What should you learn first to start trading forex?

Before you work on developing your trading strategy, it is important to understand forex basics and understand what forex trading is and how it works. Then, take some time to read the news, learn how a trading platform works by practicing on a demo account, try different ratios of leverage, and find the currency pairs you want to focus on.

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