The 5 most popular forex trading strategies explained
Forex trading is very popular in Nigeria. Investors appreciate it to freely trade forex pairs like NGN/USD and the EUR/USD, or GBP/USD. Currency pairs can be traded nearly 24 hours per day, and the entry barrier is low. Most forex brokers offer mobile apps and allow investors to open a new forex account with low minimum deposits.
As in many other areas of life, a first-class education is also a prerequisite for success in trading currencies. Forex trading courses are an ideal starting point. All forex-related aspects learned in the forex courses can then be practiced in a demo account with virtual money. Those who succeed in making money in the demo account start trading with real money to grow the account balance steadily.
This article serves as an essential guide with frequently used forex investment strategies and explains the main characteristics in detail.
Buy and Hold
The buy-and-hold trading strategy is primarily used by stock and ETF investors. The investor typically analyzes a company’s financial health and growth potential and invests for the long term. Buy and hold typically means to keep the asset for at least a few years, but it can also be for a lifetime. But, of course, that mainly depends on the company’s progress over the long run.
In forex trading, things are a bit different. The investment is made by buying a specific currency. Forex traders make such transactions, for example, when they believe that the value of their local currency loses in value compared to another one like the US-Dollar. But forex trading is not limited to trade currency pairs connected with the local currency.
Forex traders analyze the global and local economies instead of focusing on selected company financials. It’s always a currency pair that is traded, and the investors expect that the one currency in this pair increases in value, and the other loses value.
Position trading is also a longer-term investment style but is not necessarily meant to buy and hold a currency forever. Instead, position traders are looking for extensive shifts in the price of a currency pair, like, for example, the NGN/USD. Position traders hold their investments for a couple of weeks or months.
Instead of monitoring short-term charts, they follow geopolitics, global evolvements and local developments. A position trader is patient, uses bigger profit targets and gives a trade a meaningful distance to place a stop loss.
A position trader needs good knowledge about economics and global interrelationships. Most time is spent analyzing potential trades, while the trade management only requires a minimal time commitment.
Swing trading is prevalent amongst forex traders, and it’s where the patient and impatient traders find a comfortable level when investing in currencies.
Forex positions may be held for several days, but they can also be for a couple of hours or simply overnight. Swing traders should understand the fundamental macroeconomics and should also be familiar with technical analysis utilizing charts, indicators and trendlines for visualization.
Macroeconomic conditions and market technicals like breakouts above resistance or breakdowns below support can influence the validity of a swing trade. Swing traders often use the 60-minute chart to evaluate trading opportunities and make trading decisions primarily based on technical analysis. In addition, they validate their conclusion by checking economic conditions.
Day trading of forex pairs requires extensive skills in day trading, forex trading platforms and market dynamics. A forex day trader goes all-cash by the end of a trading day and starts with new trades on the next trading day. A day trader never holds a position overnight – otherwise, it would be classified as a swing trade.
A significant benefit of day trading forex pairs is that hefty market movements during sleeping times do not impact the portfolio performance. Instead, the day trader closes all positions before he shuts down the PC, and it is 100% safe in cash within the account.
Day trades may last for a couple of hours, but typically only 5-60 minutes. Therefore, day trading currencies require a high time commitment, excellent internet connections and profound knowledge about trading technology and the forex market.
This lightning-fast forex trading strategy attempts to scalp just a few pips (basis points) out of each forex trade. A currency scalper holds positions for seconds and only focuses on trading during ultra-volatile market hours.
Economic events like Consumer Price Index, Jobless Claims, Non-farm payrolls are where the forex scalper feels home. The scalper avoids trading during less-volatile market hours since the commissions and spread often eat up the profits made from small market moves.
A forex scalper invests high amounts at once. So, any internet disconnection can have a highly-leveraged impact on returns. That’s why a fast and stable internet connection combined with a reliable forex trading platform is a mandatory prerequisite.
Timing is everything in currency scalping. That’s why most scalpers use high-frequency trading algorithms and automated trading systems for this trading strategy.