Forex Strategies

Trading the Forex market is a smart move. There are many Forex strategies to implement, and they will help you invest your money wisely. However, no matter how well you have studies, researched, and examined a strategy, it will always remain risky. So whenever if you choose to trade in the Foreign Exchange market, always remember that you are taking a risk. Having said this, history has proven that certain trading strategies work. Following are several strategies that traders use in their attempts to make a profit—and you can learn from them.

Trend following is a Forex strategy used by all sorts of Forex traders. It basically says that if a certain trend is in place, it will continue to be in place. If a financial instrument is acting in one way (as per the trend) then it will continue to do so. For example, if the value of a certain currency has been rising, then it will continue to rise, or, if the value of a certain currency has been falling, it will continue to fall.

Contrarian is a market-timing Forex strategy used by all sorts of Forex traders. It basically says that if a certain trend is in place, it will reverse. If a financial instrument is acting in one way (as per the trend) then it must begin to act in a contradictory way. For example, if the value of a certain currency has been rising steadily, then it will start to fall, or, if the value of a certain currency has been falling, it will begin to rise. Traders will buy and sell based on the above notion; they will buy an instrument that has been falling, or, sell one that has been rising.

Range trading is in a way opposite of trending, because it follows the range of a certain instrument and claims that an instrument has a certain range (of highs and lows) in which it operates. So every time it rises to its high, it must move back down, and every time it falls to its low, it must move back up. Trading this way is called “trading in a range”.

But there is a notion of trending even in range trading. For example, if an instrument has moved outside of its range, then it is believed that it will continue to follow that trend. This is to say, that if an instrument has broken its range and its price has moved up, then its price will continue to rise for a while longer (and vice versa).

Scalping is a Forex strategy that takes advantage of the small differences that are created by the bid-ask spread. The only way to make a profit from this strategy is to make small and fast moves. Scalping exploits the inefficiency of the market when instability and unpredictability increases and when trading ranges expand.

News trading is used frequently and specifically by day traders which tend to trade as per the news. That is to say, to trade based on current events. Traders open positions following major news releases. The reason this technique is used mainly by day traders is because such opportunities are usually short-lived; they may last for only a few minutes or even only a few seconds. If some country released an economic report showing a growth in its Gross Domestic Product (GDP), then this may influence the value of that nation’s currency—a rising trend in the GDP shows that the economy is growing stronger, and hence, day traders may choose to invest in that country’s currency. But like already said, the opportunity to do so is usually short-lives, and hence, only day traders can benefit from such opportunities.

Perhaps you will not be surprised to know that many traders will chose to reverse these strategies. I.e. to operate in a way that completely contradicts these techniques. They will purposefully trade against those who trade using the strategies above.