At the first stage of their careers, traders need to choose a trading strategy. First, they need to ask themselves which type of trading is most convenient for them. Calm and sober-minded people should rather opt for position trading, while adventurers are more likely to enjoy scalping or intraday trading that demands prompt analysis of incoming information and fast decision making.
There exist several types of trading strategies, so a trader can pick up the most convenient one and adapt it to his/her needs:
• scalping strategies
• channel strategies
• trend strategies
• breakout strategies
Each of the above mentioned strategies can be adapted to particular skills, but it would be useful to get acquainted with their general features.
This trading strategy will be convenient for active people who have enough spare time to follow the market situation online. Orders will be opened very often under this strategy, and profits will be fixed in a short period of time. This strategy implies a great deal of trades with small profits. On average, a scalper can conduct up to a few hundreds of trades a day. Profits are fixed on tiny time frames, from 5 to 15 minutes. Highly volatile and liquid currency pairs will suit this strategy the best. Besides, it's important to have the lowest spreads on those pairs. They include: EUR/USD, USD/JPY, GBP/USD.
There's no definite indicator to help a scalper make a decision about when to enter the market because scalping isn't a trading system but rather a trading style that suggests short-lived trades. However, the following technical tools may be useful: combinations of Japanese candles, short-term support and resistance levels, moving averages, oscillators, MACD, and some others.
Contrary to popular opinion, novices shouldn't get involved in scalping, even though they tend to prefer it at first. They see scalping as a way to get profits from each market move. A lot of automated trading systems based on scalping do promise fabulous profits. However, you should always consider spreads and labour costs involved.
Unlike scalping, channel strategies suit any market participant and are quite profitable in both short and long terms. They imply drawing channels by means of various tools:
• trend lines
• technical indicators such as Fractal Channel, Envelopes, Bollinger Bands.
Channels may be drawn on any time frame, depending on traders' preferences. The tactics of channel strategies use are the following:
• a short trade is conducted when the price has bounced from the upper border of the channel, a long trade is conducted when the price has bounced from the lower border of the channel.
• Stop Loss is placed below the closest minimum near or outside the lower border of the channel.
• Profit potential is expected on the opposite side of the channel.
The list of tips can be easily enlarged with extra rules and nuances, for example, drawing the middle channel line and a bounce from it, advice on how to act when the channel is broken out, moving a stop loss, and so on.
High volatility currency pairs with rare false breakouts are the best for this strategy. They include: AUD/USD, USD/JPY, EUR/USD, GBP/USD.
The trades under this strategy are medium frequency trades and depend on a time frame and the volatility of the currency pair. For example, a trade on one currency pair on H1 time frame will be conducted no more that once a day under the channel trading system.
Trend strategies are deservedly considered as ones of the easiest to use, most popular and profitable. Trend trading is recommended to both beginner and professional investors. It's assumed that trends can be traded on any time frames, although the reliability and the profit making potential depend on its strength and term. Trends drawn on daily charts are more reliable than 15-minute trends.
Both relatively calm and volatile pairs will suit the trend strategy: USD/CAD, AUD/USD, EUR/USD, USD/CHF. In order to draw trends, trend lines and moving averages can be used. Parabolic SAR should be singled out from the group of indicators. Oscillators can be used for predicting bounces and trend peaks. The distinctive features of this strategy are:
• the length of a transactions;
• high profit potential as compared to Stop Loss.
• the possibility to adjust stop orders to new troughs and peaks, which confirm the continuation of a trend.
Breakout strategies are relatively similar to trend ones and include some tools intended to inform a trader about a trend reversal or breaking support/resistance levels. To find breakouts, trend indicators (for instance, moving averages) can be combined with such oscillators as MACD, Momentum, and Stochastic. Chaotic currency pairs don't comply well with breakout strategies.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.