What is a forex trading strategy

A set of entry and exit rules which a trader can use to open and close positions in the forex market is what is known as Forex Trading Strategy.

These rules could either be simple or complex.Simple strategies normally require a few confirmations,while complex strategies may require multiple confirmations and signals from different sources.

Again,forex trading strategy might contain some money management guidelines.Some forex trading strategies could be formed strictly around position sizing techniques.

The entry and exit rules,and the money management guidelines (which is optional) are not the only aspects of forex trading strategy. There is often the list of trading tools that is required to employ the given strategy.These tools include; charts,technical or fundamental indicators,some market data or any other thing that can be used in trading.Thus,it is important to know which of the required tools one has in possession any time he chooses a strategy.

It is equally important to choose a strategy that is easy to follow with one daily trading schedule.This could be applied successfully with one's account balance size.

THREE MAJOR CATEGORIES OF FOREX TRADING STRATEGY

1. Indicator Forex Trading Strategies: These are strategies that are based on the standard forex chart indicators and are available to all and sundry who have access to some charting software.These forex trading strategies are good for traders who would rather go for technical analysis indicators than anything else.

2. Price Action:These are the forex trading strategies that do not use charts or fundamental indicators.They are based purely on the price action.These strategies are good for both short-term and long-term traders who hate being delayed by the standard indicators.They,rather prefer to listen to the rhythm of the market as it speaks to them.Examples of plans that belong to this category include;waves,tick-based strategies,various candlestick patterns,grid and pending position systems.

3. Fundamentals:These are forex trading strategies that are based only on fundamental factors that stand behind the currencies bought and the currencies sold. The behaviour of the forex market is affected by different fundamental indicators such as interest rates and macroeconomics statistics.These strategies are very popular and good for long-term traders who would rather prefer fundamental data analysis to technical factors.

Moreover, forex trading strategies that are traded based on firm mathematical rules without any ambiguous condition and important trading decisions to be made by the trader are termed mechanical.A typical example of this system is moving average cross strategy where MA periods are given and positions are entered and exited exactly at the point of cross.

On the other hand,strategies that cannot easily be turned into mathematical rules,and hold some uncertainty are termed discretionary.These strategies give room for psychological bias and emotional error.They can only be backtested manually.The good thing about these strategies is that they are quite flexible,and for that reason,they make way for experienced traders to avoid losses in difficult market situation,at the same time they provide an opportunity for traders to extend profit whenever they thing is possible.It's not advisable for new beginners to trade the discretionary.

In conclusion, the knowledge of forex trading strategy is key to the success of trades in the forex market.

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.

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