Forex Trading Strategies

Day trading is the practice of making short-term trades on the same day. Typically, positions last for a few hours and are not left open overnight. The premise of day trading involves taking advantage of a volatile market where prices are constantly changing.

Your concentration will be tested, as this high-intensity trading style requires you to constantly monitor the market. Making quick decisions, such as whether to close or leave a position open, will be important.

Scalping may be classified as a day trading method. However, the time duration is narrowed to less than five minutes. That means that you’ll have the one minute or five-minute chart in view, and on average positions are held for a few minutes or seconds.

Scalpers favour strong market movements as they are less risky. This may entail monitoring the market for the entire day. If you choose this strategy, you have to minimise risky trades, as sizable profits are made from many small profitable orders. One loss has the potential of eroding your entire progress.

If you’re a position trader, you don’t take a short-term approach like scalpers. Price movements take place over days. It’s therefore a strategy that doesn’t require you to monitor the markets all day long.

The expectation in position trading is that the prices will rise in a strong uptrend. Position traders need perseverance and resilience to cope with minor dips. In this style of trading, carrying out comprehensive fundamental analysis is not enough. Traders must also use technical analysis techniques.

Swing trading is not a short-term trading strategy, but it shares similarities with position trading & day trading. It’s suitable in more volatile markets than position trading, and it’s said to be “intermediate.” You don’t actually require a strong uptrend to find a possible advantage.

With swing trading, the emphasis is on looking for strong price swings over a period of one day or up to several days. It would be necessary for the swing trader to leave positions open overnight, but you must watch out for unexpected occurrences such as major news updates.

The Bladerunner trade uses the 20-period Exponential Moving Average (EMA) line. It’s applied in all time periods, but many traders apply it for shorter time frames such as the 5-minute charts. The line appears inside the main chart and not in an off-chart.

The strategy involves waiting to see if the 20-period EMA line cuts through the price action line, which can happen in two ways. After the EMA line cuts through the price line, it should stay below it even after retesting. This means that the market will trend downwards. If the EMA cuts through the price line and stays above it even after retesting, the market should continue trending upwards.

This trade relies on using pivot points and Fibonacci retracements together to find entry points. You can also use it to accurately determine strong support and resistance areas.

The strategy involves looking for a confluence or ‘coming together’ between the Fibonacci retracement lines (32 %, 50% or 62% lines) with the pivot support line. For instance, if you want to enter a long position during an uptrend, you may look for a confluence before entering the market. For a strong signal, it’s better to wait for a bullish confirmation candlestick. The Fibonacci gives the highest indication, and it’s supported by the pivot point.

The thinking behind this well-known strategy is that prices will return to their mean average. It requires the use of the Bollinger Bands and is applied in stable markets moving at a steady range.

The Bolly Band Bounce strategy is executed by considering the upper, middle, and lower Bollinger Bands. You assume that the asset in question will stay within the support (lower band) and resistance levels (upper band). The middle band is usually the simple 20-day moving average. You then check if the price moves towards the resistance or the support, then bounces back to the middle.

The strategy is to buy when the prices are trending near the lower band with the expectation that they will rise towards the middle. Selling is recommended when prices hit the upper band with the expectation that they will fall. The trade may lead to a loss if the prices choose to “walk the band” without bouncing to the middle.

If you have a good working knowledge of the Fibonacci retracement lines, this will be a less challenging strategy to implement. Traders who use this elaborate strategy often swear by it and use it exclusively. When combined with other indicators, such as pivot lines, it provides a stronger signal.

You can implement this strategy during any strong market movement, be it a bullish or bearish. Let’s assume the market is trending upwards. In this case, the idea is to map two Fibonacci retracement lines. You start out by identifying three waves; an upward trend (first wave) that’s followed by a retracement (second wave) and finally the appearance of an upward trend (third wave).

You draw the one Fibonacci from the low of the uptrend to the high of the trend (the lowest wick up to the line of resistance or top of the third wave). You then draw the second Fibonacci from the low of the second wave to the highest high. The next step is to identify confluences or overlaps between the lines of the two separate Fibonaccis. During an uptrend, the level of confluence indicates a strong line of support. In a downtrend, the confluence confirms the presence of a strong line of resistance.

This is quite simple to execute, as it revolves around volatile price movements during the open of the London market or as it draws to a close. The market volatility increases based on more traders becoming active. Many traders use it whilst trading the gold market.

When the London market opens, you start looking for a hammer. It’s a Japanese candlestick pattern characterised by a long lower wick (twice the length of the body), short real body, and little or no upper wick. That’s because sellers drove the prices lower during the first half of the duration, only for buyers to reject the low prices driving the price past the open by only a small margin. It might reflect how the market will behave in a given day. You have a stronger signal by combining it with support and resistance.

You use fractals to identify a reversal and confirm its existence in very volatile or chaotic markets. Fractals appear at swing highs or swing lows.

The fractal pattern consists of a middle candlestick or bar that is surrounded by two other candles. If it’s a bearish fractal, the middle candle is the highest high and it’s flanked by two lower high points. Think of it like one high mountain with two smaller hills on its side that are higher than all other hills in the surrounding area.

For a bullish fractal, the middle candle is the lowest low and this forms a trough as it’s flanked by two higher low points. You can use the ‘Alligator indicator’ alongside fractals to confirm the existence of a reversal.

The Pop ‘n’ Stop Trade allows you to take advantage of a sudden price breakout from a tight range. There is the danger of missing the breakout and entering the trade too late. The price breakout may be prompted by a news release, rising volumes, or at the opening of the market.

With the Pop ‘n’ Stop strategy, you look for the price breaking above its price range by a big margin, “popping out.” It is followed by a small stop and then a stronger uptrend may continue. “It pops then stops.” After the brief pause, it is not guaranteed that the price will keep rising, so it’s vital that you look out for other signals that confirm the bearish trend. Also, watch out for rejection bar candle patterns like a pin bar formation. You place tight limit orders and profit take levels, as it’s easy for the price level to get exhausted quickly.

The Drop ‘n’ Stop Trade is the reverse of the Pop ‘n’ Stop trade. It’s applied when the price breaks below a range, in what is referred to as a bearish breakout.

The Drop ‘n’ Stop takes place when the price breaks below its range, followed by a brief pause with little price action, and then it moves in a clear direction usually downwards. It’s absolutely necessary for traders to act fast, but you can choose to wait for the bearish rejection bar that confirms the signal.

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The parabolic SAR is a “trend-following indicator.” It can help you deduce when to buy or sell. The indicator appears as a series of dots above the price bars. Day traders use it to uncover short-term momentum.

Using the parabolic SAR is quite easy, even for beginners. However, note that like other indicators it may produce fake signals. When the dots are above the price line, look out for an uptrend as it may be likely to form. The dots just make the price movement clear. Dots swap from the top of the price to the bottom of the line to reveal potential entries and exits.

The stochastic oscillator indicator is a must-have tool in your trader’s toolbox. It’s a momentum indicator obtained by comparing an asset’s close price and its price range over a given period. It produces better results with higher time frames such as the daily chart.

Its chart has two lines, the slow %D and the fast %K. The default look-back period is 14 days, but you can vary this parameter to increase or decrease the indicator’s sensitivity. The stochastic oscillator tells you when to enter into a trade. While it was developed to track momentum and velocity, it now indicates if the market is overbought or oversold.

You look at the 80-line and 20-line. If the %D and %K lines cross the 80-mark, the asset has been overbought. Some buyers may start selling and take profits, which causes the trend to reverse. Now if both lines fall below the 20-mark, the asset is oversold, and more traders will choose to buy, driving the prices up.

The RSI shares the same function with the stochastic oscillator as it can help you identify an overbought or oversold market. It’s a range-bound momentum oscillator obtained by comparing the average gain prices with the average losses over a given period. It also tracks the rate of price change.

There is only one line to track, and it produces an overbought signal when it crosses the 70-line or an oversold signal when it goes under 30. The RSI may show the formation of an uptrend if its RSI value moves from a low position, crosses the centerline (50) and moves to the 70-mark.

If it moves from a higher position past the 50 centerline towards the 30-mark, it may confirm a bearish trajectory. During an upward trend, the RSI value may stay above the 60 range with the 40-50 zone acting as the support. In a bearish market, the RSI value remains within the 10-60 range, and the 50-60 zone serves as the resistance.

The chart indicator created by John Bollinger that traders use to measure the market’s volatility. You use it when a market is ranging.

Reading the Bollinger chart is quite simple as it consists of two lines of standard deviation that enclosed a simple moving average line. The exterior lines may contract (move towards each other) or expand (move away) depending on the market’s volatility.

The first way to use the Bollinger bands is to determine if the outside lines are expanding or contracting. For instance, if the price line moves up, the lines may expand showing higher volatility. The outer bands can also act as lines of support and resistance. That’s because the price line tends to remain inside them.

A phenomenon called the “Bollinger bounce” notes that the prices never break the dynamic levels but tend to move towards the center. However, sometimes the price tends to fall to the upper or lower band only to remain there. This is called “walking the band.”