Why Forex Trading Strategy Matters?

The popularity of the forex market has surpassed other financial markets, with a good number of traders actively engaged in currency trading. Anyone can easily get into trading by opening a trading account with a broker and logging into a trading platform like MT4 or MT5. MT4 is number one when it comes to popularity, but the MT5 trading platform offers a superior trading experience. However, you will have to make a lot of preparations beforehand. Whenever one starts to learn about forex trading and the opportunities they get in the world’s largest and most liquid financial market, they stumble upon the term ‘trading strategy’. 

But what makes the trading strategy so important for a trader? and can your success in the volatile market be defined by the strategy you choose and follow? In this article, you will get to know everything about the basics of a forex trading strategy and why it matters. 

What is a Forex Trading Strategy?

The term strategy describes the methodology or approach one follows for trading in the forex market. A trading strategy is devised to make the trading process more efficient and rule-based, thereby improving the chances of success. In forex trading, you will buy and sell various currency pairs to profit from the price changes that happen during a trade. However, how a trader finds suitable opportunities and decides the trade’s entry and exit prices depends on their trading plan or strategy. 

The strategy will state all details about the trading techniques employed, the method of analysis that is used to make trading decisions, trends or patterns to watch out for when spotting a trade setup, and what a trader can do to maximise the potential gains. The trading strategy should be very clear and goal-oriented, leaving no room for doubts or dilemmas during the trading process. In simple words, your strategy should serve as an action plan to follow. 

The strategy can be entirely focused on technical analysis for those who trade with shorter time frames for scalping or day trading. However, many traders think that fundamental analysis is more reliable, especially when they plan to hold a position for a longer duration or place trades during a news event or economic data release impacting the market. You can also trade using automated strategies using algorithms and Expert Advisor robots to carry out the trading process with little to no manual intervention. 

However, attaining success with automated trading systems is not as easy as it sounds since you will have to regularly monitor the account, as technical bugs and issues can lead to major pitfalls in trading. When it comes to manual trading strategies, backtesting and optimisation are essential to ensure good results. You should practice and test the strategy on a demo account to see how it works in an actual market prior to risking your trading capital. If you’re a beginner, MT4 is a better trading platform for learning due to its simple UI and enough trading features. This allows you to spot any shortcomings and fix them in time.  

Types of Forex Trading Strategies

There are many types of forex trading strategies; covering them all in one article would be impossible. But I will list the most popular ones to give you a starting point. 

1. Price Action Strategy – Price action strategy is a straightforward approach that solely focuses on price action, just as the name implies. This strategy involves studying historical price movements to predict future price fluctuations. Price action trading is simple and does not look at any other indicator other than the price itself. This strategy assumes that everything that happens in the market will be reflected and revealed through the price patterns. There is no need to rely on complex mathematical formulas or other technical indicators. 

It is primarily based on support and resistance levels that can be spotted on candlestick price charts. Each candle in the chart gives a lot of information, and price action traders take their signals from the market data. However, you can still use some indicators along with price action to confirm your analysis, as naked charts may not be sufficient to decode the market situation for all traders. 

1. Trend Trading Strategy – Trend trading strategies are one of the most popular forex strategies as most traders believe in the motto, “The trend is your friend”. Trend trading strategies are all about following the trend, which tells you about the direction in which the market or the prices are moving. When there is an uptrend, the prices will rise, making it a perfect time to go long on a pair (buy position). On the other hand, a downtrend with falling prices is suitable for a sell position (shorting). 

Trend trading strategies work best when you are able to open a position at the start of a trend. If you are not able to open a position at the beginning of a trend, it will be better to wait until there is a pullback, which is a temporary pause and retreat of prices before the previous trend is resumed. But you need to make sure that it is a pullback and not a potential reversal. 

Another strategy is to open a trade in the opposite direction just before the trend reversal, as you get to trade the upcoming trend early on. Now, one problem with trend trading strategies is that the market may not be trending all the time, and the strength of a trend needs to be assessed, as weak trends may fade before your target profit is reached. 

1. Range Trading Strategy – The range trading strategies are perfect for trading a currency pair when you are unable to spot a clear trend, and the market is stuck within a range. In a range-bound market, you will see a lot of small price fluctuations happening in both directions without any continuation. Range trading strategies are executions by spotting key support and resistance levels to determine a trade’s potential entry and exit points. 

In range trading strategies, your profit targets will be lower as the price movements will be smaller, and you can only catch a few pips before the price starts moving against you. However, range trading strategies can be your saviour when you notice a lot of sideways movements and choppiness in the market, as you won’t be able to predict the upcoming trend with precision, and it would be better to make some profits from the minor fluctuations within the range. 

1. Breakout Trading Strategy –  Breakout trading is a popular strategy that focuses on price breakouts. Firstly, traders identify the key support and resistance levels and enter a trade when the price breaks above or below these levels. Breakouts are a common event in the currency market, and hence, this strategy can be used to find the perfect trading opportunities. However, the breakouts can also be false at times and identifying a fake breakout is tricky, especially when you are a beginner. 

Now, the breakouts can either be followed by a trend reversal or a continuation of the ongoing trend. When there is a bullish breakout, you can enter a long position; when there is a bearish breakout, you need to open a short one. But before anything else, you need to confirm that it’s an actual breakout with the help of reliable indicators or look for specific patterns that tell about the direction in which the prices will move after the breakout. 

1. Carry Trading Strategy – This strategy is very different from other approaches as you won’t focus on price fluctuations here. Instead, you will be earning from the positive swap, which gets credited to your account for an overnight trade position when you trade with a pair like USD/JPY, where the base currency has a higher interest rate than the quoted currency. If you enter a long position in this pair, you will be able to earn from the swap by holding the position for an extended duration. Carry trading is suitable for those who are fine with the overnight risk while keeping the trades open for a long period of time. 

How To Choose Your Strategy Wisely?

All the strategies that are listed above can yield good results if executed properly. However, deciding the strategy to bring you the desired results is critical. For this, you need to consider the trading style that will suit your schedule and work on the details of your strategy, such as time frames, trade triggers, entry points and exit strategies. For a beginner, trading styles like scalping and day trading would be challenging as the timeframes are very short and require constant monitoring. Swing trading can be better as the timeframes are not too short but not too long either and would suit those who want to take moderate risk. 

Conclusion

Finally, your trading strategy matters because you will be lost and directionless without a sound strategy to follow. You should assess your strategy’s risk and win rate after backtesting and make necessary modifications from time to time to adapt to the market situations. The market can change, and you should be flexible and responsive to the changes.  So, choose a strategy that aligns with your personality, as you won’t be able to move forward and make profits without a well-defined strategy.