Forex Trading Basics: Trading Strategies
Trading strategies are one of the most significant forex trading basics that you have to be familiar with. Among currency traders, there are two popular types of strategies – trend trading and range trading. Knowing how to use both strategies greatly increases your chances of making money in the currency markets since you can adjust your technique based on your analysis of the prevailing price environment. Here is a short description of the two strategies.
Forex Trading Basics – Trend Trading
Trend trading is the most popular strategy among currency traders because it is simpler to understand and implement. This strategy simply involves identifying the direction in which the price is moving in the belief that the trend will continue into the future. The trick for the trend trader is to maintain their position and then close it once they believe that the trend has reversed. It is also important for the trader to open a position early in order to catch the trend.
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In order to protect themselves, trend traders set tight stop orders in order to prevent themselves from losing too much money in case the trade suddenly reverses. Typically, traders set their stop losses at fifteen to twenty pips less than the entry price. Experts also recommend that, in order to reduce their risks, traders should not invest more than 1.5% to 2.5% of their capital on any trade.
Forex Trading Basics – Range Trading
In this trading strategy, the trader identifies the range within which currencies are trading and then uses them to make his trading decisions. Typically, a range trader buys currencies when the price reaches the lower support level and sells when the price rises to close to the resistance level. The range trader may also choose to short sell the currency, selling currencies when the price is high and then buying it back as the price goes down, then pocketing the difference as their profit.
In order to reduce their risks, range traders typically trade using mini-lots in order to give themselves more flexibility in implementing their forex strategies. In fact, some brokers may even allow traders to trade with lots of as little as 1,000 units or even 100 units.
READ ALSO : Forex Trading Basics: Starting to Trade
Forex Trading Basics – Using Leverage
Since exchange rates move in very small increments, a currency trader will typically need to invest a lot of money in order to realize a decent profit. However, most traders can trade with a small trading account by using leverage. When you use leverage, you are essentially trading with borrowed money. The typical ratio of leverage is 100:1, meaning that for every $1 in your trading account, you can trade $100. This allows you to realize big profits with a minimum amount of capital, but can expose you to crippling financial losses if your trades lose money and the broker makes a margin call, or demands that you deposit more money into your trading account in order to cover your losses. This risk is why you need to be very disciplined in your money management when you are trading.
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