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Good Strategies for Forex Trading

19th JULY 2014

In this article you will find a list of some of the more commonly used forex trading styles, along with a brief description of the techniques and trading strategies which forex traders might use in implementing them.

In addition, the forex trading styles have been listed according to the particular time frame that a trader employing them typically holds their position for, from the shortest to the longest term.

Day Trading

Day trading usually refers to the type of trading in which any open positions are liquidated before the close of the market on the same day. Because the forex market is open 24 hours for most of the week, a day trader would probably consider the normal hours of business in their particular time zone to be their trading day.

This type of forex trading strategy primarily protects the trader from taking overnight risk and from having to trade in overseas markets and possibly illiquid market conditions. As a result of focusing their trading activities on their own time zone, the trader can readily remain alert, ready for any market event that might occur, and available to execute and liquidate trades promptly.

With day trading, all positions are closed out before the end of the trading day, and no overnight positions are taken by the day trader. Day trading in the forex market was once the domain of professionals working for large banks.

These sophisticated forex traders generally enjoyed the means, not only of trading large amounts, but also of subscribing to the expensive market news and data services that can affect intra-day price action. These days, similar services can usually be obtained free of charge over the Internet along with a retail forex brokerage account.

Momentum Trading

Momentum trading, or trading by the impulse system, generally identifies optimal entry points in the market. This system depends primarily on the reading of one technical indicator such as an exponential moving average which gauges the inertia of the market and identifies upward and downward trends as the respective currency rate rises and falls.

The system will then employ another indicator that gauges the momentum of the market, such as the Moving Average Convergence Divergence of MACD histogram. By reading the slope of this oscillating indicator, a trader can identify shifts in the balance between buyers and sellers. When the MACD has a rising slope, buyers will generally predominate, and when the slope drops, sellers will usually prevail.

A trade signal will be generated when the MACD indicator moves in the same direction as the Moving Average, while a divergence seen between the two indicators will signal the momentum trader to exit the trade.

Furthermore, if the indicators move in tandem with an upward slope, this would signal initiating a long position. When both indicators move with a downward slope, this would indicate initiating a short position.

Swing Trading

Swing trading is a type of forex trading which involves using technical indicators to determine the levels of support and resistance, and then use this knowledge to trade ahead of these levels.

The swing trader usually can determine the optimum take-profit and stop-loss levels ahead of support and resistance as they identify them on a price chart. Swing traders will typically hold positions for more than a day, but typically less time than a trend trader.

Trend Trading

Following trends is among the most profitable and popular of all forex trading strategies. Basically, the trend trader will identify a major trend or directional movement in exchange rates and initiate a position by trading along with the trend.

This strategy makes up one of the most profitable ways of trading in the forex market and generally has the longest time horizon for profits to accumulate in.

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