There’s no doubt that most beginners find forex trading quite overwhelming and daunting. But with the right trading strategies, anyone can make profitable transactions in the forex market.
As a beginner, you need to have a good background knowledge about the forex market, currency pairs, and risk management. Just like stock trading and investing, with time and experience, you’d even get to develop a strategy that works for you. But before that, having a good knowledge of a few effective forex trading strategies will help you take good advantage of price movements.
This article discusses the best five forex trading strategies for beginners. You’ll also learn how to recognize effective trading strategies and utilize them to make good money. Let’s start with understanding what a forex trading strategy is.
What is a Forex Trading Strategy?
A forex trading strategy is a carefully laid-down plan that guides a forex trader on when to buy and sell a currency pair. With the right strategy, you’d be able to analyze currency fluctuations and know when to take advantage.
Banks, hedge funds, corporate institutions and even governments have proven strategies that work for them. Successful individual traders also have strategies they use to earn a living off the forex market. You can come up with any strategy, be it a simple or a complex one, what matters most is that it works for you. Traders derive strategies by doing technical or fundamental analysis and testing them on historical data. So, let’s find out the best strategies you can use as a beginner to make profitable trades on the market.
5 Awesome Forex Trading Strategies for Beginners
1. Trend trading strategy
Trend trading strategy entails making trading decisions based on the direction of the current price trend. This strategy requires you to study a current price trend to identify its direction, strength and duration. With the information, you’d know how stable the market is and then place your trade.
Trend trading is one of the most popular and effective trading strategies. In fact, it’s one of the first strategies most beginners in forex get to learn. A trader only needs to follow the direction of the trend. Whether it’s an uptrend or a downtrend, the idea is that currency movement will continue to go in that direction.
The task is in identifying the trend, which isn’t much of an issue though. Traders use price action and moving averages in this regard.
2. Breakout trading strategy
A breakout trading occurs when the price of a currency pair breaks out of its support and resistance levels. The strategy here is to enter the market at the point of breakout and take massive profits from the volatile period that follows.
As a beginner, once you’ve been able to identify the resistance and support levels, you’ll easily locate your entry point.
If you’re trading with this strategy, you should actively monitor your trade or set an exit point. This is because actual breakouts come with high volatility levels. Most experienced traders enter bullish positions when prices are set to close above resistance levels. Same thing goes when prices are set to close below a support level. That’s when most traders enter bearish positions.
This strategy is highly profitable and has low risk. However, you need to watch out for false breakouts and slippages.
3. Price action trading strategy
This trading strategy requires you to study the price movements of a currency in a given period. It doesn’t require much reliance on technical indicators
Traders here know that price actions are reflections of demand and supply in the forex market. Therefore, they study the charts to identify trends and use the information to enter trading positions.
No matter the timescale used, trading predictions made using price action trading strategy are speculative. Most trading experts know this. And they also know that trading action analysis is subjective. Two traders can analyze the same price movement and come up with different views.
However, it’s an excellent trading strategy for beginners because price actions form the basis for each trading asset’s technical analysis.
4. Range trading strategy
Range trading strategy is a strategy that allows traders to buy and sell currencies at definite range within a short period. A trading range occurs when a currency or security trades consistently between two prices.
As a beginner, once you spot a range, you can place trades to take bits of profits within that range for as long as it lasts. This strategy is great for beginners because market trends for any security occur just about 30% of the time. Which means that, about 70% of the time, the security price will fluctuate within a range.
Ranges don’t present a great opportunity to traders who are looking for big breaks, which are only possible in volatile markets. But as a beginner, they present less volatile (less risky) opportunities for you to build your portfolio.
5. Momentum trading strategy
The momentum trading strategy is another reliable strategy for beginners to make the most of the forex market. This strategy focuses on making money from a trending market. However, it doesn’t just focus on any trending market; it focuses more on markets that have the possibility of trending for a longer time.
So, traders make trading decisions here by looking at the strength of the trend. They typically buy high with the hope of selling higher. Momentum traders believe that a downtrend or uptrend will continue for a longer period of time.
How is this strategy great for beginners? You don’t need to study the range and know when there will be a breakout. All you have to do is study a security that’s trending already and determine if the trend has enough momentum to keep going for some time. Also, when you buy at any point, you have to keep an eye on the market to know when the price hits its peak and makes a reverse.
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How Do I Create an Effective Forex Trading Strategy?
It’s great to make money with existing strategies. However, as you continue to trade in forex, you’ll discover flaws in those strategies, and you’ll also have ideas on how they can be made better. This will give you the desire to create your own strategy. So, if you’re nurturing the thought of creating a strategy, here are simple steps you can use:
Know the basics of forex
Knowing the basics of Forex is the first step to creating a strategy that works for you. You have to understand the factors behind price actions, know what currency pairs are, and have a proper grasp of risk management. You also need to study and apply many existing strategies, as it’d be easier for you to create an effective strategy when you know the flaws of the existing ones.
Study graphs
You’ll need to have a full understanding of what forex graphs and charts represent. Study as many graphs and charts as possible, relate them to what’s happening in the forex market, then make predictions with them and see how they play out.
Find signals
You also have to use either technical or fundamental analysis to come up with trading signals. These signals are the entry and exit points of price action. A very good signal shows you when to enter a market and the right time to leave.
Test the strategy on historical data
Having created a strategy that results in trading signals, you have to use that strategy to generate results. You can test it on your demo accounts, discover flaws and correct them before trying it out on your live account. Keep studying the market and tweaking your strategy until you see a bit of consistency in the results.
Conclusion on Forex Trading Strategies for Beginners
With the right strategies, you can make a fortune from forex trading. However, you need to understand that the forex market is always changing, thus the need to consistently review your strategies. As a beginner, you’d be overwhelmed at first and might even want to give up because of the confusion. However, you should know, just like in every other skill, you need consistency to achieve mastery.
Hopefully, this article has presented you with the best strategies that will set your forex trading career on the right path.
