Jeremy Wagner of DailyFX Education explores and explains why these two types of trading strategies are popular with most forex traders.
There are many benefits to trading FX such as a tremendous amount of liquidity with low transaction costs and margin requirements. The 24-hour nature of FX trading opens the door to a variety of strategies from day trading to position trading to range trading to trend trading.
There are so many different styles and flavors of FX traders, that they truly are too many to discuss each one. For now, we’ll start off with the two strategies that are the most common. The reason they are the most common is because they are opposite of one another…range trading and trend trading.
Range trading is a simple strategy where a trader will buy a currency on sale with the expectation that the valuation will come back towards a longer-term average. This strategy may also be referred to as mean reversion and is similar to value investing.
Forex Strategy: How to Trade Ranges
One key to this strategy is identifying those price points that are more favorable for you. That means identifying a price level to enter where sellers stop selling and buyers are more likely to start buying. These price points are generally obtained by identifying levels of supply (resistance) and demand (support). Support and resistance levels can be easily obtained by performing technical analysis on the chart. Indicators and oscillators can help you time entries as well.
The second main strategy is trend following.
One of the most common strategies used by new and experienced traders is a trend-following strategy. Trend following simply means identifying the direction prices have generally been moving, then place trades in that same direction.
Trend following is popular because strong trends tend to produce the largest results. Many times, those strong results came from moves in the direction of the preceding trend.
Forex Strategy: Trading Strong Trends
Fortunately, trading trends is simple. The ease of identifying trades is in large part why new and experienced traders utilize some form of trend analysis in their trading plan.
If you are interested in trying out trading trends, but are unsure where to start, find out which of the three ways to trade a strong forex trend fits your personality the best.
By Jeremy Wagner, Head Trading Instructor, DailyFX Education