Forex trading involves a lot of studying and analysis because you would not want to invest blindly. This is more crucial when it comes to forex because a wrong move might be catastrophic. Below are 3 of the methods you can adopt as well as some other common ones.
The Buy-Dips Method
This is one of the most common strategies in forex trading. It is quite similar to that of other investing methods where you want to buy at a low price and sell them when the price goes up and make a profit from there. New traders tend to use this strategy because it is basic and easy to implement. The more experienced ones will take it a notch further by utilizing indicators and other factors before buying any dips.
When to buy dips?
Buying dips must be done at the right time and right place in order to be profitable. To identify the best time to do so, you should take note of the following:
- Trend line – this is known as the simple moving average. What you do is either take the 50 or 200 day moving average and look for a pattern of bouncing off along these lines.
- Undercut – you can look at the time when the price undercuts the moving average and that should indicate the best time to buy
- Price Support – for this, you use the resistance points to locate the best time to trade.
The Breakouts Method
This strategy is somewhat the opposite of buying dips. It is rare and unconventional because you are waiting for the price to move higher and then buy at a higher price. In Breakouts, you are basically playing on the emotions of the market when bubbles develop. One good thing about Breakouts is that you will be entering into a buying position when the prices are ‘confirmed’ that they will be traded at new high prices.
The Baskets Method
This refers to a collection of currency pairs are traded with the mentality that it will have a higher currency move. In most cases, Baskets is where exchange rates are quoted in pairs like USD/JPY, EUR/USD and so on. Trading baskets however is usually more suitable for experienced forex traders as it require experience, practice and good instincts
Apart from the 3 types of methods used in forex trading which are very effective, there are other methods that can be implemented as well.
The Forex Day Trading Method
This is a short-term trading exercise which is very common. What you do is to base your trading on the technical indicators which usually come through from insider or breaking news released in the media. In most cases, you will need a lot of experience to know how the currencies involved will move.
Like the name implies, what you want to do here is to get small gains using very big trading schemes. You invest a lot of money (in some cases, hundreds of thousands) to make very small gains. But because the amount is high, your profit is high as well. However, the same could be applicable if you suffer a loss.
Big picture trading
This method is a lot slower than any other methods. You will monitor the currency pairs through a period of days or even weeks. What you do not want to do here is to rely too much on small movements but on larger ones.
Automated Forex Trading
Perhaps the most common type of trading method using online trading engines, the automated forex trading can be easily adopted once you have engaged a broker. MetaTrader is the software used by most online brokers which come with this function. You will invest based on the signals that are provided by the EA or Expert Advisor usually provided by the application. However, the end decision will still be at your discretion so that you can still make some human judgment at the end.