Last Updated on September 1, 2020 by Jason Wilson
No rule is imposed concerning the durations of trading on the Forex. Indeed, it is up to each trader to decide themselves as to which style of trading to adopt, and this is due to the great flexibility of the foreign exchange market.
However, do not choose your strategy randomly but rather determine which corresponds best to you by concentrating on several criteria such as, for example, your available time, your investment capital amount or your capacity for stress management. We will detail the three main styles of trading in this chapter.
Whatever the strategy you decide to use, it is recommended to always refer to the daily chart or, even better, the 4 hour charts. This will enable you to notice the overall market trends as well as the support and resistance phenomenon.
Of course, hundreds of strategies are actually available and you can use them freely to elaborate and refine yours. The three styles we will detail here have been chosen due to their popularity and efficiency.
Short term trading
Short term trading is carried out over a short duration of a few minutes maximum. This strategy consists of taking position for a very short time with small profits. So, to fully benefit from this strategy you will need to use strong leverage effects.
Beware! This technique is really difficult to master and is more suitable for experienced traders. When well managed however, it allows the trader to profit easily from the different bullish or bearish trends.
To trade on a short term basis on the Forex, you need to possess certain essential characteristics such as very good stress management, real time reactivity and a high availability. Avoid all sources of distraction and make sure you are in a calm environment without the risk of being disturbed.
Use correct analysis tools such as the minor support and resistance indicators and a 5 period moving average coupled with a 10 period moving average and, if possible, a five minute candlestick type chart.
Trade only on strong currencies as GPB/USD, EUR/JPY, EUR/USD, GPB/JPY, because the other currencies will bring you only a very small profit over such a short period.
Use a leverage effect ranging between 30 and 50, never beyond, and fix your maximum loss threshold at half of your profit objective.
Don’t aim too high. A profit ranging between 5 and 20 pips constitutes a reasonable objective.
Advantages and disadvantages
Even if this strategy requires a lot of self control due to the risks linked to the minor support and resistance breakout phenomenon, it offers the advantage of maximising your gains by taking benefits from the bearish and bullish movements of a trend.
This strategy is without a doubt the most popular among investors all over the world. Its technique consists of opening positions in the morning and closing them in the evening.
The qualities required for this type of strategy are good stress management, excellent knowledge of the markets and good short term trend analysis. Experience and flair are also important. Day trading on a very short term will only require a few minutes of your day (count around 30 minutes) as you have the possibility to place orders only then.
The indicators to be used are the thirty minutes candlestick chart type, the major support and resistance indicators and a 5 period moving average coupled to a 10 period moving average.
Here again, trade only on the main currency pairs and be careful to not go beyond a leverage effect ranging between 20 and 40, fixing your loss threshold at half your profit objective. On this type of trade you can easily speculate on profits ranging between 20 and 50 pips.
Advantages and disadvantages
The only constraint of day trading is the need to carefully control the stop orders and the various market entry points. On the other hand, you will experience less stress while benefitting from the short term trends and their analysis.
Medium and long term strategies
Any position held beyond 24 hours will be considered here as a medium or long term strategy. However it is not recommended to trade and speculate on movements over several days as the longer the period is, the less the information you have will be reliable and your risks are therefore too high with no real guarantee of profit.
Medium and long term trading is more especially the domain of experienced traders that have an excellent macro-economic analysis. It does not require a particular competence in technical analysis, the long term indicators are fairly rare and not very reliable. You must possess true investor logic. This strategy does not require much availability either and it is more considered as a complementary activity.
On a long term, you can risk trading on the currencies known as “exotic” but be sure to closely monitor the movements. Generally, all currency pairs can be traded on a medium or long term. Use leverage effects ranging preferably between 10 and 30, know that this type of strategy enables a higher generation of profits (from 60 to 200 pips). It is therefore unnecessary to take too many risks.
As with the other types of trading, your maximum loss threshold should never exceed half of your gain objective.
Use preferably daily and candlestick charts and always pay attention to major support and resistance indicators as well as the trend lines.
Advantages and disadvantages
Long term strategies can seduce with their capacity to generate large benefits. In fact, they do not require any special attention to variations observed on major trends but allow you to benefit from all the amplitude of the bullish and bearish channels. However, trading on a long term basis requires major financial capabilities that enable you to hold positions. Therefore, it seems this technique is generally reserved for major investors.