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25 Februari 2022

Forex trading styles: choose your way

Forex trading styles: choose your way

People trade in the Forex market. Even if they develop automated advisors and High-Frequency Trading (HFT) algorithms. Exchange trading is a complex type of activity, it is important to immediately decide which way of earning is right for you. Otherwise, instead of profit, there will be only losses and visits to a psychotherapist. We will show the main forex trading styles in Forex. They can be used separately or combined according to the goals, time, and size of the planned profit.

Important. The article contains only brief information about the methods (styles) of trading in the Forex currency market. The task is to give the future trader direction on how to avoid mistakes at the very beginning of the activity and create a system of earnings that suits him. For each style, there will be an example of a strategy that can be used right away.

Let's start with a definition. The Forex trading style is considered to be a combination of market analysis techniques and a money management system that gives good results on the selected asset and the asset of the Forex market. All methods of market analysis are divided into three groups:

  1. Graphic. The most famous is the Japanese candlestick analysis pattern. The technique is more than two centuries old, but they continue to make a profit. Read more on the blog.
  1. Technical. Historical data is analyzed using mathematical algorithms. The result is displayed in the terminal as indicators on the chart or in a separate window. Read more on the blog.

3. Fundamental. The macroeconomic indicators of the leading economies are analyzed, based on this; a forecast of the market movement is made. Let's start with them.

Fundamental (news) trading

The publication of significant economic news and statistics always has a strong impact on Forex. Especially when the data is very different from the forecast: we expect growth for the better, worse - the price will go down. There will be, if not a complete reversal of the trend, but there will always be 2-3 sharp impulses, you can try to earn from 50-to 100 points in just a few minutes. Let's see an example:

The publication date is known in advance, we get a simple position trading forex: enter immediately after the publication or place two pending BUY / SELL orders 10-15 minutes before the exit. Without any technical and graphical analysis. Before doing so, we look at more examples of "news" Forex:

Trader's comments:

Simplicity is deceptive; this forex trading style is not for beginners. We are looking at the second example, in which every "strong" news worked "incorrectly" immediately after publication. Pending orders gave a loss, especially in the situation of the pound. 

Market makers trade on them, the trader does not know how they will behave - even the strongest events may not give any movement. Statistics also do not always help, the broker can put restrictions on opening orders during these periods. Use the news only as an addition to other strategies if you are not a hedge fund. Read more on the blog.

Advantages:

You can enter the market 2-3 times a month on strong news for a good profit. Or another option: events come out every day and for each, you can get a little profit. The release dates are known, we can say we have a news "scalping" (what is it, see below).

Disadvantages:

If the foundation is the main strategy for day trading, then there will be no time left for another. A trader will need the ability to analyze the entire flow of information: from the news (not only economic) to rumors on websites and forums. Professionals specialize in no more than 1-2 countries; otherwise, there will be no stable profit.

Money management:

The magnitude of the impulse in points after the release of the news can be approximately calculated from the statistics of past publications. With any leverage, it is not recommended to go beyond 7-10% of the current deposit.

Scalping trading

Having dealt with the news, let's move on to the next style of Forex trading popular among beginners - scalping or "fast deals". Among traders, there are two options for determining scalping: the duration of the transaction and the average profit.

In the first case, the transaction lasts no longer than 3-5 minutes, after which it is closed automatically or manually. In the second case, the closing is based on a Take Profit of 5-10 points or the current volatility. Example of the M1 timeframe:

The timeframe issue is also not so simple. After all, short-term transactions are profitable even at longer intervals than a minute. Good results were obtained on M5-M15 without changing the strategy, indicator settings, and money management:

On M5-M15, you can already make a decision and close the deal manually. Let's take time as the main parameter, and then scalping will be a position with a duration of no more than 4-5 bars (candles) of the working timeframe. Let's move on to indicators and strategies.

There is enough advertising of "author's" indicators and strategies on the Internet, we will not consider them in this article. 99% of such products consist of basic technical tools that are available in all terminals for free.

The main rule for turning a standard indicator into a “scalping” indicator is to set the parameters that remove the maximum of “noise”. Do not forget about the delay, it will always be. Examples of setting up the Stochastic oscillator and simple scalping forex strategies:

On M1, the oscillator continues to give good scalping signals if the number of calculation periods is increased. So you can see short-term trends among the "noise" and open a deal. The principle is common to oscillators: when the timeframe decreases, we increase rather than decrease the number of periods.

Strategies. The signals are clear, no comments are required. The Bollinger Bands/Awesome Oscillator strategy shows how to scalp forex successfully with basic indicators without any additional settings. You can if the market allows. The following example is two complex scalping indicators.

The Contrast indicator shows the appearance of an intersection of MA on several timeframes at once. If all histograms are green, we open BUY, red SELL. Such indicator scalping forex strategies are convenient and can be used in trading.

THV looks for divergences (divergences between the price movement and the indicator). On M1-M5, such instruments do not make sense - if there are divergences, they last no longer than 4-5 bars and are often false. We are dealing with market “noise”, there cannot be sustainable divergences in it.

Momentum and volume indicators (even tick indicators) do not improve accuracy even on the M5: the situation is changing too quickly. You can increase the duration of the transaction to 7-10 candles, but it will no longer be scalping. The same situation with graphical analysis: patterns break up in 1-2 bars and cannot be used correctly:

Trader's comments:

Almost all the patterns turned out to be false. This is a typical situation for all currency pairs, both for reversal and candle trend continuation patterns. We only scalp on technical analysis!

Advantages:

  • There is always an opportunity to trade. A short period of transactions and the volatility of the current market allow you to start scalping at any time in all Forex trading sessions. This does not require a detailed analysis of the situation (except for the fundamental background), because the "event horizon" is no further than the next 20-30 minutes.
  • If profit targets are within 20-30 points per day, they can be quickly obtained with a successful series of transactions and no longer trade.
  • Small Stop Losses allow you to stay on the market for a long time to compensate for losses.

Disadvantages:

  • A large number of possible entry points are the main problem of scalping. Even if the majority is correct, you need a quick reaction to the opening, and most importantly, the closing of the transaction. This is a big load on the nervous system and if it is difficult for you to keep up the pace, it is better to choose a different trading style.

  • The broker can forbid scalping either completely or set increased spreads and requotes for trades of 2-4 minutes.

Money management:

There is only one main piece of advice on how to scalp in forex: no martingale or doubling the next trade to compensate for the loss on the previous one. Scalping in medium- and long-term trading always leads only to losses, and with martingale, you will be without a deposit for 2-3 hours with any lot volume.

Intraday Trading

Trades are opened and closed during the Forex trading day. Transactions are not carried over to the next day! There is also a definition of a "trading day" as a time when it is convenient for a trader to trade, for each region (America, Europe, Asia) these are different periods. In this article, intraday trading is considered to be Forex trading sessions 00:00-24:00 GMT.

Trades are opened and closed during the Forex trading day. Transactions are not carried over to the next day! There is also a definition of a "trading day" as a time when it is convenient for a trader to trade, for each region (America, Europe, Asia) these are different periods. In this article, Forex trading sessions 00:00-24:00 GMT are considered intraday trading.

On the left is the popular "Morning Flat" strategy, in which the repetitive behavior of the market at the end of the Asian session (market makers and other traders close positions after them, reducing activity) and the high volatility of the largest trading volume of the European session. 

On the right are the classic Fibonacci retracement levels. Trading throughout the day allows you to calmly open on successive breakdowns, taking profits of 100-150 points. Especially during the overlapping Europa/America sessions.

Advantages:

  • Increasing the duration of transactions allows you to reduce the number of false signals in comparison with scalping. At periods of 3-4 hours, the technical analysis starts to work. For example, Moving Average crossovers or oscillators coming out of overbought/oversold conditions.

  • It becomes possible to use separate strategies "by Forex sessions": euro to European, Canadian dollar to America, yen to Asia. The main thing is that the time is comfortable for the trader.

Disadvantages:

  • As in scalping, you need to choose the right duration of the transaction. The signals are more accurate, but we need constant monitoring of positions for the reaction of the fundamental background and the actions of market makers. 
  • When changing trading sessions, it is recommended to close positions based on current profit/loss and open new ones, maybe on new assets. This requires additional time and knowledge of the specifics of assets and sessions.
  • Constant market monitoring is required. Scalping can be stopped after 2-3 hours of trading, and medium- and long-term transactions can be checked once a day, then intraday requires attention. You can wait for the entry point for several hours, it can be one in a day. If it is not possible to constantly monitor the terminal (even mobile), we move on to the next style of Forex trading.

Money management:

  • We trade according to the "classics": the volume of the transaction is not more than 5-7% of the current deposit. If multi-currency strategies are used, when several transactions (opposite, pending) are opened for several Forex assets, we reduce the lot to 2-3%.

Day trading

The average time of an open position is from 5-7 bars (candles) on the D1 (day) or W1 (week) timeframe. We immediately draw the attention of traders to the presence of a swap: a mandatory positive/negative commission for transferring a position by a broker to the next day. The percentage of swaps is small, but for transactions for 1-2 weeks, it should be taken into account when planning profits. Let's see what the timeframe looks like and possible directions of transactions:

Trader's comments:

Holding a long-term position trading forex for days or weeks can be psychologically difficult, as can fast scalping trades. If you find it difficult to look at pullbacks or corrections for 2-3 days, go back to intraday.

Trend direction, movement in a trend channel, rebounds from support/resistance are visible without market "noise", even when compared with intraday. Candlestick patterns almost always work out correctly, especially reversal patterns such as Doji. We will not write too much, just look at examples of strategies:

No additional comments are needed. It is visible how the technical indicators (Bollinger Bands) are being worked out correctly. Opening deals when SMA (200) is broken is a classic strategy – this MA on any Forex asset shows a medium-term trend, used as a resistance level. A breakout/rebound will be a great entry point for day trading.

Trader's comments:

There is no "unique" strategy for day trading. Proven techniques work well, especially the Moving Average as shown in the example. Additionally, you can confirm with an oscillator or a volume indicator after the breakdown of the SMA (200).

Advantages:

  • The duration of the transaction allows you to remove almost all the lag of technical indicators. Even strong fundamentals and other events do not have a big impact on the trend (see the example above). You can control the transaction 1-2 times a day: this is good for beginners and traders who cannot constantly be near the terminal;
  • A large deposit is not mandatory for day trading; this is a myth of brokers and training courses. You can reduce the lot size, switch to cent accounts and trade calmly.

Disadvantages:

Few transactions during the month. With a small lot size, the total profit may not be more or even less than with intraday or scalping. It is necessary to withstand possible large pullbacks and corrections while the trend is on.

Money management:

Medium and long-term rollbacks require large Stop Loss of at least 200-300 points, so large leverage is very dangerous! According to other parameters, the scheme is "classic": the first Take Profit /Stop Loss for the last max/min, then as the transaction develops, we adjust the values or close.

Swing Trading

The main idea is to identify a strong price momentum, enter at the very beginning of the trend and keep the position open for as long as possible. To do this, the classic trend and breakdown strategies are supplemented with the concept of "Three days", each of which has its meaning in the trading process:

  • Day 1: BUY
  • Day 2: SELL
  • Day 3: SHORT SELL.

At the same time, the concept of "DAY" does not always mean "one day". In other words, there may be several "Day 1" on which there will be a price increase (BUY) followed by several "Day 2" when the market is down. Short SELL (Day 3) maybe after 1-2 days of lateral movement. Many textbooks on swing trading forex do not pay attention to this feature of the technique for beginners, this leads to analysis errors.

Trader's comments:

Swing trading is almost impossible to automate by advisors. Confident knowledge of not only technical but also fundamental analysis is required. It is necessary to correctly determine the current state of the market and choose the appropriate strategy, so beginners need to be especially careful.

Swing trades last from 3-5 hours (clear periods of consolidation and breakout can be considered "days" on timeframes from H1) to several days - the duration depends only on the trend and goals for maximum profit. In other words, we have an average between intraday (intraday) and medium- (long-term) trading. The main task for a positive result is to correctly determine the current phase of the market:

  1. Accumulation. The period after a long fall or rise. Just watching.
  1. Open. The first breakout of the flat, the majority of traders are out of the market, waiting for confirmation. Swing considers this situation optimal for leading positions.
  1. Distribution. The trend is almost over, a new flat begins. The longer the trend goes, the smaller the profit and the greater the risk of getting into a reversal. You need to prepare for closing and opening reverse trades.
  1. Reverse the movement. A trader can remain at a loss if he holds the position to the last thinking that this is only a rollback. Swing trading believes that in this case, you need to wait for the reverse breakout of the active zone trader.

Attention. On swing trading forex strategies, we trade only basic currency pairs - no crosses and exotic options like the Mexican peso. In addition to large swaps and spreads, such assets often behave unpredictably, “breaking” seemingly reliable signals.

"Active zone trader" (AZT) is one of the few proprietary terms of the methodology, its purpose is to give the first signal of consolidation (accumulation) from which the trader will begin to analyze the situation. The figure shows an example of the D1 timeframe, where the best results are on most Forex assets. Then everything is simple:

  • if the price does not break through the SMA, the rollback or correction is considered false;

  • the price is actively moving away from the EMA – there is a high probability of a long correction or even a trend reversal;

  • 3-4 bars inside AZT confirm entry point.

Swing analysis has no other special patterns. When to open/close a deal, we determine by technical and graphical analysis. The main thing is to understand what phase is on the market now.

Advantages:

Swing trading is a good variant to increase profits without completely switching to day trading. In this case, you can use standard breakout and trend strategies and technical indicators.

Disadvantages:

There are no clear rules for opening a deal; this is a problem for beginners. Although the very concept of swing has been present in trading since the 60s of the last century, many experts do not consider it a separate technique. By analogy with Price Action, where standard candlestick analysis patterns are used only under other names. The swing theme is popular on the Internet, we had to mention it in the review, and it is up to the trader to decide how to use it.

Trader's comments:

This opinion is not meaningless. This is trading of confirmed breakdowns of side ranges (flat) with the addition of an analysis of market phases and volume dynamics if the transaction goes beyond intraday. This can be seen in any book about swing trading forex, so if you have basic knowledge of technical analysis, there should be no problems.

Money management:

There are no special requirements. Outside of intraday, it is recommended to follow the rules of day trading.

Non-Indicator trading

A Forex trading style that does not use technical indicators. This is not a graphical analysis of candle patterns; they are also not used here! In this variant, to determine open/close points, price levels are used, both visual based on local or historical max/min.

As an example of non-indicator strategies, let's consider a "grid" on which you can earn money with any market movement. In the "classic" version, this does not even require a detailed analysis of the current situation:

Pending BUY/SELL Stop orders are used to continue the up/downtrend.  The distance between orders can be fixed or dynamic (it is better to use an Expert Advisor). Now the calculation for the appearance of a strong and long-term movement. If it is already on the market, you can consistently open "grids" to continue above the current price!

Then it's simple. The trend begins to consistently open the "upper" or "lower" half of orders accumulating profits. After the first 2-3 orders are triggered, we remove the opposite pending positions from the market and begin profit/ loss control. We close everything at the first sign of a reversal!

Advantages:

No analysis. We built levels, opened pending orders - we are waiting for profit. We make a "grid" only according to the trend!

Disadvantages:

The correct definition of the "step" of the grid. If it is "small" to the current volatility, any impulse will only close opposite orders by Stop Loss.

Reverse situation: the step is too "big". The result can be a “lock” (see the figure): the price has “opened” opposite orders and is moving “between” them. Both Stop Losses work, it will not be possible to close both orders without a total loss. The "lock" can last from several hours to days. There may be several of them, only an experienced trader can get out of this situation.

Money management:

The total volume of transactions on the "grid" should not exceed 10-15% of the deposit! Only in this way, it will be possible to continue trading in the conditions of the "castle", make a profit, and close it without loss. Even if the entire "grid" goes into the minus, you can start over again.

Automatic trading

Advertising claims that opening deals without human intervention is a separate “style”. Of course, this is not the case - all automatic advisors work according to one of the listed Forex trading options. Among them, there are scalpers, medium-term traders, etc. It is important to understand that when the market situation changes rapidly, the adviser will “see” this with a delay or there will be no reaction at all. Never open transactions in large volumes and do not put Expert Advisors on your account without Stop Loss!

Trader's comments:

Automatic algorithms are also used by professionals. But, unlike beginners, only as an auxiliary tool, and positions are then opened only “manually”. There are examples of good results in automating "grid" strategies, so there is no need to completely abandon such tools. The main thing is to understand how it works, to conduct regular retests on the history.

Summarize.  

There is no definite answer to which forex trading style is the best. It depends not only on the nature of the trader, the market can make its adjustments. For example, if the volatility of a currency pair increases within a day, switch to scalping and short-term intraday strategies. With a “calm” market, you can earn more on medium-term transactions. Always remember about money management.