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Forex Trading Strategies

What is Forex Trading Strategy

In a highly volatile market where prices move rapidly, traders are in dire need of something tangible to rely on, here comes forex trading strategies. Forex trading strategy is a technique used by forex traders to help decide whether to buy or sell a currency pair at any given time.

Forex trading strategies can be based on either technical analysis, fundamental analysis, or both. Strategies usually build on trading signals, which are in their essence triggers for actions. There are well known forex trading strategies that can be easily found or traders themselves can construct their own.

Types of Trading Strategies

Swing trading

This strategy is a long term trading strategy, when trades are kept open from a few days to, sometimes, several weeks. Swing trading strategy’s essence is taking advantage of market big fluctuations "swings".

Fundamental analysis plays an important role on longer timeframes. Strong directional moves are often triggered by important or unexpected market news, such as corporate income statements or central bank meetings, which means swing traders need to be aware of market fundamentals.

There are ways to develop a reliable trading plan. Here are the most common swing trading techniques we’d like to share with you.

Swing Trading Tactics previews

  • Moving average crossovers - When the shorter-term MA crosses above the longer-term MA, it's a buy signal, as it indicates that the trend is shifting up. This is known as a "golden cross."
  • Cup-and-handle patterns - A cup and handle is a technical chart pattern that resembles a cup and handle where the cup is in the shape of a "u" and the handle has a slight downward drift. A cup and handle is considered a bullish signal extending an uptrend, and is used to spot opportunities to go long.
  • Head and shoulders patterns - A head and shoulders pattern is a technical indicator with a chart pattern described by three peaks, the outside two are close in height and the middle is highest. A head and shoulders pattern describes a specific chart formation that predicts a bullish-to-bearish trend reversal.
  • Flags - Flags are areas of tight consolidation in price action showing a counter-trend move that follows directly after a sharp directional movement in price. The pattern typically consists of between five and twenty price bars. Flag patterns can be either upward trending (bullish flag) or downward trending (bearish flag).
  • Triangles - A triangle is a chart pattern, depicted by drawing trendlines along a converging price range, that connotes a pause in the prevailing trend. Technical analysts categorize triangles as continuation patterns.

Key reversal candlesticks

Key reversal candlesticks, as well, can be used to complement basic tactics for more accurate execution. A key reversal is a one-day trading pattern that may signal the reversal of a trend. Other frequently-used names for key reversal include "one-day reversal" and "reversal day."

Forex Trading Strategies That Work

There are many circulating Forex trading strategies in trading and sometimes it can be confusing which one to choose. Which one works? Below we will share with you the most successful ones.

These are trading strategies that work well during Forex trading executions.

  • Scalping trading strategy is very popular in Forex trading Scalpers focus on making profit on small moves that occur frequently and favour markets that aren't prone to sudden price movements. Strategy involves opening a large number of trades in a bid to bring small profits per each. The disadvantage of scalping is that traders can't afford to stay in a trade for too long, plus scalping takes a lot of time and attention to find new trading opportunities.

    For example a trader scalping to profit off price movements for Adidas AG Stock trading for $318. The trader will buy and sell a huge amount of Adidas AG shares, let's say 100,000, and sell them during price movements of small amounts. Price increments can be as low as $0.05 or less, making small profits from each share, but since purchase and sale are in bulk, profits could be quite solid.

  • Day Trading strategy refers to trading during trading day. Quite simple - all trades must open and close during the trading day. Day trading strategy is applicable in all markets, though it's used more in currency trading. When executing day trading strategy, trader monitors and manages open trades the market throughout the whole day.

    Note, leaving positions open overnight fraught with loss of money.

    This type of strategy is often news based, specifically scheduled events - economic news, statistics, elections, interest rates. Basically, one of the ways to execute this strategy is to pay close attention to news that can affect currencies, and act accordingly. That’s why more often than not day traders trade more actively in the mornings, since most news is released at that time.

    There are a few unwritten rules day traders should follow to insure themselves from risks:

    • Day traders follow a one-percent rule - never put more than 1% of capital or trading account into a single trade. If a trader has $10,000 in a trading account, position in any given instrument shouldn't be more than $100.
    • Setting stop loss and take profit points - is the price at which a trader will sell a stock and take a loss on the trade (this happens when trade doesn’t go the way it was planned, in a way it’s a cutting losses approach).
    • Setting Take-profit point is the price at which a trader will sell a stock and take a profit on the trade.
  • Position Trading is a long term strategy, some call it “buy and hold” strategy. During Position Trading strategy traders usually use long term charts, from daily to monthly, and with a combination of other methods establish the trend of the current market. This kind of trade lasts from a few days to several weeks or more. The main idea of position trading strategy is to determine the direction of the market and make use of.

    Minor market fluctuations aren't considered important since they don't create trends, hence no impact on position trading strategy, unlike Scalping where the whole strategy is based on it. Since position trading strategy leans on fundamental analysis it's reasonable to monitor central bank monetary policies, political developments as well as long term technical indicators and macroeconomic environment.


Trading Strategies Based on Forex Analysis

h1 image - IFC Markets

Perhaps the major part of Forex trading strategies is based on the main types of Forex market analysis used to understand the market movement. These main analysis methods include technical analysis, fundamental analysis and market sentiment.

Each of the mentioned analysis methods is used in a certain way to identify the market trend and make reasonable predictions on future market behaviour. If in technical analysis traders mainly deal with different charts and technical tools to reveal the past, present and future state of currency prices, in fundamental analysis the importance is given to the macroeconomic and political factors which can directly influence the foreign exchange market. Quite a different approach to the market trend is provided by market sentiment, which is based on the attitude and opinions of traders. Below you can read about each analysis method in detail.

Forex Technical Analysis Strategies

Technical Analysis Strategy

Technical analysis is the most useful tool a trader can rely on. It helps predict price movements by examining historical data - what is most likely to happen based on past information. Though, the vast majority of investors use both technical and fundamental analysis to make decisions.

Before diving into the technical analysis strategies, there is one more thing traders usually do - there are generally two different ways to approach technical analysis: the top-down approach and the bottom-up. Basically the top-down approach is first a macroeconomic analysis and then a focus on individual securities. The bottom-up approach focuses on individual stocks rather than a macroeconomic perspective.

Forex Technical Analysis Strategies

The first most important strategy to keep in mind when choosing a Forex technical analysis strategy - following one single system all the time is not enough for a successful trade.

  • Forex Trend Trading Strategy - Like in any other field trend is the direction in which the market moves. The foreign exchange market does not move in a straight line, but more in successive waves with clear peaks or highs and lows.
  • Forex Range Trading Strategy - is usually associated with a lack of market direction and is used when there is no trend, it could be implemented at any time, but the strategy, again, is most useful in cases where market is lacking direction. Also there are different types of ranges that stand behind the strategy, here they are:
    • Rectangular Range - the price of a security is trading within a bounded range where the levels of resistance and support are parallel to each other, resembling the shape of a rectangle. This model has pros and cons: Pros - rectangular ranges indicate a period of consolidation and tend to have shorter time frames than other range types, which can lead to faster trading opportunities. Cons - these ranges can be confusing for traders who are not looking for long-term patterns that can influence the formation of the rectangle.
    • Diagonal Range - the price descends or ascends via a sloping trend channel, this channel can be rectangular, broadening, or narrowing. This model has pros and cons as well:

      Pros - with diagonal ranges, breakouts tend to happen on the opposite side of the trending movement, which gives traders an edge in anticipating breakouts and earning a profit.

      Cons - although many diagonal range breakouts take place relatively quickly, some can take months or years to develop, which makes it tough for traders to make decisions based on when they expect a breakout to occur.

    • Continuation Ranges - is a graphical pattern that unfolds within a trend. Pros - continuation ranges can occur frequently in the middle of ongoing trends, and they often result in a quick breakout, which bring profit quickly. Cons - because continuation patterns take place within other trends, there is added complexity to evaluating these trades, it makes continuation ranges a little tricky, especially for novice traders.
    • Irregular Ranges - In an irregular range, determining support and resistance areas can be difficult, but possible. Pros - irregular ranges can be a great trading opportunity for traders capable of identifying the lines of resistance making up these ranges. Cons - the complexity of irregular ranges often requires traders to use additional analysis tools to identify these ranges and potential breakouts.
  • Support and Resistance Trading Strategy Guide - Support and resistance refers to price point beyond which stock does not have tendency to fall or rise. Levels are used to determine which direction to trade and at which price level traders should enter or exit positions. In order to grasp the core of the support and resistance trading strategy, traders should understand what a horizontal level is.

    • Support levels - represents the lowest price that has stock tends to trade at.
    • Resistance level - represents the highest price that has stock tends to trade at.

    These terms are used to refer to price levels on charts that tend to act as barriers, preventing the price of an asset from getting pushed in a certain direction. Support line formation is subjected to laws of supply and demand - when stock price drops demand increases, thus support line forms, same happens with resistance line only viceversa.

    When the zone of support or resistance is identified, those price levels can serve as potential entry or exit points because, as a price reaches a point of support or resistance, it will do one of two things—bounce back away from the support or resistance level, or violate the price level and continue in its direction—until it hits the next support or resistance level.

  • Forex Charts Trading Strategies - are developed on chart patterns analysis. Charts analysis give traders opportunity to look at the historical data and see price movements tendencies overall, spot same patterns overtime etc. Depending on what information trader is looking for and has on hands he/she can choose the most convenient chart for the analysis.

    There are certain types of charts: the bar chart, the line chart, the candlestick chart and the point and figure chart. By using the following technical chart patterns traders are able to make more precise trading decisions:

    Continuation Patterns - price pattern that denotes a temporary interruption of an existing trend.

    • Pennants - key characteristic of pennants is that the trendlines move in two directions — one will be a down trendline and the other an up trendline. The two trendlines do eventually come together and that represents a signal to trade.
    • Flags - constructed from two parallel trend lines that can slope up, down or sideways - a flag that has an upward slope appears as a pause in a down, a flag with a downward bias shows a break during an up trending market.
    • Wedges - are using two converging trend lines - a wedge is characterized by two trend lines moving in the same direction, either up or down.

      A wedge that is angled down represents a pause during an uptrend, a wedge that is angled up shows a temporary interruption during a falling market. During the formation of the pattern volume typically narrows with the purpose to increase once price breaks above or below the wedge pattern.

    • Triangles - are the most popular chart patterns among others used in technical analysis since they occur more frequently in comparison to other patterns.

      There are 3 most common types of triangles - symmetrical triangles (occur when two trend lines converge toward each other and signal only that a breakout is likely to occur—not the direction), ascending triangles (characterized by a flat upper trend line and a rising lower trend line and suggest a breakout higher is likely), and descending triangles ( have a flat lower trend line and a descending upper trend line that suggests a breakdown is likely to occur). These chart patterns can last from a couple of weeks to several months.

    • Cup and Handles - is a bullish continuation pattern where an upward trend has paused, but will continue when the pattern is established. First comes "V" shape with equal highs on both sides of the cup, then the "handle" in a more settled trend - flatter and restrained pattern with slower increase.

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  • Reversal Patterns - price pattern that signals a change in the prevailing trend is known as a reversal pattern.
    • Head and Shoulders - patterns can appear at market tops or bottoms as a series of three pushes: an initial peak followed by a second and larger one and then a third push that mimics the first.
    • Double Top - where the market has made two unsuccessful attempts to break through a support or resistance level. Acts in a similar fashion as double bottom and can be a powerful trading signal for a trend reversal. The patterns are formed when a price tests the same support or resistance level three times and is unable to break through.
    • Gaps - occur when there is empty space between two trading periods that’s caused by a significant increase or decrease in price.
  • Forex Volume Trading Strategy - Volume Trading is the number of securities traded for a certain time. The higher the volume, the higher the degree of pressure, which, depending on number of nuances, can indicate the beginning of a trend. Volume analysis can help understand the strength in the rise and fall of individual stocks and markets in general.

    To determine that, traders should look at the trading volume bars, presented at the bottom of the chart. Any price movement is more significant if accompanied by a relatively high volume + a weak volume. Not all volume types may influence the trade, it’s the volume of large amounts of money that is traded within the same day and greatly affects the market.

    There are a few general steps to take, before making trading decisions.

    • Trend Confirmation - traders need increasing numbers and increasing enthusiasm in order to keep pushing prices higher. Increasing price and decreasing volume might suggest a lack of interest, this might be a warning of a potential reversal. A price drop (or rise) on little volume is not a strong signal. A price drop (or rise) on large volume is a stronger signal that something in the stock has fundamentally changed.
    • Exhaustion Moves and Volume - in a rising or falling market, we see movement exhaustion typically, sharp price movements, combined with a sharp increase in volume, signal the potential end of the trend.
    • Bullish Signs - Volume can be useful for spotting bullish signs. For example, volume increases when the price falls, and then the price moves up and then down again. If the price does not fall below the previous low when it moves back, and volume decreases during the second decline, then this is usually interpreted as a bullish sign.
    • Volume and Price Reversals - If, after a prolonged price move higher or lower, the price begins to fluctuate with little price movement and large volume, this may indicate a reversal and prices will change direction.
    • Volume and Breakouts vs. False Breakouts - On the initial breakout from a range or other chart pattern, a rise in volume indicates strength in the move. Little change in volume or declining volume on a breakout speaks of lack of interest - higher probability for a false breakout.
    • Volume History - Volume should be looked at relative to recent history. Comparing today's volume to 50 years ago might provide irrelevant data. The more recent the data sets, the more relevant results are likely to be.
    • Volume History - Volume should be looked at relative to recent history. Comparing today's volume to 50 years ago might provide irrelevant data. The more recent the data sets, the more relevant results are likely to be.
  • Multiple Time Frame Analysis Strategy - analysing security's price during different time frames and detecting "trading circles", in other words discovering repetitive patterns and taking advantage of it. It could be done either on smaller or bigger timeframes scales.The process starts from exact determination of market direction on longer timeframes, then drilling down to shorter - f.e. 5-minute charts.
  • Technical Indicators in Forex Trading Strategies - are based on patterns signals formed by price, volume and open interest of a securities. Technical analysis is trading that helps to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity. There are two basic types of technical indicators.
    • Overlays (are applied over the prices on the exchange chart)
      • Moving Average - the reason for calculating the moving average of a stock is to help smooth out the price data by creating a constantly updated average price. Random, short-term fluctuations on the price of a stock over a specified time-frame are soften.
      • Bollinger Bands - tool defined by a set of trend lines, applied two standard deviations (positively and negatively) away from a simple moving average (SMA) of a security's price. It gives investors a higher probability of properly identifying when an asset is oversold or overbought.
        Oscillators (are applied above or below a price chart)
      • Stochastic Oscillator - is a momentum indicator comparing a particular closing price of a security to a range of its prices over a certain period of time. Stochastic Oscillator is used to generate overbought and oversold trading signals, utilizing a 0–100 bounded range of values. The general idea is that in a market trending upward, prices will close near the high, and in a market trending downward, prices close near the low.
      • Moving Average Convergence/Divergence (MACD) - is a trend-following momentum indicator that shows the relationship between two moving averages of a security’s price. MACD indicator triggers technical signals when it crosses above (to buy) or below (to sell) its signal line. It helps investors understand whether the bullish or bearish movement in the price is strengthening or weakening.
      • Relative Strength Index (RSI) - is a momentum indicator used in technical analysis that measures the magnitude of recent price changes to assess overbought or oversold conditions in the price of a stock or other asset. RSI indicator is displayed as an oscillator, a line chart that moves between two extremes and can range from 0 to 100.

Technical Trading Strategies

The idea behind technical trading strategies is to find a strong trend followed by price rollback. Rollback should last for a short period of time, as soon as price retracement pauses trend will resume and continue moving in the direction of prevalent trend.

Technical analysis trading is useful for any type of market from stock trading, Forex trading and, even cryptocurrency trading. For example, an investor could use technical analysis on a stock like (S-GOOG) Alphabet Inc. - get a report to decide if it is a buy or not in 2021. The chart could show Alphabet's price and trading volume.

Forex Trend Trading Strategy

What is Trend Trading

A trend is nothing more than a tendency, a direction of market movement, i.e. one of the most essential concepts in technical analysis. All the technical analysis tools that an analyst uses have a single purpose: to help identify the market trend.

The meaning of the Forex trend is not so much different from its general meaning - it is nothing more than the direction in which the market moves. But more precisely, the foreign exchange market does not move in a straight line, its moves are characterized by a series of zigzags that resemble successive waves with clear peaks and troughs or highs and lows, as they are often called.

Trend trading is considered a classic trading strategy, as it was one of the first of them, and takes its rightful place today. We believe that trend trading will remain relevant among traders around the world in the future. All thanks to three main, but simple principles:

  • Buy, when the market goes up, i.e. we are seeing an uptrend/bullish trend
  • Sell, when the market goes down, i.e. we are seeing a downtrend/bearish trend
  • Wait and take no action when the market moves neither up nor down, but horizontally, i.e. we are seeing a sideways trend/consolidation
Sideways trend

Sideways trend

Trend Following Strategy

The trend following strategy can be applied to trade on a wide variety of timeframes, but the most accurate forecasts and lower risks relate to medium and long-term trading, where stronger and long-lasting trends are observed. Trend trading can be the best choice for swing traders, position traders, i.e. those who see and predict the direction of the market movement in the future. However, both scalpers and day traders also catch trends, but less strong and very short-lived, a sort of fluctuations within the main trend.

Any trader, regardless of their trading method, must, first of all, use technical analysis to determine the current trend in the market of a traded asset and try to predict its further development, using technical analysis.

The technical analysis tools applied are usually extremely simple and user-friendly, each trader can select a variety of indicators, lines, time frames, etc., based on the characteristics of the asset they invest in, their individual preferences, and other factors. However, the most commonly used ones are moving averages of different periods:
Bollinger bands, the Williams Alligator, Ichimoku cloud, Keltner channels, MACD, and ADX indicators, as well as various advanced modifications of classic indicators.

Since the indicators are inherently lagging, i.e. reflect the impact of past events and market movements, it is also important to use oscillators to predict the development of the trend and identify the entry points, set stop loss, take profit, trailing stop orders correctly.

Here are three main techniques for entering the market:

  1. Classic (i.e., entering the market at the intersection of two moving averages)
  2. At a breakout (i.e., placing a pending order and entering the market after confirming the price intention to continue the trend)
  3. At a retreat (i.e., entering the market not immediately by a trading signal, but later, when the price is at a more favorable level)

Breakout and classic techniques have some similarities, for example, in both cases, the absence of a take profit order and the setting of a trailing stop would be a rational decision. Entering the market at a retreat is riskier since there is no guarantee the trend will continue as intended rather than reverse.

But back to the types of trends in Forex. According to the theory of supply and demand, the market has 4 main phases of development:

  1. Accumulation (sideways movement, consolidation).
  2. Markup (bullish trend/uptrend).
  3. Distribution (sideways movement, consolidation).
  4. Markdown (bearish trend/downtrend).

In fact, on a two-dimensional chart, the trend can move up (phase №2), down (phase №4), or remain relatively horizontal (phases №1 and №3). Let's go through each of the types of trends in Forex separately.

An uptrend, or bullish trend, is a movement in the price of an asset when the lows and highs progressively increase, i.e. every next maximum/minimum is higher than the previous maximum/minimum. In fact, the bullish trend identifies growth in price in a specific timeframe.

As a rule, traders begin to actively buy exactly on the ascent of the trend line, but often they open positions when the bullish bias reaches its peak and flows into the phase of distribution, in which the price moves horizontally and prepares for the final phase of the bullish trend.

Bullish trend

Bullish trend

However, non-professional traders hold their positions longer than necessary at the end of an uptrend, hoping for the trend to continue, and often move into drawdown and lose their investments. More experienced traders manage to correctly detect the end of the 1st market phase, i.e. just before the price advances, and open long positions.

Short positions are opened either during the distribution phase or at the very beginning of the 4th phase when the trend reverses. The current bullish trend can be detected by drawing the support line at the low points:
the price bounces up at the lows as if pushing off the support line, thereby increasing the highs. If the support line vector on the chart is pointing up, then this is definitely an uptrend.

A downtrend, or bearish trend is a movement in the price of an asset when the lows and highs consistently decrease, every next maximum/minimum is lower than the previous maximum/minimum. In fact, the bearish trend identifies a fall in price in a particular timeframe. The downtrend goes through the same phases and in the same sequence as an uptrend: accumulation of positions, stabilization of the trend, distribution (consolidation).

Bearish trend

Bearish trend

However, if traders go long during the uptrend, then the downtrend implies the opening of short positions, and it is important to set sell orders (including pending orders) within the distribution phase at the desired price.

In a downtrend, the trend line (in this case, the resistance line) is drawn along the tops:
the price, as if meeting resistance, repels and tends downward, then, with a slight correction, rises back to the support line and bounces off. If the resistance line vector on the chart is directed downward, then this is definitely a downtrend.

There is an expression popular among traders: “Trend is your friend” which applies to both the uptrend and the downtrend. However, we can observe an apparent trend only 20-30% of the time, the rest of the time the market is relatively neutral and remains flat, i.e.the price is traded in a narrow range, shifting between resistance and support lines.

A sideways trend, or consolidation, occurs when the potential of bears and bulls becomes equal, this often happens before the release of important macroeconomic and other news, since traders do not know exactly how this news will affect the movement of the asset’s price. That is why the sideways trend acts as the first and third market phases when positions are accumulated and distributed.

Also, sideways movement occurs due to the lack of players in the market between trading sessions or during trading of any asset at an atypical time for it. Trading in a sideways trend is possible, but extremely risky. Such a movement will work more for scalpers who make money precisely from small and frequent fluctuations within predictable limits.

Let's sup up the above with a few remarks:

  1. The Trend is your friend, definitely. But you shouldn’t trade without taking into account the main principles of money and risk management and in the absence of a well-thought-out strategy.
  2. Forex trend trading is inherently simple, but this doesn’t mean it is inefficient. The complexity of trading strategies would only hinder the trader.
  3. At least 2 timeframes are required to identify the trend more reliably.
  4. You can visually understand the direction of the trend as follows:
    the price from the lower-left corner rises to the upper right corner - a bullish trend;
    the price from the upper left corner falls to the lower right corner - a bearish trend;
    the price moves flat and horizontally - a sideways trend.
  5. The market moves horizontally about 70% of the time, but trading with such a movement is not worth it unless you have experience and a clear understanding of the market behavior during the accumulation and distribution phases.
  6. The more often the price meets the resistance/support line and, repelling, keeps the movement vector, the stronger and more stable the trend.
  7. If the price goes up/down sharply and steeply, the trend is more likely to reverse. If the trend is flatter, evenly rising/falling, then there is a high probability that it will last long.

Support and Resistance Trading Strategy

Support and Resistance lines

Among the fundamental and most commonly used technical analysis tools, support and resistance (SR) levels have a special place. Moreover, strategies based on them are used not only by beginners, but also by quite experienced traders, who have many other tools at their disposal, as well as extensive trading experience. So why have these simple lines become so widely used by investors? Let's think about this together.

SR levels

SR levels are conditional areas that each trader allocates individually by the price extremes - minimums and maximums, on a certain timeframe. These areas are often represented as lines, however, to calculate all the risks and correctly place orders, it is still better to depict the SR as areas on the chart.

It should be known that support and resistance lines on different timeframes will be drawn in completely different ways. It's worthy to note that SR lines on large timeframes, such as H1, H4, D1 and larger, are more reliable and less likely to be broken through, the same cannot be said for the SR lines drawn on M1, M5 or M15. There are no specific rules about whether to draw levels by candlestick bodies or by their shadows: experts have not yet agreed on this issue.

Support and Resistance Trading

Reasons for the formation of Support and Resistance Areas

To understand how Support & Resistance levels are formed and how to use them, we need to analyze the psychological component of this phenomenon. A market trend formation depends on the prevalence of one of three conditional groups in the market:

  1. Bears (open sell positions)
  2. Bulls (open buy positions)
  3. Undecideds (not yet on the market)

Imagine a situation with the price fluctuating in a consolidation area near the support line. Bears sell assets, bulls actively buy, and then the price begins to rise. In such a situation, the bears regret going short, and as soon as the price returns to the support line, they will close their orders to have a chance to break even.

The bulls are happy with this scenario, since their positions get profitable when the price rises, and at the very first correction of the price to the support line, they will go long again, as they believe the price will bounce off the support level one more time. Those traders who haven’t yet opened orders see that the sideways trend has turned upward and consider the moment of price correction and its rebound from the support level the most favorable for placing buy orders.

Thus, we see a clear BUY sentiment among traders at the very first, even slight price movement towards the support line. And when this happens, a huge number of market participants immediately go long, i.e. demand surges sharply, and supply does not keep pace with it, so the price rises as expected. The situation is reversed in the case of the resistance line, where supply rises steeply and demand slips downwards.

With such a common example, we can see a direct relationship between the Supply/Demand ratio and the Support/Resistance levels vector. This is why Support/Resistance lines are often called Supply/Demand levels.

How to trade using support and resistance levels?

We have sorted out the reasons how the S/R areas form. Now let's look at trading strategies based on support and resistance levels. When on the chart the price approaches the support or resistance line, it is expected to either bounce off that line or break it.

So, traders distinguish 3 types of trading based on the Support/Resistance levels: trading based on a rebound from levels (range trading), trading based on a level breakout, and a mixed type of trading (allows you to use both strategies alternately, depending on the current market situation). Let’s consider the two key strategies:

Range Trading

From the example above, it can be seen that with a significant accumulation of bullish potential, as the price approaches the support line, it is more likely that the price will reverse from the level. Then you can go long, placing the stop loss below the support level.

When the price moves towards the resistance line, and bearish sentiments prevail in the market, traders begin to actively open sell orders, as soon as the price reaches the Resistance level. As a result, the price bounces off the level and goes down.

In this case, the stop loss is usually placed above the resistance level. Using a take profit order and trailing stop mode also reduces the risk of losses and helps to fix profits in time. A rebound from levels occurs most often within consolidation (actually, the market is in this phase about 70% of the time), since the price alternately bounces from one level to another, so such trading is quite attractive for scalpers and short-term traders: insignificant profit per trade is compensated by the frequency of orders.

Breakout Trading

With large volumes in the market and a strong trend movement, the price may break through the support or resistance line, instead of reversing from it. Trend traders benefit the most from this price behavior.

  • If the price breaks the resistance level from the bottom up, then returns to this level during correction, the price is not always able to punch it from the other side, so it bounces up from the level, forming an upward trend. Thus, after the breakout the resistance line turns into a support line.
  • If the price breaks through the support line from top down, and upon returning to this line, the price isn’t always able to break it from the opposite side now, so it ricochets off the level and continues its downward movement, becoming a downtrend. In this case, the support line is transformed into a resistance line after the breakout.
  • In some cases, after breaking through the support/resistance level once, the price crosses it back from the opposite side during the correction and returns to the previous price range. It's called a false breakout.

Key Takeaways of Support and Resistance Trading

  • Trading based on support and resistance levels is suitable for all types of markets: currency, commodity, stock. Also, it is applicable to any timeframe.
  • The principles of such trading are simple and straightforward.
  • It is easy to identify support and resistance zones with the help of moving averages and trend lines on any timeframe. They often act as Support/Resistance levels themselves.
  • Levels are a universal tool for technical analysis. They are unbiased, since most traders are guided by them.
  • The more often a level is tested, the stronger it is considered. However, you need to be extremely careful in order to timely notice changes in the trend and its possible reversal.
  • Several false breakouts indicate the stability and strength of the level.
  • Fibonacci levels, moving averages of at least two large periods with round numeric values, the Lines algorithm, the PZ and IchimokuSuppRes indicators, Pivot Points, Bollinger Bands, Fractals and many others can help identify the S/R areas.

In conclusion, it’s worth noting that the concepts of Support and Resistance levels are not new in trading; many investors are guided by them and build their strategies accordingly.

However, there are also those who believe that the levels based on old data may be useful in analyzing the market development in the past, but not in predicting the future movements, since there are no guarantees that the market will behave in one way or another, because there are plenty of factors influencing the market, and the behavior of millions of market participants is unpredictable.

Forex Range Trading Strategy

KEY TAKEAWAYS

  • Range trading is a forex trading strategy that involves the identification of overbought and oversold currency.
  • Range trading strategy is sometimes criticized for being too simplistic, but in actuality it never failed.
  • Traders, should look at long-term patterns that may be influencing the development of a rectangle.
  • The complexity of irregular ranges requires traders to use additional analysis tools to identify these ranges and potential breakouts.

Forex Range Trading Strategy

Traders generally look for the best trading strategy to help them profit. Before attempting range trading, traders should fully understand its risks and limitations. Range trading strategy is becoming increasingly popular lately.

Range trading is a forex trading strategy that involves the identification of overbought and oversold currency, i.e buying during oversold/support periods and selling during overbought resistance periods. This type of strategy can be implemented nearly at any time, though it is preferable to use it when the market doesn’t have any distinguished direction, meaning is most effective when the forex market has no discernible long-term trend in sight.

Forex Range Trading Strategy (Chart)

What is Range Trading

Range trading is an active investing strategy that identifies a range at which the investor buys and sells at over a short period. For example, a stock is trading at $55 and you believe it is going to rise to $65, then trade in a range between $55 and $65 over the next several weeks.

Traders might attempt to range trade it by purchasing the stock at $55, then selling if it rises to $65. Trader will repeat this process until he/she thinks the stock will no longer trade in this range.

Types of Range

To successfully trade while using Range trading strategy traders should know and understand the types of ranges. Here are the four most common types of range that you will find useful.

  • Rectangular Range - When using range trading strategy traders will see a rectangular range, there will be sideways and horizontal price movements between a lower support and upper resistance, it's common during most market conditions.

    Rectangular Range

    From the chart it is easy to see how the price movement of the currency pair stays within the support and resistance lines creating a rectangular (hence the name) range, from which traders clearly can see possible buy and sell opportunities.

    Note: traders, should look at long-term patterns that may be influencing the development of a rectangle.

  • Diagonal Range is a common forex chart pattern. This type of range establishes upper and lower trendlines to help identify a possible breakout. In a diagonal range, the price descends or ascends via a sloping trend channel. This channel can be broadening, or narrowing.

    Diagonal Range

    Note: diagonal range breakouts take place relatively quickly, some can take months or years to develop, traders have to make decisions based on when they expect a breakout to occur, which can be hard.

  • Continuation Ranges is a graphical pattern that unfolds within a trend. These ranges occur as a correction against a predominant trend and can occur at any time as a bearish or bullish movement.

    Note: continuation patterns take place within other trends, there is added complexity to evaluating these trades, especially for novice traders it is going to be hard to spot continuation ranges.

  • Irregular Ranges emerge differently from the previous three: trend take place around a central pivot line, and resistance and support lines crop up around it. That’s why it’s hard determining support and resistance lines. “Excellence" is not a gift, but a skill that takes practice, and applies to all chart patterns.

    Note: The complexity of irregular ranges requires traders to use additional analysis tools to identify these ranges and potential breakouts.

Bottom Line on Range Trading Strategy

Traders that choose to use Range trading strategy have to understand not only types of ranges, but the strategy lying behind using it.

Range trading strategy is sometimes criticized for being too simplistic, but in actuality it never failed. Traders need to identify the range, time their entry and control their risks of exposure and of course understand the fundamentals of hte strategy. Range trading can be quite profitable.

Technical Indicators Trading Strategy

Technical indicators are calculations which are based on the price and volume of a security. They are used both to confirm the trend and the quality of chart patterns, and to help traders determine the buy and sell signals.The indicators can be applied separately to form buy and sell signals, as well as can be used together, in conjunction with chart patterns and price movement.

Technical analysis indicators can form buy and sell signals through moving average crossovers and divergence. Crossovers are reflected when price moves through the moving average or when two different moving averages cross each other. Divergence happens when the price trend and the indicator trend move in opposite directions indicating that the direction of price trend is weakening.

They can be applied separately to form buy and sell signals, as well as can be used together, in conjunction with the market. However, not all of them are used widely by traders. The following indicators mentioned below are of utmost importance for analysts and at least one of them is used by each trader to develop his trading strategy:

  • Moving Average
  • Bollinger Bands
  • Relative Strength Index (RSI)
  • Stochastic Oscillator
  • Moving Average Convergence/Divergence (MACD)
  • ADX
  • Momentum

You can easily learn how to use each indicator and develop trading strategies by indicators.

Chart Pattern Trading Strategy - Chart Patterns in Forex

KEY TAKEAWAYS

  • There are several trading methods, each of which uses price patterns to find entry points and stop levels
  • One limitation shared across many technical patterns is that it can be unreliable in illiquid stocks
  • Traders often use chart patterns as a Forex strategy.

Forex Chart Pattern Strategy

Traders often use chart patterns as a Forex strategy.

Forex market has a behavior that shows patterns. Chart patterns usually occur during change of trends or when trends start to form. There are known patterns like head and shoulder patterns, triangles patterns, engulfing patterns, and more. Let us introduce to you some of them, it will help you identify the trend of the market and trade accordingly.

Chart Patterns in Forex

There are several trading methods, each of which uses price patterns to find entry points and stop levels. Forex charting patterns include head and shoulders as well as triangles, which provide entries, stops and profit targets in a form that can be easily seen.

  • Head and Shoulders (H&S) chart pattern is quite popular and easy-to-spot in technical analysis. Pattern shows a baseline with three peaks where the middle peak is the highest, slightly smaller peaks on either side of it. Traders use head and shoulders patterns to predict a bullish and bearish movement.

    Head and Shoulders

    Head and shoulders shaping is distinctive, chart pattern provides important and easily visible levels - Left shoulder, Head, Right shoulder. Head and shoulders pattern can also be inverse and will look like this and the pattern is called Inverse Head and Shoulders.

    Inverse Head and Shoulders
  • Triangles fall under continuation patterns category, there are three different types them:
    • Ascending triangle - The ascending triangle pattern in an uptrend, easy to recognize but is also quite an easy entry or exit signal.Ascending Triangle
    • Descending triangle - The Descending triangle is noticable fot its downtrends and is often thought of as a bearish signal.Descending triangle
    • Symmetrical triangle - Symmetrical triangles, as continuation patterns developed in markets, are aimless in direction. The market seems apathetic in its direction. The supply and demand, therefore, seem to be one and the same. Symmetrical triangle

At the start of its formation, the triangle is at its widest point, as the market continues to trade, the range of trading narrows and the point of the triangle is formed. Because the triangle narrows it means that both buy and sell sides interest is decreasing - the supply line diminishes to meet the demand.

Chart Patterns Trading

Chart patterns are widely used in trading while conducting technical analysis. Studying these patterns will be useful for building or using as a trading strategy.

  • Cup and Handle A cup and handle is a technical chart pattern that resembles a cup and handle where the cup is in the shape of a "u" and the handle has a slight downward drift. Looks like this:

    Cup and Handle

    It is worth worth paying attention to the following when detecting cup and handle patterns:

    • Length: Generally, cups with longer and more "U" shaped bottoms provide a stronger signal. Avoid cups with sharp "V" bottoms.
    • Depth: Ideally, the cup should not be overly deep. Avoid handles that are overly deep also, as handles should form in the top half of the cup pattern.
    • Volume: Volume should decrease as prices decline and remain lower than average in the base of the bowl; it should then increase when the stock begins to make its move higher, back up to test the previous high.
  • Flag is a price pattern that moves in a shorter time frame against the prevailing price trend observed in a longer time frame on a price chart. Reminds the trader of the flag, hence the name. Flag patterns can be upward trending (bullish flag) or downward trending (bearish flag).

    Flag Chart Pattern

    Note: Flag may seem similar to a wedge pattern or a triangle pattern, it is important to note that wedges are narrower than pennants or triangles.

    • Flag patterns have five main characteristics:

    • The preceding trend
    • The consolidation channel
    • The volume pattern
    • A breakout
    • A confirmation where price moves in the same direction as the breakout
  • Wedges form as an asset’s price movements tighten between two sloping trend lines. There are two types of wedge: rising and falling.Wedge Chart Pattern
    • Wedge patterns are usually characterized by converging trend lines over 10 to 50 trading periods, which ensures a good track record for forecasting price reversals. A wedge pattern can signal bullish or bearish price reversals. In either case, this pattern holds three common characteristics:

    • The converging trend lines;
    • Pattern of declining volume as the price progresses through the pattern;
    • Breakout from one of the trend lines.
    • The two forms of the wedge pattern are a rising wedge, which signals a bearish reversal or a falling wedge, which signals a bullish reversal.

  • Rounding bottom Chart pattern is identified by a series of price movements that graphically form the shape of a "U". Rounding bottoms are found at the end of long downward trends and signify a reversal in long-term price movements. It could take from several weeks to several months and it happens quite rarely.Rounding bottom
  • Double top is a bearish technical reversal pattern. Traders use double top to highlight trend reversals. Typically, an asset’s price will experience a peak, before retracing back to a level of support. It will then climb up once more before reversing back more permanently against the prevailing trend.Double Top Pattern
  • Double bottom patterns are the opposite of double top patterns Double top patterns if identified correctly are highly effective. However, if they are interpreted incorrectly. Therefore, one must be extremely careful before jumping to conclusions.

    Double Bottom Pattern

    The double bottom looks like the letter "W". The twice-touched low is considered a support level.

Bottom line on Chart Pattern Trading Strategy

All of the patterns are useful technical indicators which can help traders to understand how or why an asset’s price moved in a certain way – and which way it might move in the future. This is because chart patterns can highlight areas of support and resistance, the latest in turn can help a trader decide whether they should open a long or short position; or whether they should close their open positions in the event of a possible trend reversal.

Forex Volume Trading Strategy

KEY TAKEAWAYS

  • The number of shares bought and sold each day in any given financial instrument, known as volume.
  • Volume should be looked at relative to recent history.
  • The higher the volume during a price move, the more significant the move and vice versa - the lower the volume during a price move, the less significant the move will be.
  • When prices reach new highs or no lows and volume is decreasing, probably reversal is taking shape.

Forex Volume Trading Strategy

Volume Trading is the number of securities traded for a certain time. The higher the volume, the higher the degree of pressure, which, depending on number of nuances, can indicate the beginning of a trend. Volume analysis can help understand the strength in the rise and fall of individual stocks and markets in general.

To determine that, traders should look at the trading volume bars, presented at the bottom of the chart. Any price movement is more significant if accompanied by a relatively high volume + a weak volume. Not all volume types may influence the trade, it’s the volume of large amounts of money that is traded within the same day and greatly affects the market.

What is Forex Volume

Forex volume is probably one of the most important tools traders have at their disposal. Volume in Forex is based only on the individual pair on a given exchange at that point in time. That’s why it’s sometimes overlooked.

The number of shares bought and sold each day in any given financial instrument, known as volume. Volume is one of the most accurate ways of measuring money flow. Indicator tells traders about market activity and liquidity, that is, higher trading volumes mean higher liquidity.

Volume Trading Strategy

From the chart above, which is the GBP/USD on FXCM, volume indicator, paints quite accurate even foreseeing the price picture. Using volume indicator traders can see whether the events, such as economic data publishing, breaking news have influenced the market.

Note: Volume overall tends to be higher near the market's opening and closing times and on Mondays and Fridays. It tends to be lower at lunchtime and before a holiday.

How to Trade with Volume

Volume shows how the market moves - the more volume, the easier it is to decide when to buy or sell (volume can’t tell the difference between bear and bull markets). Volume precedes price action, here are a few general steps to take, before making trading decisions.

1. Trend Confirmation

Traders need increasing numbers and increasing enthusiasm in order to keep pushing prices higher. Increasing price and decreasing volume might suggest a lack of interest, this might be a warning of a potential reversal. A price drop (or rise) on little volume is not a strong signal. A price drop (or rise) on large volume is a stronger signal that something in the stock has fundamentally changed.

2. Exhaustion Moves and Volume

In a rising or falling market, we see movement exhaustion typically, sharp price movements, combined with a sharp increase in volume, signal the potential end of the trend.

3. Bullish Signs

Volume can be useful for spotting bullish signs. For example, volume increases when the price falls, and then the price moves up and then down again. If the price does not fall below the previous low when it moves back, and volume decreases during the second decline, then this is usually interpreted as a bullish sign.

4. Volume and Price Reversals

If, after a prolonged price move higher or lower, the price begins to fluctuate with little price movement and large volume, this may indicate a reversal and prices will change direction.

5. Volume and Breakouts vs. False Breakouts

On the initial breakout from a range or other chart pattern, a rise in volume indicates strength in the move. Little change in volume or declining volume on a breakout speaks of lack of interest - higher probability for a false breakout.

6. Volume History

Volume should be looked at relative to recent history. Comparing today's volume to 50 years ago might provide irrelevant data. The more recent the data sets, the more relevant results are likely to be.

Bottom line on Volume Trading Strategy

Volume is a handy tool for studying trends, and there are many ways to use it. Basic guidelines can be used to gauge market strength or weakness, and to test whether volume confirms price movement or signals an impending reversal. Volume-based indicators are sometimes used to aid decision making.

Multiple Time Frame Analysis Strategy

KEY TAKEAWAYS

  • Multiple time-frame analysis involves monitoring the same currency pair across different frequencies.
  • Each time frame has its benefits.
  • The methodology behind using multiple time frames is that traders can start to build a clearer picture of the price action and technical analysis story.

Multiple Time Frame Trading Strategy

Traders often use chart patterns as a Forex strategy.

The multiple time frames trading strategy is a Forex trading strategy that works by following a single currency pair over different time frames. By following the price chart traders can see the highs and lows and establish the overall and temporary trend. However, when looking at the different time frames traders can see changes and patterns that they were not able to spot by using a single time frame.

Each time frame has its benefits. Long time frames allow traders to understand the bigger picture and identify the overall trend. Average time frames present the short term trend and show traders what is happening in the market right now. Short time frames are traders' way of recognizing the exact window for when to make their move.

Multiple Time Frame Analysis

Multiple time-frame analysis involves monitoring the same currency pair across different frequencies. There is no real limit on how many frequencies can be monitored, but there are general guidelines that most traders practice. So, generally traders use three different periods; enough to have a read on the market. If used more it might result in redundant information and if less could be not enough data.

It's important to choose the right time frames when selecting the range of three periods, for example, if a long - term trader who holds the position for months decides to pick a 15, 60 minute time frame combination it will probably tell nothing to the trader.

  • Long-Term Time Frame - When using this method of studying the carts, it is best done with a long-term time frame and work down to the more certain frequencies. When a trader starts with a long - term time frame, he/she will be able to establish a general and dominant trend.

    In foreign exchange markets, where long-term time frames are daily, weekly or monthly, fundamental factors have a significant impact on the direction of movement. That's why traders should monitor the major economic trends when following the general trend on this time frame to better understand the direction in price action. Such dynamics, though, tend to change infrequently, so traders will only need to check those occasionally.

    Another thing traders should look out for is the interest rate. This is a reflection of the health of the economy. In most cases, capital will flow towards the higher rate currency in the pair, as this equates to a higher return on investment.

  • Medium-Term Time Frame - most versatile of the three frequencies because it is at this level that traders can get an idea of the short and long term time frames. This level should be the most frequently followed chart when planning a trade while the trade is on and as the position nears either its profit target or stop loss.

  • Short-Term Time Frame trades should be made on a short-term timeframe. As the smaller swings in the price action become clearer, the trader will be able to choose the best entry for a position already determined by the higher frequency charts.

    In short - term time frames fundamentals play a role as well, but in a different way than they do for the higher time frame. The more detailed this lower time frame is, the stronger the reaction to economic indicators will seem. These jerky movements are often very short-lived and are therefore sometimes described as noise. However, the traders often avoid making these trades.

Trading Multiple Time Frames

When all three time frames are combined and analyzed properly in the correct order, it will increase the chances of success. Performing this three-tiered in-depth analysis encourages big trend trading. This alone reduces risk, as there is a higher likelihood that price action will eventually continue in the direction of a longer trend. Applying this theory, the level of confidence in a trade should be measured by how the time frame coincides.

For example, if the larger trend is uptrend (sorry for redundancy) but the medium- and short-term trends are heading lower, shorts should be taken with reasonable profit targets and stops. A trader should probably wait until a bearish wave runs out on the lower frequency charts and look to go long at a good level when the three time frames line up once again.

Using multiple time frames while analyzing trades it helps to identify support and resistance lines which in turn helps to find a strong entry and exit levels.

Trading Multiple Time Frames

Multiple Time Frame Trading Methodology

Multiple Time Frame Trading Methodology is straightforward, traders only need to focus on three steps:

  1. Look at price action and structure: highs and lows, basically finding the trend.
  2. Draw Fibonacci retracement levels between highs and lows to find support and resistance levels.
  3. Enter trades in the direction of the trend at support and resistance when you get a buy or sell signal.

The methodology behind using multiple time frames is that traders can start to build a clearer picture of the price action and technical analysis story:

  • First have to look at the long-term time frame, to establish the dominant trend
  • Then increase the granularity of the same chart to the intermediate time frame: smaller moves within the broader trend become visible
  • And at last, execute trades on the short-term time frame.

Bottom line on Multiple Time Frame Trading Strategy

Using multiple time-frame analysis can be instrumental in making a successful trade. From this article you should be able to take how important multiple time-frame analysis can be. It is a simple way to ensure that a position benefits from the direction of the underlying trend.

Fundamental Analysis Trading Strategy

Fundamental Analysis Strategy

KEY TAKEAWAYS

  • Fundamental analysis goal is to calculate the fair market price of a security, which the trader can compare with the current price to see if the security is undervalued or overvalued.
  • Fundamental analysis in forex includes economic conditions that may affect the national currency.
  • There are several major indicators to monitor when conducting fundamental analysis.

Fundamental Analysis Strategy

Fundamental analysis is a method of measuring a security's value by analysing related economic and financial factors such as a country's macroeconomics, effectiveness of the company's management etc. Fundamental analysis strategy basically through this analysis trader studies anything that can influence security's value.

Fundamental analysis is used to identify if the security is correctly valued within the broader market, it's done from a macro and micro perspective. Analysis starts first from a macro perspective, only then moved to specific company’s performance (micro).

Data can be gathered from public records. A trader, when evaluating stock, should look for revenues, earnings, future growth, return on equity, profit margins etc..

If analysis shows that the stock's value is significantly lower than the current market price, then the signal is buy. And vice versa, if fundamental analysis shows the stock's value is significantly higher than the current market price, then the signal is sell.

Fundamental analysis strategy can be categorised in two groups:

  • Quantitative - information that can be shown in numbers and amounts. They are the measurable characteristics of a business, like revenue, profit, assets, and more.
  • Qualitative - the nature of information, rather than its quantity. They might include the quality of a company's key executives, its brand-name recognition, patents, and proprietary technology.

Usually quantitative and qualitative methods are used in the mix, when conducting fundamental analysis.

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Fundamental Analysis Forex Strategy

Traders who trade in Forex also use fundamental analysis as well. Sinse fundamental analysis is about considering the intrinsic value of an investment, its application in forex will include considering economic conditions that may affect the national currency.

Here are some of the major fundamental factors that play a role in the movement of a currency.

  • Economic Indicators - Economic indicators are reports published by the government or a private organization that detail the economic performance of a country. Trader will find here unemployment rates and numbers, housing stats, inflation etc.
  • GDP - is a measure of a country's economy, and it represents the total market value of all goods and services produced in a country during a given year.
  • Retail Sales - measures the total revenue of all retail stores in a given country. The retail sales report can be compared to the trading performance of a publicly traded company. What can help trader better understand the market situation.
  • Industrial Production - Traders usually look to utility production, which can be extremely volatile as the utility industry, in turn, is highly dependent on weather conditions and on trade and energy demand.
  • Consumer Price Index - measures change in the prices of consumer goods across over 200 different categories, when compared to a nation's exports, can be used to see if a country is making or losing money on its products and services.

There are three main indicators to look closely when applying fundamental analysis strategies.

  • Purchasing Managers index (PMI) - is an index of the prevailing direction of economic trends in the manufacturing and service sectors. PMI is used to provide information about current and future business conditions to company decision makers, analysts, and investors.

    MI is released once a month and contains 19 primary industries' companies surveys. PMI is based on five major survey areas, that contain questions about business conditions and changes, whether it be improving, no changes, or deteriorating.

    • New Orders
    • Inventory Levels
    • Production
    • Supplier Deliveries
    • Employment

    PMI number spreads from 0 to 100. when PMI is above 50, it represents an expansion when compared with the previous month. When PMI reading under 50, it represents a contraction, and when it's 50 - means no change.

    Formula looks like this, quite simple:

    PMI = (P1 * 1) + (P2 * 0.5) + (P3 * 0)

    Where:
    P1 = percentage of answers reporting an improvement
    P2 = percentage of answers reporting no change
    P3 = percentage of answers reporting a deterioration

    Traders can use the PMI since it is a leading indicator of economic conditions. The direction of the trend in the PMI tends to precede changes in the trend in major estimates of economic activity and output. Paying close attention to the PMI can yield profitable foresight into developing trends in the overall economy.

  • Producer Price index (PPI) - is a measure of inflation based on input costs to producers. It measures price movements from the seller's point of view.

    There are three areas of PPI classification:

    • Industry
    • Commodity
    • Commodity-based final and intermediate demand

    PPI measure starts with number 100 and then and when the production increases or decreases, the movements can then be compared against the starting number (100).

    F.e. production of ottoman has a PPI of 108 for the month of March. The 108 indicates that it cost the ottoman manufacturing industry 8% more to produce ottoman in March than it did in February.

  • Employment Cost index (ECI) - is a quarterly economic series that details the growth of total employee compensation. It tracks movement in the cost of labor, measured by wages and benefits, at all levels of a company.

    The index has a base weighting of 100.

    So the upward trend most of the time represents a strong and growing economy; employers are passing on profits to their employees through wages and benefits. Traders use this indicator for inflationary ideas, since wages represent a big portion of the total cost for a company to produce a product or deliver a service in the marketplace.

Advantages and disadvantages of ECI

Advantages of ECI

  • The ECI calculates the total set of employee costs to businesses, not just wages - health insurance, pensions and death-benefit plans, and bonuses.
  • Rates of change are shown from the previous quarter and on a year-over-year basis.

Disadvantages of ECI

  • The data is only released quarterly, and with a slight overlap, covering a mid-month period.
  • ECI can be volatile when periodic bonuses, commission payments and the like are taken into account (especially at year-end - bigger bonuses).

Bottom Line on Fundamental Analysis Strategy

There are many economic indicators that can be used to evaluate forex fundamentals. It's important to take a thorough look not only at the numbers but also understand what they mean and how they affect a nation's economy. If the fundamental analysis is properly done, it can be an invaluable resource for any currency trader to make a somewhat right choice.

Sentiment Trading Strategy

Sentiment Trading Strategy

KEY TAKEAWAYS

  • Market sentiment reflects a market movement, based on traders' potential actions.
  • Market sentiment is a third player along with fundamental and technical analysis in assessing market movement direction.
  • Sentiment indicators are not exact buy and sell signals on their own, Trader has to wait for the price to confirm the reversal before acting on it.

Market Sentiment Definition

A market sentiment is an overall attitude and feeling of the investors with regards to the present price and the forecasted price of a security, index or other market instruments. Market sentiment is also called investor sentiment. It can be a positive, neutral or a negative one.

Market sentiment is important for technical analysis, since it influences the technical indicators and it is used by traders to navigate. Market sentiment is also used by opposing traders who like to trade in the opposite direction to prevailing consensus.

Investors describe market sentiment as bearish or bullish. When it's bearish - stock prices are going down. When bullish - stock prices are going up.

In these situations often time traders emotions drive the stock market and it might result in overbought or oversold cases. You can see, market sentiment driving force is feelings and emotions.

  • Bullish Sentiment - in a bull market, the prices are expected to move in an upward direction. In this case greed is the moving force of the market.
  • Bearish Sentiment - In a bear market, the prices are expected to move in a downward direction. In this case fear of losing money is the force.

Sentiment Trading Strategy

In Forex trading we have fundamental and technical analysis to assess currency pairs movement direction, but there is a third player that has a significant role in play, which is market sentiment. Sentiment indicator is another tool that can have an input for traders to extreme conditions and possible price reversals, and can be used in conjunction with technical and fundamental analysis.

Market sentiment is a way of analysing Forex, stock and other markets' tendency to construct better trading strategies. These indicators show the percentage, or raw data, of how many trades or traders have taken a particular position in a currency pair.

These indicators show the percentage of how many trades or traders have taken a particular position in a currency pair. When the percentage of trades or traders in one position reaches maximum level, trader can assume that the currency pair continues to rise, and eventually, 90 of the 100 traders are long, hence there are very few traders left to keep pushing the trend up. Indication is for a price reversal.

As we mentioned earlier market sentiment is mostly created by emotions, which results in overvalued or undervalued stocks etc.. So some traders hunt those stocks and bet against them. To measure those markets traders use these indicators, not only to bet against, but to uncover the short-term trend:

  • CBOE Volatility Index (VIX) - If traders feel the need to protect against risk, it's a sign of increasing volatility adding moving averages and the trader would be able to determine if it's relatively high or low.
  • High-Low Index - When the index is below 30 - stock prices are trading near their lows, hence bearish market sentiment. When the index is above 70, stock prices are trading toward their highs, hence bullish market sentiment.
  • Bullish Percent Index (BPI) - Measures the number of stocks with bullish patterns based on point and figure charts. When the BPI gives a reading of 80% or higher, market sentiment is extremely optimistic, with stocks likely overbought. When it measures 20% or below, market sentiment is negative and indicates an oversold market.
  • Moving Averages - When the 50-day SMA crosses above the 200-day SMA - golden cross - momentum has shifted to the upside, creating bullish sentiment. And when the 50-day SMA crosses below the 200-day SMA - death cross - it suggests lower prices, generating bearish sentiment.

There are different forms and sources of Forex sentiment indicators. By using sentiment indicators, trader can learn when the reversal is likely to come, due to an extreme sentiment reading, and can also confirm a current trend.

Sentiment indicators are not buy and sell signals on their own, but they allow one to look for the price to confirm what sentiment is indicating before acting on sentiment indicator readings. Surely as any other indicator it's not 100% accurate in reading where the market is going, keep that in mind.


Trading Styles Strategies

h1 image - IFC Markets

Forex trading strategies can be developed by following popular trading styles which are day trading, carry trade, buy and hold strategy, hedging, portfolio trading, spread trading, swing trading, order trading and algorithmic trading.

Using and developing trading strategies mostly depends on understanding your strengths and weaknesses.In order to be successful in trade you should find the best way of trading that suits your personality.There is no fixed “right” way of trading; the right way for others may not work for you. Below you can read about each trading style and define your own.

Trading Styles Strategies

Forex Day Trading Strategies

KEY TAKEAWAYS

  • Keep emotions at bay
  • Day trading requires constant attention and stress resistance
  • To succeed in day trading traders strategy should be based on deep technical analysis using charts, indicators and models to predict future price movements.

What is Day Trading Strategy

Day trading is a short term trading strategy, involves buying and selling of financial instruments within a day, to profit from small movements of price. Day traders need to be continuously focused, since markets, such as the oil market can move suddenly in the short term. Hence these strategies are particularly effective in volatile markets.

Here are some Day trading popular techniques:

  • Collection of information, because knowledge is the power, without it no trade will pull through.
  • Setting aside funds, deciding how much money a trader is ready to risk. Basically setting aside money that trader is “ready to lose”.
  • Having enough time, Day trading is a job- not a hobby, so it's important to devote a big chunk of the day to track markets and seize opportunities.
  • Go big or go home, is not the case here - generally it’s better to start day trading with small amounts.
  • Avoid illiquid stocks - they have low prices, but big break might never come.
  • Time of trade - Many experienced day traders begin to execute as soon as the markets open in the morning, that's when news usually breaks, which could contribute to price volatility.
  • Set Stop loss and take profit points - is the price at which a trader will sell a stock and take a loss on the trade (this happens when trade doesn’t go the way it was planned, in a way it’s a cutting losses approach)
  • Set Take-profit point is the price at which a trader will sell a stock and take a profit on the trade.
  • No emotions welcomed - when trading, generally, surrendering to greed, fear, eforia and hope is a big no-no. Clear head and pure analysis will suffice.
  • Have a plan and stick to it. With fast changing situations on the market, trader can’t think on the go, so it's important to make a plan beforehand.

Best Day Trading Strategies

Day trading strategies are essential if a trader wants to benefit from frequent and small price fluctuations. An effective strategy should be based on deep technical analysis using charts, indicators and models to predict future price movements.

Below we will introduce you to the most common day trading strategies that work.

Forex Scalping Strategy

Forex scalping is a day trading strategy which is based on quick and short transactions and is used to make many profits on minor price changes. This type of traders, called as scalpers, can implement up to 2 hundreds trades within a day believing that minor price moves are much easier to follow than large ones.

The main objective of following this strategy is to buy /sell a lot of securities at the bid /ask price and in a short time sell/buy them at a higher/lower price to make a profit.
Forex Scalping Strategy (Chart)

There are particular factors essential for Forex scalping. These are liquidity, volatility, time frame and risk management. Market liquidity has an influence on how traders perform scalping. Some of them prefer trading on a more liquid market so that they can easily move in and out of large positions, while others may prefer trading in a less liquid market that has larger bid-ask spreads.

As far as it refers to volatility, scalpers like rather stable products, for them not to worry about sudden price changes. If a security price is stable, scalpers can profit even by setting orders on the same bid and ask, making thousands of trades. The time frame in scalping strategy is significantly short and traders try to profit from such small market moves that are even difficult to see on a one minute chart.

Together with making hundreds of small profits during a day, scalpers at the same time can sustain hundreds of small losses. Therefore, they should develop a strict risk management to avoid unexpected losses.

Fading Trading Strategy - Fading Trading

Fading in the terms of forex trading means trading against the trend. If the trend goes up, fading traders will sell expecting the price to drop and in the same way they will buy if the price rises.
Herein, this strategy supposes selling the security when its price is rising and buying when the price is falling, or as called “fading”.

It is referred as a contrarian day trading strategy which is used to trade against the prevailing trend. Unlike other types of trading which main target is to follow the prevailing trend, fading trading requires to take a position that goes counter to the primary trend.

The main assumptions on which fading strategy is based are:

  • Securities are overbought
  • Early buyers are ready to take profits
  • Current buyers may appear at risk
Fading Trading Strategy (Chart)

Although “Fading the market” can be very risky and requires high risk tolerance, it can be extremely profitable. To carry out Fading strategy two limit orders can be placed at the specified prices- a buy limit order should be set below the current price and a sell limit order should be set above it.

Fading strategy is extremely risky since it means trading against the prevailing market trend. However, it can be advantageous as well - fade traders can make profit from any price reversal because after a sharp rise or decline the currency it is expected to show some reversals. Thus, if used properly, fading strategy can be a very profitable way of trading. Its followers are believed to be risk takers who follow risk management rules and try to get out of each trade with profit.

Daily Pivot Trading Strategy - How to Calculate Pivot Points

Pivot Trading aims to gain a profit from the currency’s daily volatility. In its basic sense the pivot point is defined as a turning point. It is considered a technical indicator derived by calculating the numerical average of the high, low and closing prices of currency pairs.

The main concept of this strategy is to buy at the lowest price of the day and sell at the highest price of the day.

In mid-1990s a professional trader and analyst Thomas Aspray published weekly and daily pivot levels for the cash forex markets to his institutional clients. As he mentions, at that time the pivot weekly levels were not available in technical analysis programs and the formula was not widely used either.

But in 2004 the book by John Person, “Complete Guide to Technical Trading Tactics: How to Profit Using Pivot Points, Candlesticks & Other Indicators” revealed that pivot points had been in use for over 20 years till that time. In the last years it was even more surprising for Thomas to discover the secret of quarterly pivot point analysis, again due to John Person.

Currently the basic formulae of calculating pivot points are available and are widely used by traders. Moreover, pivot points calculator can be easily found on the Internet.

For the current trading session the pivot point is calculated as:

P = (H + L + C)/3

Pivot Point = (Previous High + Previous Low + Previous Close) / 3

The basis of daily pivots is to determine the support and resistance levels on the chart and identify the entry and exit points. This can be done by the following formulae:

R1 = (P x 2) – L

S1 = (P x 2) – H

R2 = P + (H - L) = P + (R1 - S1)

S2 = P - (H - L) = P - (R1 - S1)

where:

P - Pivot Point

L - Previous Low

H - Previous High

R1 - Resistance Level 1

S1 - Support Level 1

R2 - Resistance Level 2

S2 - Support Level 2

Momentum Trading Strategy - What is Momentum Trading

Momentum trading is actually based on finding the strongest security which is also likely to trade higher.It is based on the concept that the existing trend is likely to continue rather than reverse.
A trader following this strategy is likely to buy a currency which has shown an upward trend and sell a currency which has shown a downtrend. Thus, unlike daily pivots traders, who buy low and sell high, momentum traders buy high and sell higher.

Momentum traders use different technical indicators, like MACD, RSI, momentum oscillator to determine the currency price movement and decide what position to take. They also consider news and heavy volume to make right trading decisions. Momentum trading requires subscribing to news services and monitoring price alerts to continue making profit.

According to a well known financial analyst Larry Light, momentum strategies can help investors beat the market and avoid crashes, when coupled with trend-following, which focuses only on stocks that are gaining.

Carry Trade Strategy

Carry Trade Strategy

KEY TAKEAWAYS

  • Carry trade strategy is very popular.
  • Since carry trading is a high risk strategy, we welcome investors with a high tolerance for losses.
  • When to get in a Carry Trade and when to get out.

What is Carry Trade

A Carry Trade is a trading strategy, which is borrowing at a low interest rate and investing in an asset with a higher interest rate. In other words a carry trade is most of the time based on borrowing in a currency with a low interest rate and converting the borrowed amount into another currency. And, of course, this method can be used on stocks, commodities, real estate and bonds that are denominated in the second currency.

And as any trading strategy, Carry Trade strategy also has pros and cons:

Cons

  • There is a risk of sharp decline in currencies exchange rate, which will probably kill the profit.
  • Same with invested assets - they can change in price and drop the value of the income.
  • Hedging is an option but not very advantageous, since money spent on insuring losses will cover the profit traders earned from difference in interest rates.
  • This trading strategy can create a financial bubble.

Pros

  • One of the most attractive sides of Carry trading strategy is its simplicity.
  • Carry trading also lets trader use leverage, which sweetens the deal even more.
  • Profitability.

Overall if a trader decides to use this strategy, it’s imperative to have the skill and be on alert if any changes are to happen.

Risk Management in Carry Trading

There is no doubt that Forex trading strategy is quite juicy but carries a fair amount of risk, to polish this strategy it's advised to use risk management. Without risk management, trader’s account can be wiped out by an unexpected turn. The best time to enter carry trades is when fundamentals and market sentiment support them. Don’t forget the proper hedging.

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So when to get in a Carry Trade and when to get out?

The best time to use Carry Trading strategy is when banks are thinking, or rising interest rates - many people are starting to buy currency, hence pushing up the value of currency pair. As long as the currency's value doesn't fall traders will manage to profit.

The worst time to use Carry Trading strategy is during the period of interest rates reduction. Change in monetary policy also means a change in currency values - when rates are dropping, demand for the currency also tends to drop as well.

Conclusion

In order for the Carry Trade strategy to result in a profit, there needs to be some degree of interest rate rising or no movement.

Carry Trade Example

Suppose the investor borrows 1000 japanese Yen with 0 interest, then converts Yen in Us Dollar, and uses the sum to buy US bonds with 5,3% interest. Investor will make a profit of 5,3%, as long as the exchange rate between US dollar and Yen stays the same.

Many investors make currency carry trades, because it's simple and profitable especially when leverage is used. See more about what is leverage in Forex. For example if the trade mentioned above had a leverage of 10:1, trader would make 53% profit. But of course, the bigger potential gain the bigger is the risk, if exchange rate between US dollar and Yen change - f.e. If The US dollar falls in relation to Yen, trade will lose value. So when leverage is involved and the exchange rate changes, trader will lose ten times more value (if the trader doesn't hedge appropriately).

Bottom Line on Carry Trade Strategy

Bottom Line is that Carry Trading strategy is profitable, especially when leverage is used, quite simple and risky. To beat that trader has to implement proper risk management. Trader has to know when to get in a Carry Trade and when to get out. And the most important part, before using this type of risky strategy you have to have the skill and the experience.

Forex Hedging Strategy - Forex Hedging Techniques

Hedging is generally understood as a strategy which protects investors from occurrence of events which can cause certain losses.

The idea behind currency hedging is to buy a currency and sell another in the hope that the losses on one trade will be offset by the profits made on another trade. This strategy works most efficiently when the currencies are negatively correlated.

Thus, you should buy a second security aside from the one you already own in order to hedge it once it moves in an unexpected direction. This strategy, unlike most trading strategies already discussed, is not used to make a profit; it rather aims to reduce the risk and uncertainty.

It is considered a certain type of strategy whose sole purpose is to mitigate the risk and enhance the winning possibilities.

As an example we can take some currency pairs and try to create a hedge. Let’s say that at a specific time frame the US dollar is strong, and some currency pairs including USD show different values. Like, GBP/USD is down by 0.60%, JPY/USD is down by 0.75% and EUR/USD is down by 0.30% . As a directional trade we had better take the EUR/USD pair which is down the least and therefore shows that if the market direction changes, it will go higher more than the other pairs.

After buying the EUR/USD pair we need to choose a currency pair that can serve as a hedge. Again we should look at the currency values and choose the one which shows the most comparative weakness. In our example it was JPY, and EUR/JPY would be a good choice. Thus, we can hedge our trade buying EUR/USD and selling EUR/JPY.

What is more important to note in currency hedging is that risk reduction always means profit reduction, herein, hedging strategy does not guarantee huge profits, rather it can hedge your investment and help you escape losses or at least reduce its extent. However, if developed properly, currency hedging strategy can result in profits for both trades.

Forex Basket Trading Strategy

Basket Trading Strategy

Diversification is a golden rule in trading, which is the basis of basket trading strategy. In other words, don't put all your eggs in one basket.

Basket trading in Forex is selling and buying different currency pairs simultaneously, they can be both correlated or uncorrelated. The goal is to exit in surplus after closing all open positions. That is, not every position needs to be won, but the total must be positive.

KEY TAKEAWAYS

  • A basket trade is a portfolio management strategy to purchase or sell a large number of securities at the same time. Strategy can be applied on futures and Forex trading as well.
  • Basket trades allow investors to create a trade that is customized for them, which allows for easy distribution across many securities, and that gives them control over their investments.
  • Trading baskets can be a various mix, from collections of securities and currency pairs to commodities and investing products.

What is Basket Trading

Basket trading is a type of trading that simultaneously trades a group of different securities or currency pairs. It can be used on different financial markets f.e. Forex, stock, futures, etc.

Strategy lets a trader create a list of stocks, called a basket, that he/she can save, trade, manage and track as one entity. Baskets can be used to invest in and track stocks grouped by investment style, market sector, life event, or any classification trader choose.

Note: It is important to have a good understanding of the economics of the currencies that the investor trades.

Basket Trading Example

Firstly, trader should find a particular currency pair that has a clear trend - bullish or bearish. After determining the general direction of a particular currency pair based on the strengths and weaknesses of the two currencies, a basket of currencies can be selected.

For example, if a trader has established a strong USD/JPY bearish trend, it will become the base Forex pair for his/her basket. USD/JPY bearish trend means that the Japanese Yen is strengthening.

Once establishing that Yen is strengthening, instead of going short only for USD/JPY pair, trader should diversify - also go short for GBP/JPY, EUR/JPY and AUD/JPY.

So if a trader planned to risk 4% only on the USD/JPY trade, now this risk can be distributed on four currency pairs - 1% on each currency pair individually. Of course, if the main trend is established wrong, losses are inevitable.

GeWorko Method

GeWorko method is a great tool for revealing correlated instruments, portfolios and trading them. This method allows traders to create a portfolio where a financial asset is quoted by another, it could be quantitative, percentage, and price ratios.

After a trader has created a portfolio, he/she can follow assets relations - figuring out if they exist (relations), for example, if relationship graph is a constant straight line it means that when one asset changes the other changes equally, or constant oblique line, it means when one asset grows the other decreases, and the trader can make a conclusion what to sell or buy.

A distinctive feature of the method is the way of expressing the value of an underlying asset, or a portfolio, through the value of a quoted asset, or a portfolio of assets based on the ratio of their prices. The GeWorko method extends the currency cross-rate model to arbitrary assets and asset portfolios.

Benefits of Basket trading

  • Basket trading helps investors control their investments. Traders can add or remove individual or several securities to the basket. Tracking the overall performance of the basket of transactions also saves time monitoring individual securities and simplifies the administrative process.
  • Basket trades make it easy for investors to disperse their investments across multiple securities. Investments are typically distributed using share quantity, dollar amount, or percentage weighting. Share quantity assigns an equal number of shares to each holding in the basket. Dollar and percentage allocations use a dollar amount or a percentage amount to distribute securities.
  • Investors can create a basket that matches their investment goals. Baskets can contain stocks from a specific sector or stocks with a specific market cap.

Bottom Line

Basket trading strategy doesn’t have disadvantages, the whole purpose of it is to diversify the risks. Benefits include - personalized choice, easy distribution and control. Basket trading strategy can be applied on futures and Forex trading as well.

Losing trades is an integral part of basket trading as well, and traders should be prepared for it when creating a portfolio. When using this strategy it is important to have in portfolio assets that will offset those losses so as to come out with a profit.

Basket trading strategy has the potential for a big amount of profits, if done wisely.

Buy and Hold Strategy

KEY TAKEAWAYS

  • Buying and holding strategy is one of the most popular and proven ways to invest in the stock market.
  • Like any trading strategy, Buy and Hold has its pros and cons.
  • Any investment that is held and sold for a period greater than a year is eligible to be taxed at a more favorable long-term rate.

What is Buy and Hold Strategy

Buy and hold is a passive investment strategy where a trader buys stocks, currency pairs or other types of securities such as ETFs and holds them for a long period regardless of short term fluctuations in the market. The idea behind buy and hold strategy centered on long term tendencies.

Buying and holding strategy is one of the most popular and proven ways to invest in the stock market. Investors often do not need to worry about timing the market or making decisions based on subjective models and analysis. Though strategy comes with a large opportunity cost of time and money, investors must be cautious to protect themselves from market failures and know how to cut their losses and take profits, before it's too late.

Buy and Hold Strategy

How Does the Buy and Hold Strategy Work

When investor buy stocks, a priori becomes the partial owner of the company with its privileges that include voting rights and a stake in corporate profits as the company grows. If the amount of shares bought is substantial, investor can influence and ensure his/her future profit. Shareholders vote on critical issues, such as mergers and acquisitions, and elect directors to the board.

Investors have to understand and accept that change takes time. Instead of treating stocks only as a short-term profit, like day traders, traders should invest long term through ups and downs.

Equity owners bear both the ultimate failure risk or the high reward of substantial appreciation

Pros and Cons of Buy and Hold Strategy

  • Pros - Buy and hold strategy has proven time and time again to generate high returns on investment. Benjamin Graham, Warren Buffett, Jack Bogle, John Templeton, Peter Lynch are titans of buy and hold strategy, their experience proved us how well this strategy can work. Of course, skill of stock-picking is the main reason for success.

    It is less time and nerve consuming - Investors can sit back and look at the general characteristics of the market, the asset and the opportunities for future growth, and simply let the investment do its thing without worrying about trying to find the “perfect” entries and exits or constantly checking prices.

    Friendly taxes - any investment that is held and sold for a period greater than a year is eligible to be taxed at a more favorable long-term rate, as opposed to a higher short-term rate.

  • Cons - When trader buy and hold stock means he/she is tied up in that asset for the long time. Hence investor has to have the self-discipline to not run after other investment opportunities during this holding period. This is difficult to practice, when bought stock is lagging.

    Takes time to see positive movement - there is no specific time interval after which stock will start growing, investors have to arm themselves with patience.

    Crisis - just because a stock has been held for many years, does not mean that it is infallible. If or when a crisis happens, everything might turn backwards.

Bottom Line on Buy and Hold Strategy

The buy and hold strategy is the long term investment strategy, which is perfect for investors who do not have time to keep following up their investment portfolio, on a day in day out basis. Execution of the strategy on its own is not hard, but investor has to be able to find a growing or undervalued stock. To be able realize this kind of investment strategy, investors have to be savvy in long term fundamental analysis, on micro and macro levels.

Spread / Pair Trading Strategy

KEY TAKEAWAYS

  • The stocks in a pairs trade must have a high positive correlation, which is the driving force behind the Pair Trading Strategy.
  • Calendar Spread Options goal is to profit from a neutral or directional stock price move to the strike price of the calendar spread with limited risk if the market goes in the other direction.
  • Calendar spreads allow traders to construct a trade that minimizes the effects of time.
  • The calendar spread is most profitable when the underlying does not make any big moves in either direction till the expiration of the next month of the option.

Pair Trading Strategy

Pair trading is a trading strategy that involves matching a long position with a short position in two stocks with high correlation. Strategy is based on the historical correlation of two stocks. The stocks in a pairs trade must have a high positive correlation, which is the driving force behind the strategy’s profits.

The pair trading strategy is best used when a trader detects a correlation divergence. Based on the historical belief that two securities will maintain a certain correlation, should be used when correlation falters. Profits are possible when underperforming stock regains value and the price of a higher quality security falls. The net profit is the total gained from the two positions.

Pairs trading strategy works with stocks as well as with currencies, commodities and even options.

What is Spread Trading

Spread Trading is the act of purchasing one security and selling another related security as a unit. Spread trades are usually used with options or futures contracts, to get an overall net trade with a positive value called the spread. Spread Trading is done in pairs which eliminates execution risk.

Benefits of Spread Trading

  • Offers a lower risk opportunity.
  • When choosing trades carefully and monitoring them continually, the probability of collecting the full premium at expiration is high.
  • Trades usually last 6 – 21 days, which means, capital is continually working for a trader.
  • Spread trading provides opportunities for steady income.
  • It’s a perfect strategy to use when the market is volatile.

Disadvantage of Spread Trading

  • Lower profits.

Types of Spread Trades

There are a few types of spread trades:

  • Intracommodity (Calendar) spreads - is a spread trade involving the simultaneous purchase of futures or options expiring on a particular date and the sale of the same instrument expiring on another date. These individual purchases, known as the legs* of the spread, vary only in expiration date; they are based on the same underlying market and strike price.
  • Intercommodity spreads - These spreads are formed from two distinct but related commodities, reflecting the economic relationship between them.
  • Option spreads - are formed with different option contracts on the same underlying stock or commodity.
  • IRS (Interest rate swap) spreads - are formed with legs* in different currencies but the same or similar maturities.

* A spread trade is the simultaneous purchase of one security and sale of a related security as a unit is called legs.

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What is Calendar Spread Options

The calendar spread is an options strategy that consists of buying and selling two options of the same type and strike price, but different expiration cycles.

There are Vertical and Calendar spreads.

Calendar Spread Options

Calendar spread is an option or futures strategy that occurs by simultaneously opening a long and a short position on the same underlying asset, but with different delivery dates. In a typical calendar spread, trader would buy a longer-term contract and go short a nearer-term option with the same strike price. If two different strike prices are used for each month, it is known as a diagonal spread.

The typical calendar spread trade involves the sale of an option (either a call or put) with a near-term expiration date and the simultaneous purchase of an option (call or put) with a longer-term expiration. Both options are of the same type and typically use the same strike price. And there is a reverse calendar spread - where a trader takes the opposite position; buying a short-term option and selling a longer-term option on the same underlying security.

To sum up in technical terms, the calendar spread provides the opportunity to trade horizontal volatility skew - different levels of volatility at two points in time - and take advantage of the accelerating rate of time decay, while also limiting exposure to the sensitivity of an option's price to the underlying asset. The horizontal skew is the difference of implied volatility levels between various expiration dates.

Calendar Spread Options Example

Hypothetically, AmerisourceBergen Corp. ABC stock is trading at $73.05 in mid-April, trader can enter into the following calendar spread:

Sell the Jun 73 call for $0.87 ($87 for one contract)
Buy the July 73 call for $1.02 ($102 for one contract)

The net cost (debit) of the spread is thus (1.02 - 0.87) $0.15 (or $15 for one spread).

This calendar spread will pay off the most if ABC shares remain relatively flat until the Jun options expire, allowing the trader to collect the premium for the option that was sold. Then, if the stock moves upward between then and July expiry, the second leg will profit.

The ideal market move for profit would be for the price to become more volatile in the near term, but to generally rise, closing just below 85 as of the Jun expiration. This allows the Jun option contract to expire worthless and still allow the trader to profit from upward moves up until the July expiration.

The Bottom Line on Pair Trading Strategy

The market is full of ups and downs that can kick unprepared weak players. Fortunately, using market-neutral strategies like the pairs trade, investors and traders can find profits in all market conditions. The appealing part of Pairs trade strategy is in its simplicity.

Swing Trading Strategy

Swing trading is the strategy by which traders hold the asset within one to several days waiting to make a profit from price changes or so called “swings”.

A swing trading position is actually held longer than a day trading position and shorter than a buy-and-hold trading position, which can be hold even for years.

Swing traders use a set of mathematically based rules to eliminate the emotional aspect of trading and make an intensive analysis. They can create a trading system using both technical and fundamental analyses to determine the buy and sell points. If in some strategies market trend is not of primary importance, in swing trade it’s the first factor to consider.

Forex Strategy by Swing Trade (Chart)
The followers of this strategy trade with the primary trend of the chart and believe in the “Trend is your friend” concept. If the currency is in an uptrend swing traders go long, that is, buy it. But if the currency is in a downtrend, they go short- sell the currency. Often the trend is not clear-cut, it is sideways-neither bullish, nor bearish. In such cases the currency price moves in a predictable pattern between support and resistance levels. The swing trading opportunity here will be the opening of a long position near the support level and opening a short position near the resistance level.

Trading Order Types Strategy - Forex Order Types

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Order trading helps traders to enter or exit a position at the most suitable moment by using different orders including market orders, pending orders, limit orders, stop orders, stop loss orders and OCO orders.

Currently, advanced trading platforms provide various types of orders in trading which are not simply ''buy button'' and ''sell button''. Each type of trading order can represent a specific strategy. It's important to know when and how to trade and which order to use in a given situation in order to develop the right order strategy.

The most popular Forex orders that a trader can apply in his trade are:

  • Market orders - a market order is placed to instruct the trader to buy or to sell at the best price available. The entry interfaces of market order usually have only ''buy'' and ''sell'' options which make it quick and easy to use.
  • Pending Orders – pending orders which are usually available in six types allow traders to buy or sell securities at a previously specified price. The pending orders-buy limit, sell limit, buy stop, sell stop, buy stop limit and sell stop limit- are placed to execute a trade once the price reaches the specified level.
  • Limit Orders- a limit order instructs the trader to buy or sell the asset at a specified price. This means that first of all the trader should specify the desired buy and sell prices. The buy limit order instructs him to buy at the specified price or lower. And the sell limit order instructs to sell at the specified price or even higher. Once the price reaches the specified price, the limit order will be filled.
  • Stop orders-a sell stop order or buy stop order is executed after the stop level, the specified price level, has been reached. The buy stop order is placed above the market and the sell stop order is set below the market.
  • Stop loss orders - a stop loss order is set to limit the risk of trade. It is placed at the specified price level beyond which a trader doesn't want or is not ready to risk his money. For a long position you should set the stop loss order below the entry point which will protect you against market drops. Whereas, for a short position place the order above the trade entry to be protected against market rises.
  • OCO – OCO (one-cancels-the-other) represents a combination of two pending orders which are placed to open a position at prices different from the current market price. If one of them is executed the other will automatically be canceled.

Algorithmic Trading Strategies

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Algorithmic trading, also known as automated Forex trading, is a particular way of trading based on a computer program which helps to determine whether to buy or sell the currency pair at a specific time frame.
This kind of computer program works by a set of signals derived from technical analysis. Traders program their trade by instructing the software what signals to search for and how to interpret them.

High-grade platforms include complementary platforms which give an opportunity of algorithmic trading. Such advanced platforms through which traders can perform algorithmic trading are NetTradeX and MetaTrader 4.

NetTradeX trading platform besides its main functions, provides automated trading by NetTradeX Advisors. The latter is a secondary platform which contributes to automated trading and enhances the main platform’s functionality by the NTL+ (NetTradeX Language). This secondary platform also allows to perform basic trading operations in a "manual" mode, like opening and closing positions, placing orders and using technical analysis tools.

MetaTrader 4 trading platform also gives a possibility to execute algorithmic trading through an integrated program language MQL4. On this platform traders can create automatic trading robots, calledAdvisors, and their own indicators. All the functions of creating advisors, including debugging, testing, optimization and program compilation are performed and activated in MT4 Meta-Editor.

The Forex trading strategy by robots and programs is developed mainly to avoid the emotional component of trade, as it is thought that the psychological aspect prevents to trade reasonably and mostly has a negative impact on trade.