Forex Trading Strategies for Beginners: A Trading Guide
Possibly the biggest challenge to a beginning forex trader is understanding the basic forex strategies and learning how to use each one of it. Trading can be overwhelming for beginners, especially if you have no clue about forex at all. It would be like walking blindfolded in the woods—you have no idea where you’re going.
This is the reason why there are articles on forex strategies for beginners such as this one. Articles such as this help the beginning and uneducated trader know the basic strategies to forex, consecutively learning the basics in forex trading. Read through this guide to get your beginner’s guide.
Follow the Trend
Following the trend is one of the most basic and easiest strategies in forex trading for beginners. The basic principle of “follow the trend’ strategy is opening a position in the direction of the trend. Trends in the market can either be short or long, so you must first decide upon yourself which strategy you want to trade with: short-term or long-term. Once you have decided, you can pick which type of chart you want to use in trading. Remember that your chart type will depend on whether you pick a short-term or long term trend. The strategy you use will always follow the trend.
If there are regressions in an upward trend, this is also a good signal for a great entry price. If the regression happens in a downward trend, wait for the price to recover from the regression before you opt to sell. Remember that these trends can either be short or long-term, which is why your entry point and analysis of the market is a big factor.
Locating Support and Resistance Levels
In this second forex strategies for beginners, the foremost process to do is identifying the support and resistance levels. The basic principle of this strategy is to sell when the price is approaching resistance and buy when it touches support. The idea behind this is that trends tend to reverse upon contact with the two levels. The trend bounces to a bearish after touching resistance and, conversely, reverses to bullish after contact with the support.
Breakouts can also happen on the price chart. If the price breaks resistance, that resistance becomes the new support, and in a similar note, when price breaks support, it turns into the new resistance.
Retracements and Corrections
A market correction, whether up or down, is an important and telling part of how the previous trend was. These corrections can be assessed in the existing trend through simple percentages. The most common percent trace is 50% above the trend. Aside from this, forex traders, such as banks, financial institutions, and individual investors, also follow the Fibonacci retracements, where the highest percent traces are at 38% and 62%.
This is one of the most effective charting tools, and it’s also fairly easy to use. The process in using this fourth type of strategy in forex trading for beginners is to draw a line on the chart, connecting two points. If it’s an upward trend, draw another line that connects two more points below the line you initially drew.
If it’s a downward trend, draw the second line above the first line you drew, following the same process: connecting two points. The price movement often adheres to the boundaries set by the line. However, if the price does break these trend lines above or below, this is a strong indication of a reversal in the trend.
The essential benefits of moving averages are that it signals to buy and sell opportunities easily, as well as confirm the current trend.
This strategy makes use of two moving averages on the chart, one moving faster than the other. The basic principle of this strategy is that trading signals come when the two moving averages cross with each other. For example, if the trend is upwards and the price is going through a correction, once the faster moving average crosses above the slower moving average, it signals a great buying opportunity.
Oscillators determine overbought and oversold conditions in the market. If moving averages confirm the trend, oscillators identify the right time and opportunity to open a position. The two most common oscillators are the RSI and the Stochastic.
When using RSI, this indicator uses a 0-100 scale, labeling the 70- level as overbought and the 30- level as oversold. In the case of the Stochastic, it also uses a 0-100 scale; however, the overbought level is at 80 while the oversold level is at 20.
Another benefit of using oscillators is that they typically signal a strong possibility of a reversal in the trend. This happens when the oscillator signal moves in a different direction from the direction of the price.
The Average Directional Movement Index
This seventh and last type of forex strategies for beginners helps identify whether the chart shows that the market is following a trend or only oscillating between price ranges. This indicator only identifies the strength of a trend or the market direction; however, it does not identify which direction the market is going. For this reason, you must incorporate other indicators or strategies that help determine the direction of the market. When using this indicator, reading on or above 25 means, the market trend is reliable but could be fluctuating between ranges.
These seven forex strategies for beginners will help you create your trading plan and strategy as you begin your trading career. Enjoy trading!