A trading strategy is one of three most important things every trader needs in order to have a taste of success in this game of probabilities. After learning the basics of forex, you would need something to guide you in order to make sharp decisions in the forex market. Trading strategies are a part of the guides you would need.
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They come with hard rules which signal you on where and when to buy or sell a currency pair or any other instrument you trade. Below I will run you through some of the popular trading strategies that work, so you can decide which one to master.
There are a lot of trading strategies out there; the ones I talk about below are ones I have seen traders vouch for; and I even have a fair or deep experience with. Also, resources about these strategies are provided widely on the internet for free and you would not have to pay a dime before accessing them.
Price action trading strategies.
There is a high probability that you have heard of this one since it is touted by many traders as one of the best and that I agree. Price action is very broad and it entails a lot of concepts. This strategy is heavily dependent on market structures and how the market moves.
You study keenly what is happening on the charts so you can decide what to do next. The study of price action solely depends on what is happening on the charts at a particular moment in time. It entails trend analysis, support and resistance, chart patterns and candlestick formations.
Trend analysis gives you clues about uptrends and downtrends, and gives you potential reasons why a trend will hold or break. Support and resistance also makes you aware of zones where there will be buying and selling pressures.
For chart patterns, they are one of the best things to look at if you aspire to be a breakout trader with respect to reversals and continuations. Candlestick formations are one of the primary things you need to know about before delving deeper into price action.
Since price action is very broad, traders may take a few concepts and master them. Combining all the concepts in there will not be effective in the long run. For instance, one price action trader may master support and resistance trading; whereas another will master chart pattern trading.
Learn more on price action here.
Price action represented on a cryptocurrency pair chart. A chart pattern as well as support and resistance is evident.
Elliott wave trading.
Elliott waves is another trading strategy to pay attention to since it provides some sense of accuracy in the movements of the markets. The market does not move in a straight line; rather it ebbs and flows. This strategy predicts where the market will ebb and flow but in waveforms.
Elliott wave trading strategies determine where a trend will continue and where it will end. The wave forms are characterized into impulsive waves and corrective waves. Impulsive waves are moves that are in tandem with the main trend in place. Corrective waves are moves that go against the trend otherwise known as retracements or pullbacks.
The waves consist of a 5-3 pattern. The 5 waves move in support of the main trend and are known as impulsive waves; whereas the 3 waves move against the main trend and are known as corrective waves.
Note that there are also two mini corrective moves in the 5 wave pattern. Elliott wave theory has solid rules and traders need to study it attentively in order to find valid patterns.
The 5 waves are always identified as 1,2,3,4 and 5 with waves 2 and 4 as corrective waves. The 3 wave corrective pattern is also identified as A, B and C. The ABC corrective wave can take many forms such as zigzag, triangle and a whole lot.
Traders see differently so the sharpness of Elliott waves may be questioned. One trader’s 5-3 wave pattern may be different from another’s on the same chart; hence it could be subjective.
Learn more on Elliott wave trading here.
Pictorial representation of elliott wave theory.
Harmonic pattern trading strategies.
Trading strategies based on harmonic patterns are also based on waves; just that this time, the waves are referred to as legs. Harmonic trading removes the subjectivity that Elliot waves have because it heavily relies on the Fibonacci tool.
The Fibonacci tool is based on numbers and as the saying goes; “numbers don’t lie”. A sharp understanding of the Fibonacci tool is a massive requirement in understanding harmonic patterns.
These patterns come in many forms and the fibo tool is what determines the form. The retracement and the extension Fibonacci tools are the ones that are used.
Harmonic patterns are mostly timed on the charts to look out for bullish or bearish exhaustion to trade reversals in the market. The legs or waves of these patterns are labelled as X, A, B, C, and D. The D is where the actual trading takes place since it is a reversal zone.
With the types of harmonics, there are; Bat, Cypher, Crab, Gartley patterns and a few others. All of these types of harmonics provide different parameters you can use to distinguish between them through different numbers on the Fibonacci tool.
Read more on harmonic patterns here.
Pictorial representation of a harmonic bat pattern.
Trading strategy alone will not take you there.
Although a trading strategy is very key in trading success it needs to be coupled with some other important stuff before realizing its full potential. As I said in the beginning of this post, “it is one of the three most important things…”
So what are the other two? They are risk management and psychology. Your ability to implement a good risk management practice and build mental fortitude to influence psychology will take you far. These three are the elements of every successful trader.
As I said for price action and how detailed it was, the other two strategies are detailed as well. Although Elliott wave and harmonic patterns do not have many parameters like raw price action, their rules must be followed religiously to get them right.
With Elliott waves for instance, the many types of corrective waves must be mastered and for harmonics, the Fibonacci numbers must be committed to memory to figure out the differences as well.
I hope you enjoyed this trading lesson. The three trading strategies above are very potent and you can always pick one and master it. Kindly share your queries or your comments in the comment box below.
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