During the recent years, we have created hundrets trading robots and tested every trading technique we found. As a result we have experienced the first hand that there are many approaches that work in forex. There is no right, fit them all technique. Each trader can actually choose the trading system that suits him perfectly.
Forex trading can be approached in many different ways. Various trading styles are available for traders with different goals and risk tolerance. As a result, each aspiring forex trader can find trading technique that can lead him to the same goal (success) but with a different path.
Let's look at how can you approach forex trading and what king of techniques can you use to accumulate those pips.
Fundamental trading techniques
In fundamental trading we look at multiple economic indicators to gauge currency strength against each other. This ia a highly complex process where trader considers news and events to find suitable entry points in the market.
Technical trading techniques
Technical trader believes that all necessary information to execute successful trade are already available in the chart. This includes general market trend and suitable chart entry formations that represent market psychology, supply and demand.
Conservative trading techniques
Conservative, build your fortune slowly trading style should be the bread and butter of every forex trader. You should understand and master conservative approach before you move on to more aggressive trading styles. Conservative trader will rarely open more than one trade per instrument at the same time. Each trade will be typically protected by stop loss, trailing stop function or break even function. With most conservative techniques, trader will risk 1 - 2 percent of his account balance per trade (ideally even less). Conservative trader will use standard signals and filters for position entry and exit (indicators, chart patterns). The goal isnt to game the market, but simply be better than most market participants in your ability to identify execute the trade.
Aggressive trading techniques
Aggressive technique breaks the established rules of conservative trading. It will often completely disregard any established rules to achieve the goal of profit. It is also necessary to say, that before the trader attempts to break conservative rules he must first know them very well Getting aggressive to early leads to failure without exception. Forex market is amazingly suitable for aggressive trading style. It offers low costs, immediate execution and almost limitless liquidity. Aggression must always be coupled with intelligence for it to work. Typically, this styles involves opening and managing multiple position simultaneously.
This relatively conservative approach look for breakouts on support/resistance lines. Breakout can be identified in multitude of ways. However one thing is alway the same. Trader will expect sudden and rapid price movement in the direction of breakout. This will be typically coupled with sudden rise in trading activity (volumes). Failed breakouts are commonly known as fakeouts and can be also traded with great results.
Failed breakouts often offer great entry price with amazing risk reward ratio. There are fairly frequent in forex market and can be employed in multiple trading styles. Ranging from aggressive to conservative.
Scalping trader thrives in action. He will be looking for relatively small profit many times per day, often opening up to hundreds of positions in a single session. This trading technique is extremely demanding and therefore most suitable for automatisation. Expert advisor can typically trade the same scalping strategy with much better results than human.
Trader defines the trend in any way he can. Looking at the technical indicators. Fundamentals or market sentiment. He will then proceed to follow the trend for as long as he doesn't notice any signs of slowing down (trend exhaustion). Once the trend runs out of steam he will exit the trade and look for another opportunity. To ensure that he protects already gained profit, trailing stop can be used.
Range trading techniques are great to be used, when there is not clear trend present in the chart. We will be looking to enter the long position at the bottom of the range and short position at its top. Once the opposite signal occurs, position will be closed. This approach overlaps with fakeout trading, however fakeouts doesn't require range to be present in the chart. Risk reward ratio of range trading systems is excellent.
When trade moves against you, you can simply accept loss or get creative. Hedging allows you to cover for exiting position by opening position into opposite direction. You can wait for correction to be over to close the hedging position, or switch directions completely. Hedging at the trend reversal can be done with increased leverage to produce interesting results. Hedging is advance technique. When used by inexperienced market operator, can cause a lot of trouble. Instead of solving traders existing problems, hedging can get him deeper in trouble.
Averaging technique involves opening multiple trades on better price once initial entry fails. Resulting position will be larger and opened on better overall price than initial entry. Averaging is a logically sound approach of placing a trade in chaotic forex market. As with other powerful tools, it should be always used with caution. Trader should not fight the trend. Instead, averaging should be used to follow the trend and take advantage of market volatility, open fractional trade and thus be able to get the better overall entry price.
Adding to the winner (pyramiding)
Pyramiding enables trader to open multiple trades in the direction of rapid price movement. The goal is to limit the exposure while doing so. Trader will attempt to risk only his initial entry when opening consecutive trades. Under ideal circumstances, he will end up with multiple positions in profit and opened in the direction of fast price movement while never risking more than his initial trade stop loss. The key to do this correctly is to never allow the trading series to return to red numbers. Risk reward ratio for this trading technique is fantastic. Trader can easily make 100x more than his risk. However success rate is typically low. Conditions must be perfect for this approach to work. Less daring modifications of this approach can be used with great success.
This mechanical trading technique requires very little prediction. Grid extracts money out of forex market taking advantage of its inherent volatility and ultra low trading costs. When set correctly, grid can extract money out of the market in regular intervals. Directional grid,working in only one direction can be used also for the same purpose. The main disadvantage is is unfavourable risk reward ratio. However it is compensated by extremely high success rate.
In our experience the best way to approach the market is to not limit yourself into one trading styles. Why would you ? You can pick and choose the best elements from each trading technique and combine them. Resulting hybrid system often resolves existing weaknesses of used techniques.