When it comes to stepping into the dynamic forex market, beginners often have a lot of questions and doubts. Trading with liquid and volatile currency pairs can be very lucrative as frequent price movements offer a lot of trading opportunities. However, newbies are confused about the ideal trading style to optimise the profit potential and the best trading approach to follow for building a successful career as a forex trader. Because the forex market is known for its flexibility and there is not just one approach that yields good results.
In this article, I will be sharing some practical tips that can help you find the best trading style and approach for yourself to navigate the forex world with ease.
- Choose your trading instruments
The first thing you need to do before deciding your trading style is pick the instruments that you want to trade with. In the forex market, there are a number of currency pairs to choose from and each currency pair has different levels of liquidity and volatility. The liquidity and volatility of the currency pairs need to be considered while fixing your trading style. For instance, scalpers will always choose major pairs for trading as they have the highest trading volume generating liquidity, which is essential to open and close trade positions within a short span of time as scalpers do.
The price movements of currency pairs are measured and stated in pips which is the standard unit in forex. The profit or loss of a trade depends on the number of pips by which the price moves and scalpers mostly target to make a smaller number of pips from a trade as they enter multiple trades to accumulate enough profits. A trader can then easily convert those profits into the base currency of his/her account with the help of a currency calculator. This currency conversion helps traders find out the exact profits or losses they have made on a trading day.
You can consider minor pairs with enough liquidity for scalping or day trading. But exotic pairs may not be good for these trading styles as they are less liquid in comparison which makes it difficult to find perfect entry and exit points. Swing trading and position trading will require pairs with medium or low volatility as pairs that are extremely volatile will increase the overnight risk. If you are interested in strategies like carry trading, you will have to narrow down your choices to pairs that have an ideal interest rate differential like the USD/JPY.
- Decide the duration of your trades
The 2nd tip to find the ideal trading style in the forex market is deciding the duration of your trade. This is the time for which you will be holding a trade position. Scalpers enter and exit trades within a few minutes but you will have to spend a lot of time monitoring the charts and finding suitable trading opportunities. For day trading, the duration of trades can be longer but needs to be shorter than a day. You will close all the positions before the day ends and both trading styles remove the overnight risk and you won’t have to consider swap rates.
But the prices will only move by a few pips which limits your profit potential and you will have to open multiple trades. But both scalping and day trading demand more time as you have to spend a lot of time for analysis and will have to be present during major trading sessions and session overlaps to ensure sufficient liquidity. On the other hand, if you are fine with keeping your trades open for a longer duration, you can consider trading styles like swing trading and position trading. In swing trading, the duration of a trade can be a few days to a few weeks.
Position trading has the longest duration as you can keep the trade open for however long you want ranging from several weeks to months or even years. The profit potential of a trade is dependent on the duration as those with higher profit targets will keep the trade open for longer and wait for the price to move more. Swing trading and position trading can be considered if you are prepared to hold a position for an extended period of time. But, make sure to use the best online tools to plan your trades better.
- Devising a strategy to enter trades
The third tip for finding a perfect trading style is devising the strategy that you will be following for entering the trades. This includes the method that you will use for analysing the market situation, whether you will be trading trends and ranges by entering early or waiting for breakouts to happen, what timeframe you will consider while using charts and the trade trigger needs to be clearly stated in the trading plan or strategy. The timeframe that you choose for analysis is crucial while deciding the trading style. Beginners are often advised to start from longer timeframes to learn more about the market dynamics and how prices change over a period of time.
Technical analysis can be done with minute charts and day traders can either use minute charts that are longer than 15 minutes or hourly charts based on their preference. The patterns you will be looking for in finding potential entry points and the indicators you can rely on for confirmation need to be decided in advance when your approach to the market is purely technical. Those who plan to depend on fundamental analysis need to study the influence of major economic events on currency price fluctuations.
- Determine the size of your trade positions and manage the positions
Determining the position size of your trades and planning to manage these positions are also important to figuring out the ideal trading style. In scalping and day trading, your trade sizes will be smaller but the number of trades will be higher and managing the short-duration trades demands more time. You will have to be there finding trading opportunities and adjusting the stop loss or take profit levels to get the best possible results out of the smaller-sized trades. The position size of trades will be larger for swing trading and position trading. Because swing traders enter a lesser number of trades and hold them for longer duration.
Hence, they will be risking more money to reach their profit targets. Position traders will set the biggest trade size as they will only be entering trades once in a while and keep it running for weeks, months or years. But you won’t have to devote much time to managing these positions which makes these trading styles a considerable option for those who want to engage in passive trading due to time constraints. The amount of capital you can risk for trades should also be considered while choosing your trading style and the trading approach should be in line with your trading goals and risk tolerance.
- Planning your exits
The last tip for finding your trading style is planning your trade exits in advance. Most traders solely focus on their entry points and don’t pay much attention to the exit strategy. This is a big mistake as the point at which we exit a trade is just as important as the entry point. Your exit strategy should be aimed at maximising the profit potential while minimising the risk of loss if the market becomes unfavourable. This is crucial for outlining your trading approach in the forex market. The exit strategies of scalpers and day traders would be a lot different from the approaches followed by swing traders and position traders.
We always talk about the importance of setting stop loss and taking profits for all trades that we enter which helps us to automate the exits. But there is a less talked about exit strategy that is worth a try and it is the use of trailing stops. Trailing stops are not rigid and stagnant unlike normal stop losses and this flexibility allows you to optimise the gains when the market is moving in your favour. Trailing stop losses can move based on the market direction and we get to benefit from optimal exit prices. This is ideal for those who cannot actively manage the positions for moving the stop losses manually as and when needed.
Sum Up
In the end, all traders who have enough knowledge and skills get equal opportunities in the forex market irrespective of their trading style and approach as all trading styles and approaches have their own benefits and risk management is the key to making profits. Those who learn to adapt to the market in a way that their personality, preferences and trading goals are well-aligned with the trading approach will be able to taste success in the long run.
