What Is The Best Way To Trade Forex - All About Forex

What Is The Best Way To Trade Forex

What Is The Best Way To Trade Forex – What are the best forex trading strategies? This is definitely a question I get asked many times a day and it is a very important one. When you start trading, you need to decide on a specific trading strategy and then focus all your attention and energy on executing it. Most traders never do this and then fall victim to system jumping. In this guide, I will explain the differences between the different types of strategies, what they are based on, when they work best, and what you should know when choosing a particular forex trading strategy. We will cover the following trading strategies: #1 Trend Following #2 Pullback #3 Reversal #4 Fake (#5 Macro) As you can see, each trading strategy and style tries to capture different market behavior. This will also be a highlight as I am a big believer in specialization. Instead of trying to trade all the time, you should pick a specific market behavior and then try to make it better. #1 Trading Strategy That Follows the Trend Following trends is a method most traders experience firsthand, and sayings like “the trend is your friend” have been around for decades. As the name suggests, trend following is a style of trading where the trader must wait for an established trend before entering the market. Therefore, trend following traders need to wait patiently until the actual trend becomes clear. The screenshot below shows the portion of the market movement that is typically captured by following traders. Red areas highlight market turning points, while blue areas highlight phases consistent with trends. Many hobbyists make the mistake of anticipating a new trend before it appears and jumping on it too early. These traders, although they think they are trend traders, are actually reversal traders. There are also differences between early and late trend following. Since trend-following traders must wait until the trend is confirmed, the question becomes: When is the trend confirmed? Early trend traders try to enter the new trend as soon as possible, which can lead to them being too early and getting a false signal. The advantage is that the potential reward-to-risk ratio is much higher. Late trend traders await further confirmation. Of course, it may happen that they are late, but their signals are often strong. The trade-off is that the reward/risk ratio is not as high, while the win rate is higher. When it comes to trading tools, a trend-following trader can choose from a wide variety. Momentum indicators like MACD, RSI or STOCHASTIC are often popular. The screenshot below shows the STOCHASTIC, and one way to get into a trend after a trade is to wait for the STOCHASTIC to reach a lower or higher area. Many traders make the mistake of thinking that it can give a reversal signal, which is completely wrong. A very high or very low STOCHASTIC indicates a strong trend. Of course, the moving average is another popular trend-following tool. The two moving averages work great as crossover signals in the screenshot below. A new trend begins each time the moving average is crossed. The great thing about this type of crossover system is that traders avoid automatically picking tops and bottoms because moving averages take some time to cross. The Ichimoku indicator is another trend-following tool. It is similar to a moving average crossover system, but different in premises. A classic Ichimoku entry occurs when price breaks out of a “cloud” when two Ichimoku lines move in the same direction. #2 Retracement Trading Strategy Retracement is another trend following trade. Pullback traders look for an established trend and trade in so-called correction phases. A correction is a price movement in the opposite direction of the main trend. In the screenshot below, the market was in an uptrend, and the pullback (correction) is a short period when the price moves sideways or in the direction of the trend. Prices usually move in these up and down waves, and the pullback trader uses this feature to time his trades. A pullback trader either waits for the price to move up the trend or even enters the trade when the market moves down. The danger with the second approach is that the pullback will not reverse. But the upside is that the reward-to-risk ratio can be high. The market does not always provide a pullback. The example on the left shows a market where the price just dropped, but never pulled back. There were multiple pullbacks in the second and third phase and good entry opportunities for pullback traders. As you have already seen, trading pullbacks and trends often overlap, and traders following trades often trade pullbacks as a natural progression. Of course, there are many ways a pullback can form on your chart. There are 3 examples in the screenshot below. Double retracement retraces the level 2 times before the price continues the trend. The bearish retracement price broke above the previous high point and made a deep correction. The immediate pullback price stops at the breakout level and moves sideways for a while before resuming the trend direction. Moving averages are also a popular tool for pullbacks. When price is in a market trend and then returns to the moving average, a pullback can be traded. Either the trader trades the price when it reaches the moving average or waits until the price moves back to the trend. As we will see when we talk about breakout trading, we can also trade so-called price formations as pullbacks. In the screenshot below, the price had a clear downtrend when the head and shoulders formation was formed. In this context, the head and shoulders formation becomes a trend-following pattern and is seen as a pullback. The lines between pullbacks and trend following are blurred here. #3 Reversal Trading Strategy Reversals are turning points and a reversal marks the true origin of a new trend. Hence, a reversal trade can also be considered a very early post-trade trend. However, it is usually more efficient to choose between classic trend following and reversals as each trading method has its own unique characteristics. The screenshot below shows a chart of various market stages and trend stages. Trend followers usually choose an early or mature trend. As the market enters the mature trend phase, a contrarian trader starts paying attention to the market. This usually happens after at least 2-3 trend waves have formed. The danger with the reversal trader is that you are too early and constantly operating in a contrarian mindset. Many unsuccessful reversal traders try to predict market turns before they occur. Greed drives traders here, as they believe that the earlier they get in, the closer they can get to the absolute top/bottom and thus get a much higher reward/risk ratio. When it comes to contrarian tools, divergence is a classic affirmation. RSI divergence shows a tired trend where the strength of the trend fades. When a mature trend gives you an RSI divergence, a reversal can often occur. The RSI is usually a trend indicator, but when the RSI shows that the trend is losing strength, it can work very well as a reversal tool. MACD or STOCHASTIC can also be used as reversal tools. I consider myself a classic reversal or very early trend following trader. I’ve never been comfortable following trends, and once I realized that reversals are not about predicting reversals before they happen, reversal trading became a “fun” way to trade. #4 Breakout Trading Strategy Breakouts can occur during trend following and reversal trading. Breakout periods are often the link between two phases of a trend. A breakout describes a departure from a consolidation pattern. Consolidation patterns, as shown in the screenshot below, can occur during market reversals (tops and bottoms for reversals) or established trends. The screenshot below shows how a consolidation and a breakout are a connection between two market phases. Consolidation can occur during market reversals, and breakouts then signal a trend reversal. If consolidation occurs during an established trend, the breakout comes after the trend signal. This screenshot below again highlights this feature and it becomes clear how breakouts connect different phases of the market. As a trader it is usually best to choose a specific type of breakout. Trying to trade all breakouts can lead to poor results and confusion because each market phase behaves differently and thus requires different tools, signals and understanding. Breakout traders are pattern traders that breakout traders usually look for

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