What are Forex trading strategies? Forex trading strategies are techniques that Forex traders use to identify price levels to enter and exit the market. They are methods, indicator-based or not, which guide traders to buy or sell at different times.
There are many of those strategies and techniques. Most times, the strategies different traders adopt depend on a variety of factors such as individual trading style, personality, and even their day-to-day schedules.
For instance, different strategies work best with different trading styles. While the ones discussed here are best suited for swing and other forms of short-term trading, they can, however, be used with other styles. Read on to discover those 3 strategies that can significantly better your trades.
Bollinger Band Forex Trading Strategy
This strategy is based on the popular indicator, the Bollinger Bands, developed by the famous technical trader, John Bollinger. Bollinger Bands are based on the concepts of support and resistance as they seek to identify them.
This indicator has three bands (hence the Bands in its name). The middle line is the simple moving average (SMA) of the currency's price. The other two lines are plotted above and below it.
The simple moving average (SMA) is a measure of volatility. Hence, when market volatility is high, the bands widen while they contract when it is low. Volatility, it must be noted, is the measure of the fluctuations in the price of the currency pair over a sustained period of time.
Bollinger Bands have become extremely popular and over the years. Why? They are easy to use, and they provide best forex signals to trade. Generating signals with the indicator is based on the presumption that when the price is close to the upper band, it will either break out from it or move back to the 20-day simple moving average (SMA) represented by the middle line.
The price being closer to the upper band indicates that the market may be already overbought. And the closer the price is to the lower band, the more likely that the market is already oversold.
Fibonacci Forex Trading Strategy
The Fibonacci and Bollinger Bands trading strategies both have one feature in common: they can be used to identify possible levels of support and resistance. Traders then use those levels to enter and exit the market, and as guidance in placing their stop loss.
Fibonacci is represented with six lines, the retracement levels, which are drawn at specific points on charts. These levels are 100%, which is the highest point, 50%, the average level, and 0% which is the lowest. The other three lines usually drawn are at 61.8%, 38.2%, and 23.6% levels.
In using Fibonacci retracements, you must keep in mind that this strategy works best when the market is trending. Consequently, the idea is to buy at a support level suggested by a Fibonacci line. Conversely, you sell when the Fibonacci sequence suggests a resistance. And don’t be confused with those numbers: all they aim to do is to easily point out the levels of support and resistance. Nevertheless…
RSI Indicator Forex Trading Strategy
The Relative Strength Index (RSI for short) has won over numerous traders over the years. Needless to say, it is one of the most popular indicators and has been used to devise many strategies for trading the Forex market. It is used to identify overbought and oversold conditions of the market.
However, the RSI indicator is known to seldom give false signals in conditions of high market volatility. This tendency is mitigated by combining the indicator together with other momentum indicators such as the moving averages. You should note that the RSI indicator is plotted under the price chart, and has two main levels to determine the overbought and oversold levels of the market.
So, how do you use the RSI Forex trading strategy? You do so by taking note of two of the different levels the indicator plots and varies from time to time: the 70 and 30. Meanwhile, the indicator is on a scale of 0 to 100. When the price is on a strong uptrend, the indicator usually trends up too, and when it crosses the 70-level point, the market is consequently considered overbought.
Of course, that will present a good selling opportunity as a reversal in trend is most likely imminent. Conversely, any reading below the 30-level point is regarded as an oversold condition of the market and might be a good time to go long. However, always wait for the confirmation of trend reversals before you take your trades.