Momentum trading is based on finding the strongest security which is also likely to trade the highest. The Momentum trading strategy is based on the concept that an existing trend is likely to continue rather than reverse. Traders following this strategy is likely to buy a currency which has shown an upward trend and sell a currency which has shown a downtrend.
The main concept of the Daily Pivot Trading strategy is to buy at the lowest price of the day and sell at the highest price of the day
Fading in the terms of forex trading means trading against the trend. If the trend goes up, fading traders will sell expecting the price to drop and visa-versa. Unlike other types of trading which targets the prevailing trends, fading trading requires to take a position that goes counter to the primary trend. The main assumptions on which fading strategy is based are:
- Securities are overbought
- Early buyers are ready to take profits
- Current buyers may appear at risk
Note: “Fading the market” can be very risky and requires high risk tolerance!
You’ve probably never heard of this before because I came up with it.
Back while I was in proprietary trading, one of the “interesting” things I learned was transition trading.
You’re probably wondering:
“What is transition trading?”
Well, the idea is to enter a trade on the lower timeframe, and if the market moves in your favor, you can increase your target profit or trail your stop loss on the higher timeframe.
Here’s an example:
Let’s say you traded the breakout on GBP/JPY 1-hour timeframe and the price quickly went in your favor.
You noticed the 4-hour timeframe respecting the 20MA.
So instead of taking profits, you trail your stop loss using the 20MA hoping to ride a bigger move.
And if you’re wrong, you’ll exit your trade when the price closes below the 20MA.
Now, there are variations of transition trading.
But the main idea is this:
- Find an entry on the lower timeframe
- If the price moves in your favor, consider planning your exits on the higher timeframe
Now, let’s discuss the pros and cons of transition trading…
- Can get an insane risk to reward (possibly 1 to 10 or more)
- Can lower your risk as your entry is on the lower timeframe
- Only a handful of your trades will lead to monster winners
- Must understand multiple timeframes really well
Now that you have an idea of the different forex trading strategies out there.
I don’t recommend scalping for the retail traders because the transaction cost will eat up most of your profits.
And you’re slower than the machines which put you at a major disadvantage.
Still, if you want to learn more, then read on…
Scalping is a very short-term strategy where you’ll hold trades minutes or even seconds.
As a scalper, your concern with what the market is doing now and how you can take advantage of it.
The main tool you’ll use to trade is order flow (which shows you the buy and sell orders in the market).
Now, let’s discuss the pros and cons of scalping…
- Have lots of trading opportunities each day
- Can make a healthy income from trading
- High financial cost (paying your software, newsfeed, connection, and etc.)
- Glued to the screen for many hours a day
- It’s a highly stressful endeavor
If you want to be a scalper, I recommend you join a proprietary trading firm because they will provide the tools to help you with it.
Swing trading is a medium-term trading strategy where you can hold trades for days or even weeks.
The timeframes you’ll trade on are usually the 1-hour or 4-hour.
As a swing trader, your concern is to capture “a single move” in the market (otherwise called a swing).
So you’ll likely:
- Buy Support
- Sell Resistance
- Trade breakouts
- Trade pullbacks
- Trade the bounce of the moving average
Thus, it’s important to learn technical concepts like Support & Resistance, candlestick patterns, and moving average.
Here’s an example of swing trading on USD/JPY:
Now, let’s discuss the pros and cons of swing trading…
- Don’t have to quit your full-time job to be a swing trader
- It’s possible to be profitable every year because you have more trading opportunities
- Won’t be able to ride big trends
- Have overnight risk
Now, if you want to learn more about swing trading, then The Complete Guide to Finding High Probability Trading Strategy will help immensely.
Position trading is a longer-term trading approach where you can hold trades for weeks or even months.
The timeframes you’ll trade on are usually the Daily or Weekly.
As a position trader, you mainly rely on fundamental analysis in your trading (like NFP, GDP, Retail sales, and etc.) to give a bias.
Also, you might use technical analysis to better time your entries.
You analyze the fundamentals of EUR/USD and determine it’s bullish. But, you don’t want to go long at any price.
So, you wait for EUR/USD to come to Support before taking your position.
Now if your analysis is correct, you could enter at the start of a new trend before anyone else.
Now, let’s discuss the pros and cons of position trading…
- Don’t need to spend much time trading because your trades are longer-term
- Less stress in your trading as you’re not concerned with the short-term price fluctuations
- A favorable risk to reward on your trades (possibly 1 to 5 or more)
- Require a firm understanding of fundamentals driving the market
- Need a larger capital base because your stop loss is wide
- May not make a profit every year because of the low number of trades
There’s a trading strategy called Trend Following (which is similar to position trading).
The only difference is Trend Following is purely a technical approach that doesn’t use any fundamentals.