The foreign exchange market is highly volatile experiencing many fluctuations. However, only two different market conditions have been identified: the trend and the range. Some forex traders will trade in both conditions, but this requires multiple strategies and psychological approaches. In order to determine which condition suits your personality and strategy you will need to understand what the different movements are and how to trade them.
The trending forex strategies
In the foreign exchange market there are times when the currency price of a particular pair will move in one direction. This is known as a trend. There are numerous ways for one to identify this trend, all seen via technical analysis. The timeframe of trends can vary from hours to days dependent on the strength of the presenting trend.
A trending forex strategy involves executing and holding a trade on the chosen trend. A trader can be profitable using this strategy if he/she enters the trend early and hols the position until the trend reverses. A risk all traders using this strategy face is that the price will continue moving in the same direction along with the trend. In order to be an effective trend trader you must implement stop losses and always find the correct entry point. Although exciting, the trend trading forex strategy is highly risky and can cause many losses. Due to this increased risk it does require strong risk management techniques to be implemented by the trader. This must be remembered when creating a trading plan.
Liquidity when trend trading
As is mentioned, trend trading can incur a great amount of losses and does require risk control. It has been seen that the stops required can be as small as 15 pips which is why many trend traders will experience losses. The liquidity of the market has to be reviewed as it must be at an appropriate level to consider trading on a forex trend. Many traders do not consider this aspect due to the forex market having an overall liquidity. Yet, there are times with the market shows a low liquidity and it is at these times that trending forex strategies are inappropriate.
Using leverage when trend trading
The option of leverage is often used by trend traders as a means of increasing profits. If a trend trader is experiencing a profitable movement then leverage will double his/her income. However, if the trend suddenly reverses the trader can incur a detrimental loss which may be greater than if leverage had not been used.
The range forex strategies
A range market can be seen when there is no trending. This is the general state of the market and can be noted for approximately 80% of trading hours. Traders using a range strategy will be far less impulsive than trend traders and are not concerned about the direction of market movements. They believe currency prices will return to their baseline irrespective of current movements. The range trader is often a long-term trader and prefers the prices are removed from fluctuation as it will benefit him/her in the long run.
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