There are a number of different FX trading styles that you have to know about. It is important that you know what your FX trading style is before you start trading. You should look at all the different trading styles to determine which the best one for you is. Once you have done this you will be able to determine the best trading strategy to use and the best analysis to complete.
The Different Types of FX Trading Styles
Before you can get into what momentum trading is it is best to complete a foreign exchange comparison of the different trading styles:
- Fundamental traders are not as common in forex trading as stock trading. These traders use fundamental analysis to determine market movements.
- Scalpers are short-term traders who complete high volumes of trades each making minimal profits. The overall profits of the scalper come from the volume of trades and the use of leverage.
- Momentum traders find currency pairs that are moving strongly in a single direction. They ride the momentum of the trend until they reach their desired profits.
- Technical traders use technical analysis to identify entry and exit indicators based on certain time frames and market conditions.
- Swing traders are medium term traders who hold trading positions for more than one day. These traders use both technical and fundamental analysis to identify their indicators.
Most new traders try out each of these styles before finding the one that suits their personality the best. Some traders enjoy the fast-paced nature of scalping while others enjoy the longer wait required with fundamental trading.
Trading Pairs for Momentum Trading
Once you have chosen a trading style you need to determine the currency pairs you should be trading. Highly volatile pairs generally work for scalpers and swing traders. However, long-term traders need pairs that move at a steadier pace. The momentum trader will look at currency pairs that are trending. This is why many trader consider momentum trading to be trend trading. The more volatile the pair the better because this is a day trading strategy which requires the trader to not have positions open over night.
Most of the major currency pairs should be alright for momentum trading. There are some traders who use exotic pairs for momentum trading but this is riskier. The swings in exotic pairs are more unpredictable which makes them hard to use especially for new traders.
Setting Up the Trades
Once you have identified the currency pair you will be trading you should look at the charts. You need to use a combination of leading and lagging indicators. The key to making a profit in momentum trading is to get in on the trend as soon as possible. The longer you wait the less profit you will make and the higher the spread you have to pay.
You should use technical analysis to identify your entry and exit points. It is very important that you have your stop loss points set up as well. It is possible for the momentum to change and you need to be prepared.
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