We have discussed specific forex strategies in previous blogs but here we focus on some general types. The standard for our analysis of each time is the win ratio, and the difficulty level.
If you are new in the forex market, this will hopefully be useful to you.
1. Pullback Trading
What it is
Pullback strategies revolve around retracement levels. They require the trader to use an indicator of their choice (could be Fibonacci or any other) to identify where the retracement will stop and the original trend continue.
Why it’s popular
Traders will go for pullback strategies because the risk to reward ratio is high. Since they plan to get in at a point where the currency value is highly diminished, the eventual return to the original trend will make the difference between entry and exit quite steep. So if you can get it right, you’re looking at great returns.
The Challenge
These strategies are often very tricky to master as there is a lot of chance involved and one can never be too sure. However, pullback trading is quite popular and widely used.
There is a low winning rate though because more often than not, the market will change course ending retracement and going back to the original trend at a level the traded did not anticipate.
2. Counter Trend Strategy
What it is
Those who trade counter trends will look for a well formed trend to peak, and try to catch the trade there. This will mean that when the opposite corrective wave begins, they will be able to make the best of the move in the opposite direction.
Why it’s popular
The reason for the popularity of counter trend strategy is similar to pullback trading. If a trader is able to catch a peak, which is also the overall peak of the trend, then the move in the other direction will be a very lucrative one. It is the possibility of very high reward that encourages traders to try it out.
The Challenge
It is very hard to figure out which peak is going to be the ultimate one for that trend. There are a lot of false corrections and retracements in which the trend moves in the other direction but only for a short period before going back to the original direction. So if you’ve caught one of those false peaks you could be looking at big losses.
Therefore, in counter trend trading too the win ratio is not that high. It is a tricky one to trade.
3. Range Bound Trading
What it is
Sometimes, a currency movement can be seen adhering to a range. So when it hits a certain low, buyers come in and the price is driven up. Similarly, when it hits a certain high, bears will bring the price down. It’s essentially support and resistance trading. When a level is established, traders start relying on it and will get in around the high or low to make use of the opposite move.
Why it’s popular
With a good stop loss, this strategy is not too tricky to trade. There is a good win ratio too; between 40 to 50 percent.
It is also easier to spot when you are in too deep because any reasonable move outside of the range will show you that things are going wrong for you and you can get out.
In other types of strategies there is a lot more uncertainty and the hope that the initial trend will form again will keep traders in for too long. Here you are strictly trading within ranges so things are a bit clearer.
The Challenge
Finding a well-established range is possibly the biggest challenge in these types of strategies. They are not too easy to come by.
Setting stops might be a little tricky too because you might be tempted to set it too close from fear and also perhaps confidence.
Other than that range bound strategies are quite easy to understand and implement.
4. Breakout Strategy
What it is
This type of strategy revolves around trading a breakout trend when the market is in the middle of it. Traders who trade breakout will look out for any signs of consolidation in a strong trend. If there’s consolidation, it means that the market is about to continue that trend. That then serves as a good entry point indicator and you can ride the wave.
Why it’s popular
Figuring out a good entry is one of the biggest challenges that traders, especially new traders, face. This makes that part of the trade much simpler by showing you that consolidation is happening and so you can become part of this trend as well.
It is quite a simple way to trade and in many ways foolproof (we use that term loosely here. Nothing in forex is fully foolproof). The win ratios are high on this one as well.
The Challenge
This strategy is quite low risk but still there could be correction or perhaps the next time the up or down trend stops, instead of consolidation reversal will take place.
The challenge here then is essentially just market’s volatility.
