What is the best way to trade?
In this lesson I want to make you aware, of the different ways that one could trade the Forex Market. In terms of what is the best way, it all really depends on you as a trader and what you feel comfortable with. We will be looking at quite a few different ways of trading, with a short description on each.
Generally though, the professional traders tend to use simple and less complicated trading methods, and usually rely on reading the Price Action directly from the chart in order to make their trading decisions. I wanted to give you a quick overview of the different trading styles, so you have a better understanding of how people trade the Forex Market.
Different Trading Styles
We will start with Technical Trading, also called Technical Analysis. This type of trading along with Fundamental Trading, (which we will look at next) is one of the most popular and main styles to trade the Forex Market. It involves analyzing the price chart in order to make a trading decision.
Some traders will even use what we call ‘Technical Indicators‘ to help them with their trading decisions, these are tools that can be applied directly on the chart (more on charts later), in order to analyse the Price Action. Personally I do not use any Technical Indicators and trade by simply viewing the chart itself.
Fundamental Trading involves looking at market news/reports that will have an affect on the Currency Pair you are looking to trade. For example; you would keep an eye on EUR and USA news if you were trading the EUR/USD. This is often done by using an Economic Calendar (shown below), which details Country Reports along with date and times they are due to be released. Some market news has more of an impact than others, such as the Non-Farm Payroll which is released on the first Friday of every Month.
This type of trading taken alone, can be very risky as the market can be particularly volatile during the news release times. Most traders, including myself use a combination of both Technical and Fundamental analysis in order to trade the markets. These two types of trading are the most common amongst Professional Traders.
With Day Traders, all the trading activity is completed in the day, i.e. they will not be involved in trades that extend a day. This means they will enter and exit multiple positions in the same day, thus profiting from multiple trades in a short amount of time.
Scalpers are quite similar to Day Traders, however they will enter and exit trades even quicker than Day Traders. Positions are usually open for a few minutes or sometimes even seconds. In doing so they ‘scalp’ a couple of pips here and there, multiple times a day. Professional Traders will often disregard scalping as a method, as there is usually little to no regard of money management and it is often seen by Pro Traders as gambling.
As the name suggests, this type of trading is carried out automatically via software-based trading systems. The software trades according to a set of rules that the trader has defined, the software will then wait for all criteria to be filled, upon which it will automatically open up a position. I would not favour this type of trading as trading is not a robotic process, rather it is based upon the emotions of other traders.
Trading the Trend
This type of trading involves ONLY taking trades in the direction of the trend (be it UP or DOWN). Traders will very often look at the Daily Chart in order to identify the trend, and then take trades on a lower time frame chart in accordance with and in the direction of the trend.
I prefer trading with the trend as it is a high probability move, as opposed to trading against the main trend. The market will only ever move in one of three ways, UP, DOWN or RANGING (Moving sideways), a Trend Trader will wait for the market to establish a trend (UP or DOWN) and then enter this trend by looking for high probability entries within this trend. If the market is RANGING, generally a Trend Trader will stay out of the market until a valid trend has been established.
The image below shows that UP and DOWN trending markets, rarely move straight in one direction and will usually form Swing Highs and Swing Lows along the way.
I would say that I use a combination of; Technical, Fundamental and Trend Trading. In my opinion these are the strongest ways to trade, as they offer high probability – low risk trade set ups, and that is exactly what we want. Losses are part and parcel of Forex Trading (and any trading for that matter), it is controlling these losses that will help you to become successful.
This concludes Lesson 4, in our next Lesson we will be taking a look at the different chart styles, this is something that we should start to get used to, as true trading involves being able to actually look at the chart and understand what it is showing you. See you there!
Next Lesson: 5. Introduction to Charts