An Introduction to Trading Strategy
- There are three basic types of traders
- Traders should develop techniques to fit their trading style
- Once you have a trading plan, practice to perfect your strategy
Each trader must develop their own unique trading style. Normally traders will choose a style based off of the times they trade and the assets the select for trading. Ultimately these strategies will fall into one of three categories. Today we will briefly review the basis of range, trend, and breakout trading and what traders implementing these strategies look for.
Range Trading Strategies
First, range traders use technical analysis to trade sideways moving markets. This is done by identifying price trading horizontally between two areas of support and resistance. Once these values are found, traders can begin to trade between them. Normally ranges are known to occur during times during of low volatility.
The benefit of trading ranging markets is that traders can take a directionless trading strategy. This means range traders will look to initiate both buy orders (at support) and sell positions (as price reaches resistance). As well risk can be clearly defined to exit ranging positions in the event of a price breakout.
To learn more about trading range bound markets, see The 3 Step Range Trading Strategy linked below.
Learn Forex: US Dollar Range
(Created using FXCM’s Marketscope charts)
A Price breakout occurs when price action either rises above resistance or drops below support. Normally a breakout is preceded by a consolidating pattern or sideways movements such as a range mentioned above. Savy traders that are aware of these conditions can quickly adapt their trading plan and be prepared to take advantage of the next market move with a use of an entry order while waiting for a breakout.
The advantage of this style of trading is that breakout t traders have the ability to trade with entry orders. This means even if you are not in front of your computer, entries can be set to enter the market if price breaches a certain level. The idea is to enter the market on a surge in price in the direction of market momentum. In the event that price continues to consolidate these entry orders can easily be deleted and traders may then look for trades elsewhere.
Learn Forex: EURUSD Daily Breakout
(Created using FXCM’s Marketscope charts)
The Retracement Strategies
Lastly, trend traders look to take advantage of strong directional movements in the market. Trading a retracement is probably one of the most popular methods of doing so. Retracements traders will wait patiently for a pullback in the trend and then enter into the market. In the uptrend depicted on Gold below, this would allow traders to buy at a cheaper price, as opposed to entering the market on a breakout towards higher highs.
Retracements can also be timed using oscillating indicators such as CCI pictured below. These indicators use overbought and oversold levels to time momentum turning back in the direction of the trend. For more information on trading with CCI be sure to take advantage of DailyFX’s training course through Brainshark. The course is free and after clicking the link below sign into our ‘Guestbook’. You will be met with a series of videos including other strategies involving the CCI Indicator!
Learn Forex: Gold Overbought & Oversold with CCI
As you can see, there is a trading strategy for everyone! When you are ready to practice your selected trading strategy, register for a Free Forex Demo account with FXCM. This way you can become comfortable with the market and finding trading setups in real time!
---Written by Walker England, Trading Instructor
To contact Walker, email email@example.com. Follow me on Twitter at @WEnglandFX.
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