Ultimate Guide To Forex Trading

So you’ve delved into the wonderful world of Forex and you’re as confused and paralyzed as a deer at a headlight. No worries, let this article enlighten you on some of the most fundamental types of trading systems.

The Trend Is Your Friend

Trend following is the most common type of trading system. Because the majority of the market follows a clear direction, it means that the majority of the market participants agree on the direction as well.

By following the trend, you’re following the crowd. And because of this, your probability of making winning trades is higher. You won’t be arguing with the market, but rather you’ll be agreeing with it. Moreover, you’d be making fewer trades.

You still need entry and exit rules, and the discipline to follow them. Here are a couple of tips:

Trend Following Entry/Exit Tips:

1. Try entering on corrections and retracements. How do you know when the market might trend following again? Enter on support and look at price action. If the trend if up, and you see buying, that’s a good place to enter.

2. Use a trailing stop below recent lows to let your profits run.

That about briefly summarizes trend following, so let’s look at the next trading method.

Fading

Fading is the opposite of trend following; it’s arguing with the market’s trend. Essentially, it’s bottom picking. What’re the potential rewards for fading?

The first obvious advantage is that when your trade is a winner, the rewards are significantly bigger. For example, if the reward to risk ratio was 8:1, you could’ve had 7 losing trades but still come out net positive. Keep in mind that your system still needs an edge; you can’t just gamble and hope for the best. Do your homework!

Two entry signals include a doji and a close below the previous low (or above previous high). Fading, which is very different from trend following, requires a different set of skills. That basically summarizes fading, so now let’s talk about the final forex trading tyle.

Breakout Trading

All you have to remember regarding the breakout method is the keyword “breach”: you enter whenever the market breaches the highest high or the lowest low. This can be the 52 week high/low or even the 20 day high/low, it’s up to you. Next, you’ll need to determine how you will exit your trades.

Note that although trend following and breakout trading seem similar, they have a key difference. Trend following just means you follow the trend. Breakout is a specific entry method.

Where Do I Go From Here?

That last paragraph brings up another important point. You can trade however you want. These trading styles are just to expose you to different ideas. Of course, if you want to, you can follow the trend and enter on a breach on only the trend’s side. You can use whatever combination that suites you.