online-business-group.com

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.

Trend Following

The most common type of trading system. If you carefully think about it, it’s pretty clear why this is the most common type of trading: as the majority of market participants align themselves to one side, the market, a product of the participants’ decisions, will also go one-way. If the majority of the EUR is going up, it means that the majority of traders are going up.

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:

Entry/Exit Tips:

1. Enter on retracements and not in the middle or top of a swing. Entering on support is a little bit tougher, but it’s well worth it.

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

That’s a basic summary of trend following. Let’s look at the next trading strategy.

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?

A definite pro of bottom and top picking is that when you’re right, your reward is huge. Let’s say your reward was 9 times the amount you risked so your reward to risk ratio was 9:1. This means that you could’ve been wrong 8 times but still generate capital. Of course, your system has to be positive, you can’t just guess, hope, and pray, unless you want to lose money.

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 style.

Breakout Trading

This type of trading is entering when price makes a new high or low. If the market breaches the 52 week high, you might want to enter then. Or if the market breaches the past 20 week’s low, you might want t short it then. The keyword is “breach”. Of course, you should make sure that your system has a positive edge and is profitable. Breakout trading is just another way of entering the market. Of course, the way you exit a trade is totally up to you; you might want to trail by the most recent lows. Or perhaps you’ll have a predetermined exit.

Note that trend following and breakout trading are different. Trend following is riding the market’s wave; breakout trading is enter on a breach.

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.