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Four Forex Trading Strategies Every Trader Needs to Know

Four Forex Trading Strategies That Every Trader Needs to Know

Forex trading is a constant learning experience. We know forex traders who have been doing this for 20 years and still learn new things about the forex markets on a regular basis. In fact, maintaining an open, even humble mind is a key to trading forex successfully long-term.

Still, just because you can keep learning forever doesn't mean that there aren't certain FX currency trading strategies that are better to learn early on, learn well and actually implement, or else you won't likely be trading forex long enough to learn other, more complicated stuff.

There are such battle-tested, essential FX trading strategies, and here are four:

1. Trend Trading

Reading forex charts, identifying trends and then trading them effectively are the most basic concepts in forex trading and also the most consistently profitable. If you can identify a three month trend in that first month, you really can get literally rich from trading forex.

Take the status of the USD in October of 2009. The U.S. economy had been in the tank for a full year, government spending was out of control, the Euro was on a tear, interest rates in the U.S. were being kept artificially low by the Federal Reserve (creating fears of inflation), and so on and so forth. In short, everyone was hating USD, which seemed headed towards worthlessness.

And then, slowly but surely, sentiment shifted. People began to want to hold dollars again. Maybe America wasn't quite dead yet. If you put any sum of money into a USD-related pair, betting on USD, you made some serious money trading the trend.
You made some serious money, that is, unless you didn't realize that trading trends is all about preventing yourself from getting stopped out…in a market where other traders and even other forex brokers are trying, at all times, to stop you out of a trending trade.
Indeed, good money management, such as always keeping enough equity in your account to prevent margin calls, is probably the most important part of trading FX trends successfully.

2. It's Doji Time

Japanese candlestick charts are the constant companion of the forex trader. It's almost a one-to-ne correlation: the more you know about candle charts, the more you know about FX.

To that end, there are all sorts of esoteric chart patterns that forex traders follow: hammer, hanging man, bearish engulfing pattern, morning star, shooting star, and others. Each of these formations can signal something about the direction of currency pair prices.

But before you get into all that, a good place to start your "I think I'm turning Japanese" forex experience is with the simple, powerful doji. These things can help you make money, as well as giving you a clear picture of why chart patterns matter and what they mean.

A doji, when viewed on a chart, looks like a cross. No or very little "body" is present on the candle that symbolizes price. This means that the opening price of the currency pair was the same or very close to the closing price of the currency pair.

This can mean different things at different times, and is up for interpretation. In a currency pair that's been trending, a doji may mean that the trend is nearing an end or reversal. In a currency pair that's range-bound, a doji may mean there is not much price action to be had here; buyers and sellers of the currency pair are more or less agreed on what the price should be.

It's up to you to determine what any particular doji means to you, but rest assured that to millions of other traders, every doji means something--and will cause some huge trades.

3. The Breakout Trade

As part of our emphasis on encouraging you to think like the real forex pros, we repeatedly stress the reality that the forex markets are stop-driven. Big banks, in addition to legions of individual forex traders, use stop loss orders to limit potential losses in the currency markets.

Because of all these stops just waiting to be taken out, and also because forex news events such as talk of possible interest rate rises can move the markets suddenly, you have to always be on the lookout for that currency pair that may be on the verge of a breakout.

A breakout can be defined as a movement of price beyond the normal trading range of a currency pair. Sometimes, this breakout to another price level will in effect create a new trading range for that currency. At the very least, many traders will assume as much, adjusting their take profit limits and their stop loss limits accordingly.

There's nothing better in forex trading than being in that new trading range ahead of the crowd.

4. The False Breakout Trade

Also referred to as "fading the break," the false breakout trade is the opposite of the breakout trade strategy, but plays upon similar principles: the stop-driven nature of the FX markets and the tendency of forex traders to view the breaching of key price levels as a momentous event.

The false breakout trade entails going against the crowd of traders who are assuming that because a key price level has been breached, that means this currency pair is going to keep running because everyone betting the other way just got stopped out.
You are basically betting against the breakout, saying it's fake.

Veteran forex traders such as are to be found trading on behalf of banks and hedge funds are a big fan of the false breakout forex trading strategy--which means that you need to learn it, too.

Important Forex Information

The most important step in currency trading is finding the right broker; our forex experts can help. See our
reviews of forex brokers for more information.  

The earlier you can start building a forex trading system that works for you, the better off you will be when trading the markets. Learn to build forex trading systems.  

In order to understand when to sell short in the forex market, we must examine individual currency short selling strategies. Learn the strategy of short selling currencies.  

While it is true that the bigger your position, the more you can benefit from utilizing the carry trade forex strategy, smaller investors can beneit, too. Read about the carry trade.