3 Basic Forex Trading Methods For The Confused

You’re probably confused as hell about what to do, where to start, which program to use, which indicator to incorporate, etc. This article will clarify on Forex Trading 101.

The Trend Is Your Friend (until it ends)

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 have to have a complete system, however. Here are some tips to read:

Trend Following 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.

Trend following is a very common, basic trading method. To qualify the common saying, “The trend is your friend, until it ends.” Let’s take a look at another trading style.

Fading

The second type of trading is called fading. Fading means going the opposite direction of the market. Sometimes you can sell into strength, or buy into weakness. This is basically bottom and top picking. So what’s the good thing about 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 style.

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 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?

Realize that you can splice and dice the methods to suite your taste. You could enter only in the market’s primary direction, and use the close above a recent high as a signal, or even the doji.

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