Three basic trading strategies to enter the market for beginners
The ability to correctly analyze the price chart of a currency pair is one of the key skills for a trader. However, its presence does not automatically make a trader successful.
Of course, the results of trading depend very much on the skills of technical analysis, but the skill of analyzing charts itself excludes the participation of some money and emotions of the trader. It is problematic to exclude money and emotions from the process of real trading on the currency market. That's why two traders with the same knowledge and skills will show completely different results.
You can't just walk into the market
Every day a lot of trading recommendations and forecasts for trading in the foreign exchange market are published on websites devoted to trading.
However, none of the most accurate forecasts will not bring a trader to profit if he does not know how to enter the market on time.
The ability to find the "Head & Shoulders" pattern on the chart, for example, will bring profit only if the trader is able to implement the signals of this pattern at the necessary moment in time. The time interval between the formation of a signal to enter the market and the opening of a deal is the factor without which it is very, very problematic to gain profit on the currency market.
There are many methods for choosing the right time to open a deal, but the most versatile and, at the same time, effective, are three approaches:
- Entering the market when the price breaks through a certain technical level.
- Enter the market at the end of the correction in the direction of the trend.
- Opening a trade in a narrow price range that precedes a strong price movement.
Consider each of these strategies in more detail.
Entry strategy #1. Level breakdown
Trading strategy The technique of entering on the breakdown of a technical level is very simple and is used by many traders.
Its essence is the following: the trader determines the static or dynamic support and resistance levels on the chart and enters the market after the price breaks through the levels up (buy) or down (sell).
The most common mistake
Along with the simplicity, such a strategy for entering the market is quite dangerous. According to the classical rules of technical analysis, to open a deal at the breakdown of the level should be only at the return of the price and the rebound from it. That is, a prudent trader will refrain from opening a trade at the initial breakdown, expecting the price to return to the level and rebound from it. If this does not happen, the trader simply does not open a deal.
Emotional traders, of which, unfortunately, there are many more, know about this rule, but they do not observe either the first or the second point. And the price continues to fall precipitously, having already passed a sufficiently large distance from the broken level. Trader #2 rushes after the impulse and opens a trade. As a rule, after just a few points, the price turns around and goes against the trader, bringing losses.
Loss instead of profit
Since the position is open with a violation, there is no adequate amount of stop loss it is not a question. Sometimes the trader even just does not exhibit it, because there is absolutely nowhere to put it correctly, but that's another story.
Thus, a price break of a technical level can bring good profits only if you enter the market in time. Most traders rush to "jump on the departing train", often making a loss instead of profit.
Strategy #2. Entering on a corrective pullback
Trading by trend is the easiest and most profitable way to trade the currency market.
Its principle implies that after a strong price movement, the price corrects to a technical trend line (a support line for an uptrend, and a resistance line for a downtrend), after which it forms the next impulse in the trend direction.
Strategy #2 involves opening a position at the end of a corrective pullback. The method is very effective, because it uses the money of traders who did not have time to enter on previous trend impulses as a "price engine". Having opened a trade at the right moment, all that is left is to allow the price to reach the established target, bringing the trader profit.
The pitfalls
However, even here there are pitfalls waiting for the trader. According to the classics of technical analysis, a deal should be opened only after the price rebounds from the support (resistance) trend line.
But not everyone has the patience to wait for the price to rebound, and why lose extra points if you can open a buy position right when the price touches the support trend line, reinforcing your belief in your rightness with such phrases as "The current trend is more likely to last than to change direction", "Trend is your friend", etc.
Here's a prime example of where this can lead:
That is, the trader's greed and haste led to the fact that he did not wait for the price rebound, hoping it would happen, and opened a buy position, which, according to his calculations, should have been at the beginning of the price impulse, bringing additional profit. It didn't work out - the price broke through the support line, the uptrend ended, and the buy position had to be closed at a loss.
A sensible trader, without waiting for a bounce, would simply stay out of the market without suffering any losses. And the whole difference between the two traders is the timing of their entry into the market.
Strategy #3. Entering in a narrow price range
Opening a trade when the price is in a narrow price range alarms many traders, although this principle is not some fundamentally complicated.
Logically, it is when the price is in a narrow price range that is the best time to open a trade. Volatility is low, allowing you to pick suitable levels for positions, and a period of consolidation is usually followed by a sharp price spike up or down.
That is, the trader opens a position when the price is, roughly speaking, in a narrow flat movement, and waits for its sharp rise or fall, depending on the forecast made.
This strategy has quite big advantage - If the trader's forecast is not justified, and the price goes against, the transaction can be closed with a minimal loss.
How to strengthen the strategy?
The most suitable for such a market entry strategy are the patterns of technical analysis, which are based on the principle of price accumulation. These patterns are such as "Flag", all kinds of tapering "Triangles", "Wedge", "Pennant", etc.
The price shrinks in a narrow range, like a spring, which increases the probability of a sharp exit from the established range. And the trader who correctly predicts this price movement and opens a deal in time will make a good profit.
As a rule, such price breakthroughs are quite rapid and if you miss the moment, then catching the momentum can lead to the consequences described in the first strategy. If, for example, place pending order SellStop at the level of a probable price breakout, the trade will trigger itself.
If the price breaks in the opposite direction, the SellStop order, of course, will not open. If, however, as a result of a false breakout, a "pause" will still be open, but the price will go in the opposite direction, due to the narrowness of the price range, the size of the stop loss will be small, minimizing the losses.
What is the best strategy and what to choose to trade
What strategy to choose for trading? There is no simple answer to this question. The use of the strategies described above can hardly be turned into an ordinary repetition task.
Fortrader reminds that a successful speculator should plan his positions depending on the situation on the market, the risk parameters identified for him and trading tactics. In addition, the strategies are not mutually exclusive, and in the same situation you can successfully use one of these strategies to enter the market.