To learn how to trade Forex and make money on the market, you must first understand how the money trade works. If you lose money on Forex trades, it’s not because of some inherent flaw in your strategy or system. It’s because you haven’t identified and chosen a Forex system that suits your trading style. Let’s take a look at the three main types of trading styles, and then look at the different indicators that show when these systems are working well for you.
Long-Term Style – This style is also known as “Divergence” style and uses historical data for analysis. You try to identify trends in a time frame, and then exploit these trends. The risk in this style comes from falling in love with one trend and then getting out of that position quickly. Because there’s less of a period for profit before losing money, this style can have shorter maximum loss limits.
Short-Term Style – This style relies on moving averages and can be used at any time frame. Using moving averages allows you to see which way an asset is moving, and helps you make better decisions about what you should be buying. Unlike the long-term style, there’s not nearly as much risk in this style. However, there are far fewer profits to be made. This style is perfect for people who like to sleep in on the weekend and trade Sunday through Wednesday. Because there’s not a long period of time for profit before you see significant losses, this approach to Forex trading is not recommended to those who like to have more than ten percent of their money invested in their account at any given time.
Entry Risk – When using this approach to Forex trading, you are looking to make small gains from time to time. This is a good strategy for those who are new to trading, since you don’t risk quite as much money as when you trade long-term. These trades will net you small profits, but they don’t pay very much. You can use the entry price to establish whether or not you should stay in the trade. Some traders prefer to cut their losses after smaller gains, while others enjoy staying in on larger wins.
Momentum – This is a type of trading where you have a plan for each trade. You watch the market trends in real time and place trades based on these trends. In order to get the most out of momentum, it’s important to only trade in time frames where there is little change. Trade with small amounts in all time frames, and your profit will increase.
The final category is Scalp Risk. Scalping is a style of trading where you look to make a few small profits over time. These trades don’t pay very much and are generally considered to be “high risk.” They can result in substantial losses, so they must be handled with care. The best traders will use scalping to minimize their risks.