What are the best trading strategies for the forex and stock market? I often hear this question. When you first start trading, it’s best for you to focus on one particular trading strategy and focus on making it work. Most traders never do this and often change their trading strategy if something doesn’t work out and then everything repeats itself.
In this guide, I’ll try to explain the differences between different strategies and show you when they work best. I will also tell you what you should know when choosing a specific trading strategy.
You will see that each trading strategy tries to reflect its own characteristics of entering and exiting the market.
Once you’ve made a choice about which trading strategy you want to use, forget about the rest. There are a wide variety of trading strategies, but it’s best if you focus on one thing at a time. Do you want to be a trend follower? Master this method of entering the market, but do not suddenly switch to reverse trading. If you want to trade breakouts, stay away from false breakouts.
Following the trend is an approach that attracts most traders. The saying “the trend is your friend” has been around for decades.
Trend following, as the name suggests — is a style of trading where a trader has to wait for a trend before entering the market.
The chart below shows the part of the market movement that is usually captured by trend traders. Red areas indicate market reversal points, while blue areas indicate trend phases.
Many novice traders make the mistake of trying to anticipate a new trend before it appears and entering the market too early.
trading strategy – following the trend
In addition, there is a difference between an early and late trend.
Since trend-following traders have to wait for the trend to be confirmed, the question arises: when can the trend be considered confirmed?
Traders who follow an early trend try to enter the new trend as early as possible, which can lead to a false signal. The advantage here is that the ratio of the potential risk to profit is much higher.
Traders who enter a late trend are waiting for a stronger confirmation. Of course, they may also be late to enter the market, but their signals are often stronger. The trade-off here is that the risk-to-profit ratio is not so optimal here.
When it comes to trading instruments, a trend-following trader can choose from a wide range of indicators: for example, MACD, RSI, or Stochastic.
The chart below shows a chart with the stochastic indicator, and one of the ways to enter the trend is after the stochastic reaches the lower or upper area. Many traders make the mistake of thinking that this may signal a reversal, but this is not true. A high or very low stochastic level indicates a strong trend.
trading strategies – stochastic
Moving averages are another popular trend-following tool. Two moving averages work perfectly as a cross signal. Every time the moving averages cross, a new trend starts. This allows traders to automatically avoid entering the market at peaks or troughs because moving averages take some time to cross.
trading strategies – moving averages
IndicatorIchimoku is another tool for following the trend. It is similar to the moving average crossing trading strategy, but the prerequisites for entering the market are different. Classic software loginIchimoku occurs when the price breaks out of the “cloud”, and two lines of Ichimoku move in the same direction.