A Guest Post by FXTM
Contrary to popular belief, there is no single trading style that is the ‘right’ one for Forex trading. A number of different styles can lead to success, leaving the novice trader with the question of which one to choose.
The single most important thing when choosing a trading style is to select one that resonates with your personality. Of course, this doesn’t mean that if you are a reckless and unsuccessful gambler in your personal life that you should transition this into Forex trading – in fact, you should ask yourself honestly whether you are suited to Forex trading at all if this is the case. What it does mean is that your trading style should be one that you are comfortable with, since this will allow you to trade consistently and leverage your strengths.
The first thing to decide is whether you are a hunter or an angler. A hunter enjoys the thrill of the kill and focuses on the big win, while anglers are comfortable to cast their line skillfully many times before a fish strikes. In Forex markets, those that adopt an angling strategy usually follow trends in the hope that one of them will develop into a catch. On the other hand, hunters often trade against trends, hoping that a currency pair will suddenly retrace and lead to large profits. This also means that hunters work on short time horizons, since they are looking for inflection points where they think that the market will turn quickly. Anglers, on the other hand, work on long time horizons, since trends can take weeks or months to develop.
Another important consideration is whether you should adopt a fundamental or technical trading strategy – or whether you should strike a balance. Fundamental traders look for underlying reasons why a currency should rise or fall – such as increasing or decreasing GDP growth rates. Technicians, on the other hand, believe that the future performance of a currency can be predicted from the current market trading conditions – for instance, whether a currency is oversold or bumping up against a resistance level. In reality, while each camp is often dismissive of the other’s approach, a dogmatic adherence to either can lead to disaster. For example, unexpected economic news can blow through technical resistance levels, while trading based just on fundamentals can be swamped by technical factors. A wise Forex trader will lean towards one strategy or the other, while making rational decisions that are informed by both.
In fact, the choice of a fundamental or technical trading strategy is also tied to the hunter or angler question. Studies have shown that over the long term, currency rates respond positively to fundamental factors, making this a preferred approach for anglers. On the other hand, technical factors predominate in the short term, making this a better technique for hunters who are trying to time the market.