One of the keys to a solid trading strategy is finding and working with a forex trading method that suits your skills and personality. We all bring different talents to the table and there is no one size fits all trading method. So, if you’re setting out at the beginning of your trading career and are wondering which method will suit you best, we’ve compiled this handy guide of forex trading methods to help you decide. However, it’s important that you also take the time to understand your strengths and weaknesses to know how they will interact with the methods laid out below.
As the name suggests, a trading method is a strategy in which you decide to buy and sell in the market based on predetermined rules and parameters.
here is the 6 most popular forex trading method:
The first method on our list, the Elliot Wave method is a level-based analysis. Developed in the 1930s by Ralph Nelson Elliot, the method is based on the proposal that price trends are a result of the dominant psychology of investors. His pattern recognizes swings in the market in correlation to swings in investor psychology. These swings result in waves, recurring in similar ways, over and over again.
The core idea in this theory is that the waves of price movement are composed of smaller “fractals”. Breaking these fractals down in mathematical terms, Elliot was able to recognize repeating patterns which he was then able to use to predict future market moves.
The first wave described in this method is an impulse wave. This wave follows the same direction as the overall trend and always contains 5 waves in its structure. The second wave, which moves opposite to the impulse wave, is called the corrective wave. By studying these waves as they come and go, practitioners of the Elliot wave method seek to understand the prevailing mindsets of the investing crowd as they buy and sell. By recognizing patterns, traders can see the dominant mindsets influencing the markets. In that sense, the Elliot method is not only trading strategy but a psychological gauging of the market’s overall intent.
Read our complete guide to Elliot Wave
Developed by Richard Wyckoff in the early 1930s, the Wyckoff method centers around 3 laws designed to guide traders in their approach to the financial market. The law of supply and demand, the law of cause and effect, and the law of effort vs. result. But in regards to forex trading methods, the most lasting of his legacy is perhaps his five-step approach to trading. The five steps are an accumulation of all his life’s teachings, compressed into an executable list of actions.
Here are the 5 steps:
Step 1. Determine the trend
Step 2. Determine the strength of the asset.
Step 3. Search for assets with sufficient motivation. Will the risk be worth the reward?
Step 4. Determine how likely the asset is to move.
Step 5. Time your entry.
The benefit of the Wyckoff method is that it allows traders to make well thought out movements rather than act on impulse and emotions. It is favored by traders who like to work out there actions and make logical, informed decisions.
Ream more about the Wyckoff Method
Unlike the previous two methods which were named after their respective creators, the supply and demand method of trading is fairly self-explanatory. In this method, traders are looking for places where price has made a strong advance or decline. Once found, these points are marked using rectangles.
The place where price has made a strong advance is noted as a demand zone.
The place where price has made a strong retreat is noted as a supply zone.
The core idea in hunting these zones is that when the market makes a strong move up or down the large players are not able to get all of their trades placed. This means they will leave pending orders in the zone, with the plan to buy or sell once the market returns to the zone. It is the goal of the supply and demand trader to jump on these opportunities when they arise.
We wrote a complete guide about Supply and Demand.
In addition, we have an in-depth video on supply and demand, where our CEO – Gil Ben-Hur teaches the core reason that drives price.
The approach is exactly as its name implies – a system in which you setup everything prior to trading and then leave all actions automated according to predefined parameters.
There’s one small caveat here – you have to understand that set and forget trading is not a strategy, it is a trading approach. However, we’ve included on this list because many traders have solidified it as the core of their trading strategy.
You chose your entry, stop losses, and profit targets to effectively control your trades without actually having to do the up to the minute work once the trade has begun.
We wrote a post about The Advantages and Disadvantages of Set and Forget Trading.
One of the simplest ways to identify strong entry and exit points. Built mainly for long-term investments, the point and figure method keeps an eye on supply, demand, and potential developing trends. What sets this method apart from others is that it doesn’t work on the same timeline that other strategies tend to adhere to.
The reason point and figure charting is different in relation to time is because the method ignores time completely. Rather, point and figure charting is only concerned with price changes. Traders who use this method believe that by removing the distraction of time, a lot of noise caused by the day-to-day actions of the market will disappear. Traders who follow this method also believe that by ignoring small movements, identifying support and resistance levels should become easier.
Going back to our earlier theme of describing methods named after titans of finance, the final method on this list is the Taylor trading method, named after George Douglas Taylor, one of the most influential trading minds of all time.
The method suggests that the market is driven by patterns which come from “market engineering.” The large players manipulate markets in order to drive down prices and set up buying opportunities for themselves. After, once the market had sufficiently rebounded and resulted in profits for the big players, a short term top was made to offer them an opportunity to sell. Once the market sold off, this cycle would continue.
This artificial engineering enhances the natural movements of the market, which creates false moves which then trick traders into buying when they should be selling, and selling when they should be buying.
Traders who adhere to the Taylor method search for these movements and capitalize on false moves.
As with most things in the market, your individual approach should be based on what your strengths and weaknesses are. A system that works very well for one person might result in ruin for another person. It’s up to you to try and test each system to determine if there is compatibility with your personality and skills.
Rather than trying to squeeze your trading career into one of these forex trading methods, it’s best to find the method that works well for you. Trying to use a system that is not inherently compatible with your skills and strengths will lead to frustration and a perceived failure in the market. Research all available methods and make a sound determination on which will be the best to grow your career and bottom line.
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