There is no one always correct way to trade on the Forex market which after all is a market that attracts all kinds of traders – experienced and inexperienced, skillful and those with much to learn – and a wide variety of strategies. As Governments develop different approaches to economic stimulus, strong trends have developed in the valuation of currencies and a common Forex strategy is one that follows the trends.
There are 3 ways to identify trading opportunities into the direction of a strong trend. You can buy the dip and sell the rallies; breakout into new highs or lows and diversify with currency baskets.
Many inexperienced traders will follow the strategy of buying low and selling high. Those more “in the know” will filter signals with a strong trend. This is because many traders are using indicators and oscillators that will help them decide when pairs have become oversold – thus enabling them to buy low. But they look for overbought levels on the oscillator to guide them as to the best time to sell. In both cases they are following the trend.
When you follow a breakout strategy you are waiting for the price to move higher and then buy at a higher price than if you were buying dips. There is reason in what seems to be madness. So many traders who play the market let their emotions get the better of them and thus prices may not be rising for a rational reason except for the greed and lack of control of other traders.
With a breakout strategy the key is confirmation. A trader reaches a buying position only when prices have confirmed they are ready to trade at new highs. If there is no such confirmation and prices do not trade to new highs, then you have successfully avoided a losing trade.
Basket Trading is a strategy that combines trading with different currency pairs at one time. One of the main benefits of the strategy is that it allows the trader to place several positions in just one order and to be more efficient in managing his securities. It is a less stressful way of following the trend.