Whatever measure, guide, or indicator you are looking for, whatever the time frame, there are 3 basic types of trades.
In this post, I’ll explain the basic types of Forex trading. What caused this subject?
Regardless of personal experience in trading, conversations, and exchange of views with other traders are valuable. In one of such conversations, the topic was the types of tradings. After many hours and a lot of coffee, we had one conclusion: There are 3 types of trading.
I need your attention for a minute. Let me explain this.
True is, whatever measure, guide, or indicator you are looking for, whatever the time frame, there are only 3 types of trades.
I meet a lot of people thinking they’ve mastered trading. The problem is they didn’t understand the differences between the trades they took.
Sure thing is, it will be easier for you if you know the ultimate goal and what can you expect from the trade you took. And it is possible if you know the type of trade you just implemented. This is very important because your knowledge is what determines where to place your stop loss and your take profit.
When a professional trader enters a trade, he knows exactly what he’s trading.
And my trading friends and me, we can recognize 3 types of trading.
Each of those trades has some special characteristics. I’ll tell you more about each of them. Depending on the market you’re trading, the success of each type of trades may be different.
What are the basic types of Forex trading?
Some traders are attracted to trade all of those types for a limited number of currency pairs. But others are specialized in only one of those trades.
When a professional trader enters some trade, he must know what he is trading.
What is REVERSAL TRADE?
A lot of traders think that implementing Reversal trades is composed of “calling a top” or “calling a bottom”.
However, this isn’t quite true. Actually, the entry price of a reversal trade is often in a previous zone of support or resistance.
Reversal trades are among the most popular basic types of Forex trading because of their ability to be easily spotted. They take place in a ranging market.
As you can see the buyers were very aggressive on the chart above because they pushed the price up all the way to point 1 from an original support zone. But, once the price hit a resistance zone (marked as 1), buyers started to take profit. And several traders began to short the currency pair and got more aggressive.
They took control of the market. This had for the result to create a strong rapid decrease in price.
At point 2, the same result came, which was a good opportunity to enter a Reversal trade. The sellers placed their orders at that level and the buyers began to take profit because they knew the price had reversed in the past at the same level.
The stop loss should be placed above the highest point (A) and the take profit someplace below the resistance zone. It is okay to expect a risk-to-reward of 1:2.
BREAKOUT TRADE is one of the basic types of Forex trading
Breakouts trades are usually made by a strong continuous movement in a direction. Therefore, some traders call it an acceleration because the movement is fast.
This is a typical example of the Breakout trade. Take a look!
The bulls were confident and kept pushing the price higher and higher to point 1. At that price, the sellers became more aggressive and took control of the market until the buyers showed even more power.
The level pointed with a 2 shows a price at which bears are known to get more aggressive in the market. But, they were not aggressive when the price reached that level.
Because there were no traders wanting to sell the currency pair aggressively, more and more traders went long, thus pushing the price higher and breaking through the resistance level.
The stop loss on that trade should be somewhat below the resistance zone that was broken. So, the take profit level is above the zone. It is okay to expect a risk-to-reward of 1:2.
Pullback trades are usually more solid because the retracement back to a previous price level represents a certain confirmation.
(Retracement is the temporary reversal in the direction of a stock’s price that goes against the prevailing trend. But remember, a retracement does not signify a change in the larger trend.)
As you can see, a pullback trade is characterized by a retracement, often to the previous support or resistance zone.
Take a look at the chart above!
The price kept ranging between a support and resistance zone. At point 2, no one was aggressive enough to move the price significantly higher or lower. Once the price broke above the resistance zone at point 3, several traders began to feel excited about their profit so far.
Most of them thought that this high price might be a good opportunity to take a profit. But, as more and more people took profit on long trades, the price slowly decreased. When the price got back to the previous resistance zone, some traders began to feel that this price was too low.
The traders then bought the currency pair again (at point 4) to force the price up.
The stop loss on that trade should be somewhat below the resistance zone that was broken. The take profit point should be someplace above the zone. It is okay to expect a risk-to-reward of 1:2.
How to use the basic types of Forex trading
Look at the top of this post.
When a professional trader enters a trade, he knows exactly what he’s trading. But do you know too?
Study your previous trades and recognize the types of trades you were entering. Then ask yourself this simple question:
”Did I make this as well as I could?”
If you get YES as an answer, you are a very good trader. But if your answer is NO this will help you to make progress.