Advanced Forex Trading Techniques

Five advanced Forex techniques

15 Min Read
Last Updated July 23rd 2021

When you first delve into Forex trading as a novice trader, you imagine a path paved with gold. Surely it can't be that difficult, you think. But you quickly discover how little you know, how much you need to learn and how complex Forex trading appears to be.

Then you get some hard lessons, and if you are still standing, Forex begins to feel a little less complex. You find it easier to identify patterns and historical price zones of support and resistance.

You have your favourite currencies that you are now familiar with, and it's going well.

You are mastering your emotions and learning to be patient, and your one or two strategies are returning a small profit each month.

You feel like it's time to raise the bar and start looking around for more advanced Forex trading techniques.

In this article, we will introduce you to five advanced Forex techniques.

  1. Scalping
  2. Position trading
  3. Hedging
  4. Price action with context
  5. Ichimoku Cloud

Scalping

There are three perquisites for scalping the Forex market

  1. You really need to know what you are doing
  2. You need nerves of steel
  3. You must be patient and have a calm mind

There are probably more, but without these prerequisites, you can lose a lot of money fast.

How Does Scalping Forex Work?

The idea is simple; the intention is to take many trades for small profits and enter and exit the trade within a few minutes.

You will typically be trading on the 1-minute or 5-minute timeframe, or even the 15-minute timeframe can work for scalping trades.

During a scalping session, you may take dozens of trades with the hope of returning an overall profit.

What's the Downside of Scalping Forex

It's exhausting.

For the duration of your trading session, you have to stay alert and aware. After a couple of hours, your concentration may slip, and these are the times where you either make mistakes or start impulsive trading.

Some traders love scalping Forex, but others say it is the quickest route to ruin. Many novice traders start their trading journey by scalping Forex because it's a quick return, and they don't have to wait hours for the price to hit a zone before entering a trade.

But, the fact is, over time, more traders burn out from scalping Forex than any other technique in Forex trading.

What's Important to Know About Scalping Forex?

  1. Know the current overall trend – if you are looking at the low timeframes, it's impossible to formulate an idea of the prevailing trend. To assess trend direction, check out the higher timeframes.
    How does it look on the daily chart? Then move down to lower timeframes and wait for an opportunity to trade with the trend. Or you can take advantage of a pullback move
  2. Is the price near support or resistance? – even on low timeframes, you don't want to get stuck up against a wall of support or resistance. Check whether the price has broken through a zone and perhaps wait for a retest
  3. Has the price broken a trendline? – if the price has got through a trendline, there's an opportunity to look for some good scalping trades. The price will typically try for a retest of the trendline, where you can then enter with the flow of the market
  4. Has an economic news announcement triggered a price spike? – watch and wait. Red flag financial news will trigger a price response. If the price moves away from the current direction, you may be able to catch the move back with some scalping trades
  5. Have a stop loss and take profit area – it may seem pointless to have a stop loss and profit zone when you're scalping Forex. But this is the mistake novice traders make.
    Imagine if you have no stop loss and the Internet suddenly goes down, or Windows 10 decides right now is the time for an update. In the time it takes for Windows to download a long and probably unnecessary update, your trade may have ramped up significant losses.
    It's harder to achieve a good risk to reward ratio (RTR) with scalping but, as a rule, aim for at least a 2 to 1, which means, even with a 50% win rate, you will stay ahead of your profits.

Read Also: Best Forex Pairs to Scalp

Position Trading

Position trading is an advanced Forex technique and is the complete opposite of scalping.

Position trading is ideal for traders who do not have the time to spend watching the Forex charts, or they want bigger profits from their trades. The technique is based on your overall exposure to a currency pair. So the position is your average price for a currency pair.

For example, you take a short trade for GBPJPY at 1.4950, and the trade moves into profit but then retraces. The price moves to 1.5150 and, here, you take another short trade.  Your average price is 1.5050.

Once the price drops back to 1.5050, you are in profit overall.

What's the Downside of Position Trading?

The only downside – and it is quite a significant one – is that you are entering a trade for the same currency pair when your current trade is showing a deficit. It's supposed to be a golden rule that a Forex trader does not add to losing trades.

How Can Position Trading Work for Me?

Know your currency pair and exactly what position it is currently trading around.

Careful analysis is vital. The most successful Forex traders wait for a retest of price, and it almost always happens.

And you could say why take a trade when you expect it to retrace and you can enter the market at a better price? Yes, that is true, but for the time-strapped Forex trader, it can work. They either don't have the time to monitor trades all day or don't want to be glued to the charts.

 Hedging Forex

Hedging is a way to cover both sides of the trades at once.

It is an advanced Forex technique and not one for the fainthearted.

You will take a long and a short position on the same currency pair, although some highly experienced traders may hedge between different currency pairs. The latter is, however, a complicated process where things can quickly go horribly wrong.

For example, you decide to take a long trade on EURUSD as your analysis shows that the price is approaching a historical reversal zone. But, once you take your trade, the price reverses and heads south.

To hedge the trade, you check out USDCHF, which tends to move diametrically to EURUSD. You decide to buy USDCHF as a hedge for the EURUSD trade.

EURUSD continues moving down, but USDCHF is moving up. At some point, you can exit the EURUSD trade for breakeven and either hold the USDCHF trade for a profit or exit this trade for overall breakeven.

It sounds easy.

It isn't.

Hedging Forex takes skill and, if you're going to do it, you have to consider how you're going to do it. Perhaps you took a 0.01 micro lot for EURUSD. You could take the same lot size for USDCHF, or you could buy a 0.02 lot. This option would take you to breakeven quicker. And, if you let the USDCHF run, you exit the trade for a nice profit.

It is an advanced technique, and you can quickly get into a mess if the price changes again. Practice the technique in a demo account until you've got the hang of it.

Trading Forex Options

A Forex option is an agreement to purchase a currency pair at a predetermined price at a date specified in the future.

For example, you are long in GBPJPY at 1.49, and the price action suggests that the price is dropping and may hit support at 1.48. Your stop loss is at 1.47.50. it's potentially a significant loss.

To counteract this, you use an overnight Forex option for the price of 1.4750. If the option price does not hit this price, you lose the premium price that you paid for the option. If the price triggers the Forex option, then you are paid out for this. It's a way of counteracting losses.

It's not the most attractive Forex technique. Sometimes it's easier to cut your losses before they get too big and go back to the drawing board for your analysis.

Forex price action can sometimes seem baffling because it doesn't do what you expect. It's better to wait for a strong signal in the market rather than taking a trade just because it looks like it is moving in the direction you expect.

Price Action with Context

Central banks, prominent investors and traders drive the Forex market.

Every trading day, Forex generates $6.6 trillion, and this is growing all the time. As more banks realise they can profit from Forex, they trade funds for clients or directly for the bank. And we're not talking the odd punt here and there either.

It can be frustrating to see unexpected price moves in the Forex market. But a retail Forex trader, such as yourself, can learn to take advantage and follow the big boys' footprints.

Check Out: Price Action Trading UK Guide

What is Market Context?

Market context is a characteristic of a trend. If a currency pair isn't stuck in a range, consolidating, it's moving in a trend direction. The elements involved in market context are listed below.

  1. Impulse – when the market moves with momentum and power, the price creates new highs and lows. It's easy to spot these on the charts
  2. Price correction – after the impulsive move, the price almost always corrects. Why? Simply because investors are taking their profits from the impulsive move. Once the price has corrected, it will likely turn back and continue the way it was heading.
    It may not always be easy to identify until you've observed it many times.
    Sometimes after the impulsive move, the price consolidates. Here, novice Forex traders become confused. Is the price going up after this? Or will it come down?
    Watch and wait, and the price will get on the move again.
  3. Volatility – when the market becomes indecisive, it appears there is no clear direction. Price may consolidate or whipsaw up and down, creating big empty strips of candles on the chart.



    In the example above, the image shows the GBPUSD 15-minute chart.

    You can see an example of price stalling. For several hours, it whipsawed up and down between a small range of 30 pips. Then the price connected with the trendline and broke above the range—the reason for this is that the price is at a strong historical price point.
    If you look back over the years, you will see the same response to strong price zones.
  4. Lack of volatility – where no volatility exists, buyers or sellers are dominating the market and the price moves in a clear trend direction.
    This strategy focuses on market trend and price patterns, Fibonacci and candlestick patterns etc., basically, all of the things you look for when you are doing your technical analysis. 
    No two traders will apply the same context, but the core concept is whatever tool or analysis you use to assess price action.

Don't Miss: What Are The Most Volatile Currency Pairs?

Ichimoku Cloud Trading Strategy

Ichimoku Kinko Hyp is an indicator widely available on most platforms. Although classed as an indicator, it is possible to create a complete trading strategy with it.

There are four components to this indicator.   

1. Kumo Cloud – this element is a zone, which works as potential support or resistance zone. It consists of Senkou Span A and Senkou Span B. if the price is above the cloud, the indication is for a bullish market. If the price is below the cloud, it is considered a bearish market



The above image is the EURUSD daily chart with the complete Ichimoku Cloud indicator attached.

The price is currently beneath the cloud  (the pink & green areas) – and mostly consolidating. You can see that the price is pushing up against the cloud, which is narrowing. If the price breaks through, it could mean the EURUSD may trend upwards.

There's no guarantee, but it's a reasonable probability.

2. Tenkan Sen and Kijun Sen – this two-part element works as dynamic support and resistance. If the price rejects either of these, it indicates a potential trend continuation.

Some Forex traders use one or both of these elements without the rest of the Ichimoku Cloud elements. Try adding just Kijun Sen to your chart and see how many times the price bounces off it. See the below example.



This image above is the GBPUSD 1-hour chart

The purple line is Kijun Sen (KS). Working from the left, see how the price bounced off the line with a strong reaction. Later, it came back and spiked through (possible economic news response). On the second arrow, the price got above the KS, then came back to retest it.

The green box below is a historical price zone for this currency pair where it quite often becomes stuck before exploding back out into the trend.

3. Chinkou Span – This element measures the average price of the last 26 candles. This element works as a cycle, according to the theory of Ichimoku. When the market is at this level, the price is likely approaching support or resistance levels

Read Also: 20 Types Of Technical Indicators Used By Trading Gurus

Recap of Advanced Forex Trading Techniques

We have discussed five very different Forex trading techniques.

The only way to know if an advanced Forex technique will work for you is to test it thoroughly. Every Forex trader has a unique style and way of trading. Once you find an advanced Forex technique that you like and can work with profitably, it can take your Forex trading to the next level.

Pick a strategy that suits your natural temperament. For instance, you may be naturally patient and disciplined. If so, you may find that the scalping Forex technique works for you because you don't become flustered by the fast-moving market.

Conversely, if you don't have sufficient time to spend at the charts to take dozens of trades, then scalping is off the menu, no matter how your personality fits with the advanced technique.

Position trading takes time and skill and can be risky, so if you are risk-averse, this technique might cause you some angst.

Likewise, the Hedging technique takes a lot of practice to master. And really, the technique is more a get out of jail free card. Unless you are a highly experienced Forex trader, things can quickly get out of control.

Price with context is probably the most straightforward of the advanced techniques. Primarily, this is because you are using tried and tested elements of price action measured by technical analysis. And there s a level of flexibility as to what aspects you use or, indeed, you may wish to use all of them as confirmation elements to enter a trade.

You may be a strategist who loves gadgets. So the appeal of the Ichimoku technique may be right up your street.

Whether you use all four elements of the indicator or choose one or two, you will have to be patient because it may take time for the price to move below or above the cloud. Or, with Kijun Sen, you have to wait to see how the price reacts once it approaches this element.

Please note that the above information is not providing advice on tax, investment, or financial services. We provide the above information without consideration for risk tolerance and a specific investor's financial circumstances.

Trading financial instruments such as Forex may not be suitable for all investors. It does involve risk and the possibility of a loss of capital.

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