Whether you are a seasoned trader or just starting, there are always new strategies that are worth looking at.
You never know when you will find that extra advantage you seek in forex trading.
By now you should be experienced with the following trading strategies (or styles):
- Position Trading
- Swing Trading
- Day Trading
And if all these strategies sound foreign to you, do not fret. There is plenty of time to learn them as well. However, this article will focus on another forex trading strategy you might not be familiar, transition trading.
Well in the simplest way someone can put it, transition trading means that you are a surfer waiting for the wave to catch up with you. Yes, it all sounds a bit zen and not very technical, but there is some madness to the mayhem. So let's dig in a little deeper.
In more financial terms, this strategy revolves around the idea of entering at a low time frame, bonus points if you are close to the resistance, of a currency pair and increase your target profit or trail your loss at a higher time frame.
If you have followed everything that was said up to this point, then that is fantastic. Chances are you already understood what the transition trading strategy attempts to do, and you ready to implement it.
If you felt loss or a tad confused, then keep reading, because it is essential to disentangle everything that was just said.
First of all, you need to be familiar with time frames and how to work with multiple of them in forex trading. If you are using MetaTrader 4, your available time frames will range from 1 minute (M1) to 1 month (MN). These time frames are necessary because they will affect the behavior of the candlesticks.
If you are working with an M1 time frame and you are looking at the moving average (MA), then you will get a very active trading screen. Remember that MA lags behind the indicators because its job is to smooth the volatility shown by current prices.
In any case, the reason why all of this matters is that to 'catch the wave' you must work at minimum 2 different frames. For example, let's use a more sensible time frame. Let's use M30, and you are looking at the GBP/USD pair.
At the moment you see the pair is about to go bullish, so opened a position. You aren't sure when will the run end or if it will happen at all. But looking at the 20MA with H1, everything seems to point out that things will only get better. Therefore, you will want to trail your stop loss on 20MA and keep riding the way.
If the run ends soon after, you will close your position at 20MA. However, if the time frame suggests things can get even better, you trail your stop loss again and keep increasing your wallet.
This strategy offers a low-risk and an extremely high reward since you are always looking to enter at a low point. Unfortunately, the downside comes from having to be proficient in managing time frames and the moving average. But if you are ready to try, go for it. Your portfolio will thank you!