Too much information? Analysis paralysis? Worried and confused about Forex Trading? Here we will clarify the 3 fundamental types of Forex Systems.

Trend Following

Trend following is the most common type of Forex trading, because when a trend is present, it means that most of the traders – the market participants – are agreeing on whether to buy or sell.

By following the trend, you’re following the crowd. And because of this, your probability of making winning trades is higher. You won’t be arguing with the market, but rather you’ll be agreeing with it. Moreover, you’d be making fewer trades.

You still have to have a complete system, however. Here are some tips to read:

Trend Following Entry/Exit Tips:

1. Enter on retracements and not in the middle or top of a swing. Entering on support is a little bit tougher, but it’s well worth it.

2. Use a trailing stop below recent lows to let your profits run.

Trend following is a very common, basic trading method. To qualify the common saying, “The trend is your friend, until it ends.” Let’s take a look at another trading style.

Fading

The second type of trading is called fading. Fading means going the opposite direction of the market. Sometimes you can sell into strength, or buy into weakness. This is basically bottom and top picking. So what’s the good thing about fading?

The first obvious advantage is that when your trade is a winner, the rewards are significantly bigger. For example, if the reward to risk ratio was 8:1, you could’ve had 7 losing trades but still come out net positive. Keep in mind that your system still needs an edge; you can’t just gamble and hope for the best. Do your homework!

A few price action triggers include a doji and a close below the recent low or above the recent high. Fading is very a different trading style from trend following. Now let’s discuss the last forex trading strategy.

Breakouts

This type of trading is entering when price makes a new high or low. If the market breaches the 52 week high, you might want to enter then. Or if the market breaches the past 20 week’s low, you might want t short it then. The keyword is “breach”. Of course, you should make sure that your system has a positive edge and is profitable. Breakout trading is just another way of entering the market. Of course, the way you exit a trade is totally up to you; you might want to trail by the most recent lows. Or perhaps you’ll have a predetermined exit.

So what’s the difference between trend following and breakout trading? Ok, they might seem pretty similar, and they kind of are. The key difference is the entry. With breakout trading, you enter with the breach of a prior high or low. With trend following, a breach doesn’t have to occur, but rather you can enter on a dip.

Where Do I Go From Here?

Keep in mind that you can mix and match the above three elements to suite your needs; you could follow the trend but enter on a breakout, or whatever.