Short Term Forex Trading Strategies - Looking For Structure Amongst Volatility
Some of the shortest term Forex trading strategies are high frequency trading. However these are performed by computer programs using very fast processing and communication. For the human trader, scalping on the 1 minute chart is around the shortest that might comfortably be done, however it is possible to scalp on the tick chart (and therefore time frames between tick and 1 minute, if supported by the broker's charting).
The tick chart is hard to read, especially to see patterns, and even to know if a pattern has any meaning at this time frames. The tick chart however can strategically be used with the 1 minute chart (as higher time frames may be utilised with the 1 minute chart). One way to use the tick chart like this, is to use it for clues about whether a change in direction of a move might have momentum behind it.
As chart time frames become shorter, then momentum can become more apparent. However the volatility on these short time frames also means that momentum can change and direction can alter rapidly. Trading on signs of momentum change can however be a way to approach scalping small moves in value. Patterns on the 1 minute chart may be closely analysed to see if they can continue or about to reverse, allowing for a scalp. It can be possible to look for specific patterns which are implicated in momentum, for example the push which may happen at the end of a downward move. These kinds of moves are in line with scalping small pips sizes, rather than larger.
Another short term Forex trading strategy is to news trade a Forex trade. Here sharp moves can be seen on release, which may be spent within a minute or so. This is trading on fundamental data rather than technical data. To focus more on technical data, the trader might wish to consider using value levels, which is to say ordering moves via their range from big figure to big figure. This is a highly non-fundamentalist approach to Forex trading, but it can find rationales for looking for shorter term moves, for example action after a move to or through a big figure.
In general fundamentalist approaches can be seen as longer term, for example trading on the overall effect of economic news, rather than its immediate effect and day traders may tend to focus on technical approaches as these are viable on shorter term time frames, but not necessarily accurate at all. In fact fundamental data has a firmer grounding arguably, but its effects can rapidly be dissipated, even in a news trade or obscured by other influences on the market from traders to computer programs. Value level trading is a type of trading which can make sense of patterns, which are also a way to trade on the shorter term.
Trading on patterns can be an approach to short term trading, depending on which time frame is used (i.e. there are patterns on the 1 minute chart, but these can be volatile). Patterns may also be a way to turn a short term trade into a longer term trade. The problem with short term trading is that while it may seem more naturalistic to the complexity of the Forex market, it can result in trades being buffeted by market volatility. A medium to longer term trade may make for a more structured approach to trading, with the caveat that the Forex market is complex and can change direction with ease. The trader can look for factors which may reinforce or perturb any Forex move, in particular trends, for example moves happening in the Equity market.
Patterns which are viable on short term time frames can include any patterns, as time frames have a self similarity, in that patterns can be seen across time frames from long to short. However 1 minute patterns may be volatile and can move fast, resulting in what is in effect volatile moves, even if structured by pattern formation. This means that reversal pattern can happen rapidly.
Even if a trader is trading on the medium to long term they may wish to examine the 1 minute or 5 minute chart for clues of what may be happening on longer time frames. For example a pause in a move on the 15 minute chart may on examination of the shorter term chart be seen as apparently happening because a pattern is playing out which is perhaps reversing. Now whether this translates into the higher time frame is another matter since as noted, patterns can reverse quickly on the 1 minute chart, however the trader may wish to consider these patterns on lower time frames, when the higher time frame is pausing.
Thus short term Forex trading is one which may seek to translate types of trading on higher time frames to lower time frames by virtue of the self similarity of pattern formation (and value level significance) and also to take advantage of features more native to shorter term time frames, for example the potential to scalp short momentum changes. However short term time frames can possess a utility for longer term trading as well. Keeping an eye on higher time frames may also be a way to turn a short term trade into a longer term trade, thus allowing short term trading to be a way to provide a rationale to begin trades, with the possibility of either trading on the short term or turning it into a longer term trade.
The core strategies for short term trading are arguably short term pattern formation allied with momentum and value levels allied with pattern formation. The trader may wish to automate short term trades, but may also wish to consider that on the short term, the use of human discretion, allied with experience may be even more significant. This article has not specifically mentioned technical indicators, however they can be used as indicators for short term trading, for example using a moving average, but the volatility at short term time frames can make them even more problematic as ways to project direction or momentum.
If short term Forex trading strategies were to be picked, then they might be value level trading, based around the big figure, for example such as the behaviour of a major Forex pair as it hits the '00', does it bounce, cut through, reverse up (or down) and so on. Like all trading such outcomes may or may happen, but the potential for an outcome, does provide a rationale for making a short term trade, in what can be a volatile unstructured market. However this reality of short term trading may make medium to longer term strategies potentially more viable.
