When you are new to the market you are going to be warned against the use of certain FX trading strategies. Some of these FX trading strategies are considered to be controversial and this is why you are warned against them. It is important that you know what these controversial FX trading strategies are and how they work so you can understand why you are warned against them.
Effective Market FX Trading Strategy
The effective market strategy is considered by a number of traders and is possibly the least controversial of these strategies. The effective market strategy states that the market price for currency pairs is an accurate value of the currency and until a future event changes this. The future event referred to is usually a fundamental event. This strategy is partly the basis for many long-term forex strategies that work off fundamental news releases.
However, you cannot assume that the only reason the currency price will change is due to a future event. There are always fluctuations in the market that are not caused by future events. Large trades done by the heavy hitters of the market can cause a price fluctuation which his not linked to an event.
The Use of the Greater Fool Theory
This strategy uses the basis that there is always someone who is willing to buy a currency pair at a higher price. Anyone using this strategy will be looking at trends and assume that there are always traders who are going to continue the trend. The problem with this strategy is that all trends reach a point where there are no more traders to drive the momentum. When this happens a reversal will happen and traders using this strategy are not prepared for that. This strategy does not allow for trend reversals which lead to losses for any trader using the strategy.
Using the Odd Lot Strategy
The odd lot strategy is a stock market strategy that some traders feel will work on the forex market. As the name suggests the trader will trade with odd lot number and not the full lot numbers that every other trader is using. This has been shown to make profits on the stock market when used correctly. However, this is not something that works very well on the forex market. The odd numbers of the lots size is hard to gain on the forex market and has very little impact on the trade.
The Rational Expectation Strategy
The rational expectation strategy is controversial because it can be used to explain everything, but actually tells the trader very little. The theory behind this strategy states that traders should react to market movements in a rational and logical manner with the expectations of the future in mind. Many trader state that this is the theory behind all forex strategies because you are trading based on what the market is likely to do in the future. The vague nature of this strategy is what makes it controversial and why many traders find it useless. When you use the rational expectations strategy you are creating a self fulfilling prophesy where you push the market in the way you were expecting it to go.