Forex trading strategies define the techniques used by traders to determine when to open or close a trading position. There are various kinds of forex strategies that can be used by traders, including technical analysis or fundamental analysis.
A good forex trading strategy will make it easier for a trader to analyze the market and confidently execute positions with good risk management techniques.
Forex strategies can be divided into several organizational structures that can assist traders in placing the most applicable strategies. You can trade through the best forex trading app and make sure it’s not a forex trading scam.
This forex trading needs to bring together various factors to formulate a trading strategy that is right for you. There are many different strategies that can be followed, but understanding and comfort with the strategies is important. Each trader has unique goals and sources, which should be considered when choosing a suitable strategy.
Forex Trading Strategies For Beginners And Best Forex Trading Platform
There are three criteria traders can use to compare different strategies regarding their suitability:
- Required time resources
- Frequency of trading opportunities
- General distance to target
In trading positions it is usually the strategy with the highest profit-risk ratio. The most demanding strategy in terms of your time is to trade with the scalping strategy due to the high frequency of trades made regularly.
Price Action Trading Strategy
Trading with price action techniques involves studying historical prices to formulate a technical trading strategy. Price action can be used as a stand-alone technique or in conjunction with indicators.
Fundamental factors are rarely used; however, often economic events are included as a contributing factor. There are several other strategies that fall into the price action category as described above.
Trade length: trading with price action can be used in various time periods (long, medium and short term). The ability to use multiple time frames to analyze makes price action trading more valued by many traders.
Entry/Exit Points: There are many methods for determining support/resistance levels which are commonly used as entry/exit points:
- Fibonacci Retracement
- Using the candlestick wick
- Trend identification
In price action, there are different types of trading ranges, trend, daily, scalping, swing and position. This strategy corresponds to various forms of trading terms which will be explained in detail below. Examples show various trading techniques with this strategy to show how diverse the trading techniques are, along with the various order options that traders can choose from.
Reach Trading Strategy
Range trading includes identifying support and resistance points where traders will trade around these key levels. This strategy works well with no significant volatility and no visible trend. Technical analysis is the main tool used with this strategy.
Trade length: There is no certainty how long a trading position will last as this strategy can be used for any time frame. Managing risk is an integral part of this method because breakouts can occur. As a result, traders with this range strategy want to close any positions around the current timeframe.
Entry/Exit Point: The oscillator is the most frequently used as a timer. The Relative Strength Index (RSI), Commodity Channel Index (CCI), and Stochastics are some of the more popular oscillators. Price action is sometimes used in conjunction with oscillators to further validate signals or range-bound breaks.
USD/JPY has shown a prolonged range of price levels over the past few years. The chart above depicts clear support and resistance that traders use as entry/exit points. The RSI oscillator shows the timing of the entry/exit points as highlighted by the shaded blue and red squares – Red: overbought and Blue: oversold.
This trading range can yield a favorable return to risk ratio, however, it comes with a long time investment per trade. Use the pros and cons below to align your goals as a trader and how many resources you have.
Trend Trading Strategy
The trend trading strategy is a simple forex trading strategy used by many traders of all experience levels. Trend trading tries to make positive profits by taking advantage of the directional momentum of the market.
Trade length: Trend trading generally occurs in the medium to long term as the length of the trend itself fluctuates. Like price action, multi time frame analysis can be adopted in trend trading.
Entry/Exit Points: Entry points are usually determined by the oscillator (RSI, CCI, etc.) and exit points are calculated based on a positive risk-return ratio.
Using a stop level distance, traders can match or exceed this gap to maintain a positive risk-return ratio. For example, if the stop level is placed 50 pips, the take profit level will be set at 50 pips or further from the entry point.
When you see a strong trend in the market, open a position according to the direction of the trend. For example, a strong uptrend in EUR/USD.
Using (CCI) as a time entry tool, notice how whenever the CCI drops below -100 (highlighted in blue), the price responds with a rally. Not all trades will be successful this way, but because it follows a trend, any downside causes more buyers to enter the market and pushes prices higher. In conclusion, identifying a strong trend is important for a useful trend trading strategy.
Trading with trends can be even more creative with so many variables to consider. A list of pros and cons can help you identify whether trend trading is right for you.
Benefits trend trading strategy :
- Lots of trading opportunities
- Preferred risk to profit ratio
Lack trend trading strategy :
- Requires a long time investment
- Requires a strong appreciation of technical analysis
Position Trading Strategy
Trading with positions is a long term strategy that mainly focuses on fundamental factors, but technical methods can be used such as Elliott Wave Theory. Minor market fluctuations are not something to consider in this strategy as they do not affect the broader market picture. This strategy can be used in all types of markets from stocks to forex.
Trade duration: As mentioned above, this trading strategy has long term prospects (weekly, monthly or even yearly!) suitable for more persistent traders. Understanding how economic factors affect the market or overall technical trends is very important in forecasting trading ideas.
Entry/Exit Points: Key levels on the longer time frame charts (weekly/monthly) hold valuable information for traders due to a comprehensive view of the market. The entry and exit points can be seen using technical analysis according to other strategies.
The DAX30 index chart above depicts an expected two-year head and shoulders pattern, which is in line with a possible decline below the horizontal red line to the right of the shoulder. In this example the decline in the German DAX30 index technically and fundamentally looks as planned.
Towards the end of 2018, Germany went into a technical recession as the US/China trade war hurt the auto industry. The Brexit negotiations are not helping as the possibility of the UK leaving the EU is likely to have a negative impact on the German economy as well.
In this case, understanding technical patterns as well as having a solid fundamental basis makes it possible to combine technical and fundamental analysis to build solid trading ideas.
Pros and Cons based on your goals as a trader and how much resources you have.
- Requires minimal time investment
- Very positive risk to reward ratio
- Very few trading opportunities
- Requires a strong appreciation of technical and fundamental analysis
Day Trading Strategy
Day trading is a strategy designed to trade financial instruments on the same trading day. That is, all positions are closed before the market closes. This can be one trade or several trades throughout the day.
Trade duration: Trading times range from very short term (minutes) or short term (hours), where trades are opened and closed within the trading day.
Entry/Exit Points: The trader in the example below will look to enter a position when price breaks the 8-period EMA in the direction of the trend (blue circle) and exits using a 1:1 risk-reward ratio.
The chart above shows a representative daily trading setup that uses moving averages to identify a long trend as the price is above the MA lines (red and black). Entry positions are highlighted in blue with stop levels placed at the previous price break. The take profit level will be equal to the stop distance in the direction of the trend.
The pros and cons listed below should be considered before executing this strategy. Day trading involves a lot of time and effort for little profit, as can be seen from the EUR/USD example above.
Lots of trading opportunities Average risk-to-reward ratio
Requires a long time investment Requires a strong appreciation of technical analysis
Scalping Trading Strategy
Scalping in forex is a general term used to describe the process of taking small profits on a regular basis. This is achieved by opening and closing multiple positions throughout the day. This can be done manually or via algorithms that use predefined guidelines on when/where to enter and exit positions. The most liquid currency pairs are preferred because spreads are generally tighter, making short-term strategies look more suitable.
Trade duration: Scalping requires short term trades with minimal profit levels, usually operating on smaller time frame charts (30 minutes – 1 minute).
Entry/Exit Points: As with most technical strategies, identifying a trend is the first step. Many scalpers use indicators such as moving averages to confirm trends. Using the main levels of this trend on longer time frames allows traders to see the bigger picture.
These levels will create support and resistance lines. Scalping within this range can then be performed on smaller time frames using oscillators such as the RSI. The stop level is placed a few pips to avoid a big move against the trade. The MACD indicator is another useful tool that traders can use to enter/exit trades.
The EUR/USD example in the 10 minute time frame above shows a typical example of a scalping strategy. The long-term trend is confirmed by the moving averages (the price is above the 200 MA). Smaller timeframes are then used to target entry/exit points.
The time of the entry point is indicated by the red rectangle in the trader’s bias (length). Traders can also close long positions using MACD when the MACD (blue line) crosses the signal line (red line) highlighted by the blue rectangle.
Traders use the same theory to set up their algorithms, without manual execution from traders.
With the scalping trading example above, see what are the advantages and disadvantages of this strategy in choosing the most suitable trading strategy for you.
The largest number of trading opportunities of all forex strategies
Requires a long time investment Requires a strong appreciation of technical analysis Lowest risk to reward ratio
Swing Trading Strategy
Swing trading is a speculative strategy in which traders want to take advantage of distance ranges as well as market trends. By selecting ‘top’ and ‘bottom’, traders can enter long and short positions accordingly.
Trade duration: Swing trading is considered more of a medium term trade as positions are generally held anywhere between a few hours to a few days. Long term trends are preferred because traders can take advantage of the trend at many points along the trend.
Entry/Exit Points: As with any trading range strategy, oscillators and indicators can be used to determine optimal entry/exit positions and times. The only difference is that swing trading is applicable to a trending and restricted market.
The combination of the stochastic oscillator, ATR indicator, and moving average is used in the example above to illustrate a typical swing trading strategy. The uptrend is initially identified using the 50-day moving average (price is above the MA line). In an uptrend, traders will look to enter long positions with the old adage ‘buy low, sell high’.
Stochastics are then used to identify entry points by looking for oversold signals highlighted by the blue rectangle on the stochastic and chart. Risk management is the final step where ATR gives an indication of stop levels. ATR is highlighted by a red circle.
This number represents the approximate number of pips from the stop level that should be set. For example, if the ATR reads 41.8 (reflected on the last ATR reading), the trader will place a stop 41.8 pips from the entry.
From the swing trading example above, you can consider the advantages and disadvantages below to determine if this strategy suits your trading style.
Lots of trading opportunities Average risk-to-reward ratio
Requires a strong appreciation of technical analysis Still requires extensive time investment
Carry Trade Strategy
A carry trade involves borrowing one currency at a lower rate, followed by investing in another currency with a higher yield. This will eventually result in a positive carry trade. This strategy is mainly used in the forex market.
Trade duration: Carry trades are subject to fluctuations in interest rates between the related currencies, therefore, trade durations are profitable for the medium to long term (weeks, months, and possibly years).
Entry/Exit Points: Strong market trends are perfect for this trading strategy as they involve a longer timeframe. Determining the trend is the first step before placing a position (higher top and higher lower and vice versa) – see example 1 above.
There are two aspects of the carry trade, namely exchange rate risk and interest rate risk. Therefore, the best time to open a position is at the beginning of the trend to take full advantage of the exchange rate fluctuations.
Regarding the interest rate component, this will remain the same regardless of the trend as traders will still accept the interest rate differential if the first mentioned currency has a higher interest rate against the second currency, for example, AUD/JPY.
Is carry trading right for you? Consider the following advantages and disadvantages and see if it is a forex strategy that suits your trading style.
Little investment of time required Average risk to profit ratio
Requires strong forex market appreciation Rare trading opportunities
Forex Strategy: Summary
This article outlines 8 types of forex strategies with practical trading examples. When considering which trading strategy to use, it is necessary to compare how much investment time is required behind the scenes, the risk-return ratio, and the regularity of the total trading opportunity.
Each trading strategy will appeal to different traders depending on his personal attributes. Personally adapting your trading style with the right strategy will ultimately open up more opportunities for traders to succeed in trading.
Best Forex Trading Platform
Best Forex Trading Platform? To go, you have to find an online forex broker to place your order. In this review, we explore the ten best forex trading platforms overall.
We have implemented various criteria to support this platform in our top ten. These criteria include ease of use, speed of execution, cost, trading tools, learning resources, market analysis and real-time data. The same benchmarks you would use to compile your own short list of forex platforms.
10 Best Forex Trading Platforms:
- IQ Option – The best total plan
- BDSwiss – Who doesn’t want Swiss fintech?
- eToro – The platform that popularized social trading
- FxPro – No trading desk forex platform
- XTB – Great customer service
- Admiral Markets – Extendable demo account
- FXCM – Not the prettiest performance, but solid
- Libertex – Great player but sadly abandoned
- Plus500 – UK based forex broker
- IC Markets – Raw spread trading
Forex Trading For Beginners
Forex trading for beginners should use a demo account first in order to know the functions of the features provided by the trading platform.
Youth in developed countries such as England, America, Japan, China, Germany, the Netherlands, Italy, and Australia are no longer beginners because they have been in business since school age.
In trading, you must be comfortable enough to do buying and selling activities. You also have to be good at reading market movements in order to take the right steps.