The following guide explores popular Forex Trading Strategies used by most successful traders and brokers. Trading strategically can yield large profits, which makes Forex trading an increasingly lucrative investment.
Since 1971, millions of Forex traders have been committed to their investments and they are determined to dominate the market.
An optimistic attitude and patience go a long way when trading on Forex markets. Traders need to learn to cut their losses and keep trying when traders are unsuccessful because there is always a chance of making a profit.
It takes time and perseverance for people to get comfortable trading in Forex markets, but with the help of educational resources, trading tools and experienced Brokers, your chances of success are greatly increased.
In 2021, advances in technology and developments in software applications enable Forex traders to trading activities by using Application Programming Interfaces and the rich variety of trading tools developed specifically for Forex trading.
The Forex market is highly competitive but exponentially rewarding. All successful Forex traders use Forex Trading Strategies, so it is important to decide which ones work for you.
Forex Trading Strategies are based on four fundamental principles: an awareness of market indicators, trends and conditions; identification of entry and exit points; risk management and implementation of a strategy.
Your unique trading strategy is your best chance at surviving in the world of Forex trading. It will give you the confidence and knowledge you need to become an experienced trader.
You will begin to understand Forex market trends and by using market analysis and trading tools, you will be equipped to navigate the market and identify trading opportunities.
Why do I need a Forex trading strategy?
Forex Trading Strategies are used as guidelines or rules to follow when trading, which is necessary when buying or selling currency pairs or when entering and exiting markets at critical moments or when analyzing market trends.
The trading of currency is done in currency pairs and the exchange rate between currencies is an expression of the value of one country’s currency compared to the value of another country’s currency.
The exchange rate of currencies is determined by the economic performance and conditions of different countries, as well as fluctuations in inflation, interest rates and trading activities.
Other important factors to consider when trading currencies are global health conditions, Geographical and economical positions of businesses and people, and the political climate of countries.
Considering all the factors that may influence your trading experience, it is essential to use a strategy that will help you meet your Forex trading goals, protect you from the fluctuations in markets and indicate what move to make next when circumstances change unexpectedly.
Despite how unpredictable the market may be, these vulnerabilities create profitable trading opportunities and it is important to research and analyze markets and to understand how technology can be used to automate your Forex Trading Strategies for your convenience.
Most successful Forex traders use Trade Brokers and Trading platforms, which automatically scout for trading opportunities, analyze markets and signal when it’s time to trade using price alerts.
Alternatively, having good analytical skills will be beneficial if you prefer to tailor your Forex strategies, but there are several Forex Trading Strategies that have been proven to be reliable and are used and trusted by millions of traders globally.
Which trading strategy is best?
First, identify your level of understanding and experience with Forex trading. All levels of traders should understand the two core Forex Trading Strategies, which are Fundamental Analysis and Technical Analysis.
Fundamental Analysis and Technical Analysis
Analysis is an essential factor of success when trading with currencies and it is important to understand the principles of Fundamental Analysis and Technical Analysis when exchanging currencies and deciding whether you should buy, sell or wait.
Predictions can be made using the Fundamental Analysis, to evaluate the value of a currency based on the core economic indicators globally and the performance of one currency, in relation to another currency.
The trader’s focus is on the difference between a currency’s value and its trading price, and the value of a currency is taken into consideration when deciding when to buy and sell currencies.
Pros and Cons of Fundamental analysis
|Gain insight into international markets and the global economy||Traders need to understand Economics|
|Awareness of Forex market activity and related news||New traders may be overwhelmed by the vast amount of information to be digested|
|An understanding of unpredictable fluctuations in prices||Short-term news may be misleading|
|The ability to predict long-term price movements in Forex markets||It may be challenging for new traders to enter markets, or for existing traders to exit without losses|
|Volatile price movements may result in losses for new traders|
The Technical Analysis is universally accepted by most Forex traders because it is based on the analysis of market trends and price movements over time, using charts and Science.
Markets move up, down and sideways, so it is important to understand how to identify Forex market trends and how price charts and timeframes can be used to analyze support and resistance levels.
Pros and Cons of Technical Analysis
|Trade with accuracy, using charts and indicators||Since more people use it, an increase in traders could have a negative impact on price movements|
|Identification of entry and exit points in the market||It is easy to neglect signals when traders rely on charts to make decisions|
|Enables traders to estimate profits and mitigate the risks of financial losses||Indicators may be unreliable|
The Trend Trading Strategy, a form of Price Action Strategy, is a casual approach to Forex Trading, where the trader analyzes the trend of a currency price and enters or exits a market based on the direction of the price.
Medium to long-term investments are made and are profits are gained by following market trends and striking at the right moment.
Pros and Cons of Trend Trading
|More opportunities to trade||Traders need to understand market trend indicators and technical analysis|
|Ideal for traders who implement long-term strategies||Market trend indicators may be misleading and delay price movements|
|Rewarding if you have discipline and patience||Profits may be lost if exit points are misinterpreted during the Consolidation and Retracement periods of market trends|
|There is less pressure to trade and time spent on order|
|Retracements, which are temporary price reversals, create entry points into the market|
This short-term Price Action approach is used when the trader capitalizes on the minor price fluctuations of profitable currencies. The Day Trading Strategy requires active, daily analysis of the market and short trading bursts of up to 15 minutes per instance.
Multiple trades are made daily and a strict awareness of Market news and Market Trends is essential. The trader pays close attention to the news and economical changes such as interest rates, statistics, and exchange rates.
Day trading may be combined with other Forex Trading Strategies, such as Breakout Trading, News Trading, Day Trading, Trend Trading and Counter-Trend Trading.
Pros and Cons of Day Trading
|A profitable strategy for experienced traders||Higher opportunity cost with a greater risk of losing money|
|Deals are sealed by the end of each day, leaving no room for overnight risks||Requires full-time commitments|
|Can be combined with other trading strategies
Greater potential to earn money in less time
|Losses may be overwhelming for inexperienced traders|
When this Price Action Strategy is used, the rule of thumb is to enter low and sell high. Swing traders spend about 4hours per day trading and they have the opportunity to trade on multiple Forex markets at the same time.
Trades may last for any amount of time between 1 hour and several weeks. Traders rely on Technical Analysis to guide their trading activities and they keep a close eye on price movements and Stop/Loss targets.
Pros and Cons of Swing Trading
|A profitable strategy for experienced traders||The trader cannot rely on trends using this strategy|
|The trader can take advantage of market swings||Overnight risks need to be taken into consideration|
|Technical analysis allows the trader to predict price movements||Investing in multiple trades at once increases financial risks|
|Can be used as a part-time trading opportunity, with many markets||An advanced understanding of Technical Analysis is needed|
|Higher leverage can be placed on larger positions||Trader pullbacks are unpredictable and may be demoralizing|
This is a long-term strategy that is highly dependent on choosing the right moments to enter and exit markets. Position traders often use fundamental and technical analysis strategies to guide their decisions.
The idea is to capitalize on large price movements in Forex markets. Small trades are made over long periods, using low leverage.
Decisions are based on the key macroeconomic variables of global economies and analysis of the market plays an essential role in opening and closing trades.
Pros and Cons of Position Trading
|Low maintenance strategy, requiring 1hour per day||Long-term strategies require patience|
|The stability of a long-term approach relieves the stress of short-term price fluctuations||The trader does not have access to capital and there is less opportunity to make profits.|
|Less risk compared to Scalping, Swing Trading and Transition Trading||Money can be lost during Market pullbacks caused by minor price fluctuations|
|Stocks are held during major price movements in the market||A deeper understanding of Fundamental and Technical Analysis is essential|
Range traders commonly use this Price Action Strategy and it requires a fundamental understanding of Technical Analysis.
Market price ranges are identified so that trades can be made by buying in at the bottom of a range and selling at the top of the range.
The limits of a market price range are within the range of Support (the average minimum price of a currency) and Resistance (the average maximum price of a currency).
Pros and Cons of Range Trading
|A profitable strategy for experienced traders||May be time-consuming|
|Allows new traders to enter markets with limited funds||Market trends may only occur 20-35% of the time and price range fluctuations are temporary|
|It may be an easy strategy to apply because the process is clear||Markets become unpredictable when other traders use the same strategy|
|Effective in a stable market with no trends||Brokers may incur additional costs|
The Scalping Strategy
This is a form of Arbitrage trading and profit is made daily by accumulating profits from small price movements (pips) in Forex markets. Currencies are held for seconds or minutes at a time before making the next move.
The Scalping Strategy is a combination of Day Trading and the Price Action Strategy. It relies on choosing the right entry and exit positions, which can be signaled by Forex applications within specific parameters.
Pros and Cons of the Scalping Strategy
|Bursts of daytime trading opportunities||It may be time-consuming, requiring several hours of screen-time per day|
|Low-risk profile because of small exchanges and overnight risk is eliminated by sealing deals daily||Transaction costs may accumulate and trades may be reversed in response to the news|
|An understanding of Fundamental Analysis is not required||An understanding of Technical Analysis is required|
The Carry Trade Strategy
Carry traders have the option to negotiate a loan on a currency with low-interest rates to purchase a currency with high-interest rates. Profit is gained on the interest rate differential between the currencies, which is affected by fluctuations in prices.
They receive a daily payout on the interest earned when open Forex positions are ‘carried’ overnight. The movements of the currency increases or decreases the profitability of the currency.
Brokers will notify you of a successful Forex swap and profits will be paid out after service fees are deducted.
Pros and Cons the Carry Trade Strategy
|Minimal time requirements||Requires a greater understanding of Fundamental and Technical Analysis|
|Positive differentials will give daily payouts of interest payments||Depreciation of interest rates because of long-term investments|
|Return on capital is higher because leverage is used||Positions are held over long periods, which limits profit opportunities|
|Capital may be sacrificed if Carry trade pairs lose value faster than interest rates are gained|
The Support and Resistance Strategy
The Support and Resistance Strategy is a form of Day Trading, where the trader buys at the minimum Support level and sells at the maximum Resistance level.
The Support level is the point where the price of a currency no longer decreases, and the Resistance level is the point where the price of a currency no longer increases.
Charts with timeframes can be interpreted to analyze fluctuations in prices, evaluate levels of Support and Resistance, and to choose the best time to buy and sell currency or enter and exit a market.
Pros and Cons of the Support and Resistance Strategy
|The Support and Resistance strategy is easy to implement and follow||Prices are unpredictable and market levels may be disturbed by sudden fluctuations|
|It is a profitable approach to Forex trading||Relying on market news may be misleading when false breaks are announced|
|Decisions are verified using charts to identify the levels of support and resistance in a market||Knowledge of Technical Analysis is essential|
The Breakout Strategy
Breakout traders predict price movements and a moment must be chosen to enter and trade in the market when the price breakout is profitable.
When the number of market opportunities increases, traders are attracted. The high volume of trades causes fluctuations in trading ranges.
A Breakout will be caused by an increase in either Support or Resistance levels and there will be a sudden, unpredictable movement in the price. This creates an opening to enter the market.
Pros and Cons the Breakout Strategy
|Financial risks are limited||Profitability is inconsistent|
|Market entry and exit points are established and profits are decided||Market news may be misleading and responding to a false breakout could lead to losses|
|Greater earning potential when breakouts are anticipated||Decisions must be made with accuracy to avoid missing opportunities to capitalize on Breakouts|
There are many different ways to approach Forex Trading and choosing a Forex Trading Strategy that works for you will determine how successful you are financially. Being fully committed to Forex trading requires a strategy that compliments your personality and adapts to your lifestyle.
Forex trading may be overwhelming to new traders, so a good place to start is by practising on a Forex demo account, doing research and finding a Forex broker who understands your goals. Demo accounts may also be a good way to test different strategies before investing real money.