Do you presently experience difficulty, in finding a suitable forex trading strategy for your trading style and risk tolerance?In this post we've made a list of proven forex trading strategies. This will enable you to choose a strategy that would best suit your trading style.
Each strategy has it's own approach and is suited to different types of traders. You may like one trading style and dislike the other. You decide the type of trader you become.
Let's begin right away.
What is Forex Strategy?
Forex Strategy is a process by which forex professionals develop directional biases through a comprehensive, and intensive price data analysis to determine buying or selling points as well as pre-defined areas of exits.
You may apply a Forex trading strategy for a long-term or short-term goal.
Here are the most popular forex trading strategies today:
1. Scalping Strategy
2. Day Trading Strategy
3. Trend Following Strategy
4. Range Trading Strategy
5. Breakout Trading Strategy
6. Carry Trade Strategy
7. Swing Trading Strategy
8. Position Trading Strategy
1. Scalping Strategy
This strategy involves making numerous trades over short time frames, aiming to profit from small price movements.
Scalpers make use of 1-hour or 15-Minutes time frames. Those are their higher time frames to identify overall market trends. Then, they open trades on 1-minute or 5-minute charts.
That means scalpers open their buy or sell positions on 1-minute or 5-minute charts.
Enter and exit quickly:
Do you want to become a scalper? You are going to be focusing on small price movements and close trades within minutes.
Manage risk:
Managing risk is very important. Remember no strategy is a holy grail, use tight stop-loss orders to limit losses.
Example:
A trader using a 1-minute chart on the EUR/USD pair makes multiple trades in a day, capturing small profits of 5-10 pips each time.
See another example in the screenshot below:
As you view the trade on the screenshot, you can find out that the trader's first opened position was a sell order. He then secured it by moving his stop loss to break even.
When the price started reversing he began to place buy orders. All these buying and selling activities took place within a couple of minutes.
2. Day Trading Strategy:
This strategy involves holding positions within a trading session to take advantage of expected price movements in a certain trapping session.
For example, a trader may decide to maintain their trading only in London or New York session.
Most day traders take advantage of crystal clear trade setups when they present in both London and New York sessions.
That means when they see a setup present during London open they buy or sell. Then, they will close their trade before New York opens.
On the other hand, when they see another opportunity during the New York session they will buy or sell again. But this 2 times profits in a day do not always happen.
You can see only 1 setup more often as a day trader, and again, sometimes there would be no setup at all for the whole day.
How to Implement This Strategy:
Every individual professional trader has their trading approach as we mentioned earlier.
Step 1. H4 Chart Analysis
Personally, as a day trader, when I want to buy or sell any currency pair I look at the Highs, I look at the Lows and Trap areas of the week. See the example in the screenshot below:
The areas I labeled rectangles are the Highs, Lows and Trap areas. Then the arrow sign is the direction of the overall trend.
Step. 2 H1 Chart Analysis
Secondly, I move to the H1 timeframe to identify the current level of the price. The price is in level 2 in this example. This is where I look for a possible trade setup. See the screenshot below:
Immediately a trade setup presents itself, I would start looking for an entry point. That's when I now move to the 15-minute timeframe.
Step. 3 15-Minutes Chart Entry
Finally, when I move to the 15-minute timeframe I look for confluences, using TDI subgraph and other indicators before I place my trade.
Remember the overall trend in this example is uptrend. Therefore, the buy order on the 15-minute chart was perfect. From step 1 to step 3 is what is called top-down analysis.
Manage Risk:
Always apply good risk management to protect your equity.
Example:
Before you push the Buy or Sell button, measure the distance of your target entry point and where the stop-loss will sit. Your stop-loss should stay below the Low and your take profit should be at least 30 pips above the price.
3. Trend Following Strategy:
This strategy involves identifying and following the direction of the market trend. Traders using this strategy believe that prices will continue to move in the same direction as the current trend.
How
to Implement This Strategy:
Identify the trend: Use tools like moving averages (MA), the Moving Averages Convergence Divergence (MACD), or trend lines.
Enter the trade: Once you identify a trend, enter a trade in the direction of the trend. For example, In a downtrend, you will look to sell. And again in the uptrend, you will look to Buy.
Manage Risk:
Set stop-loss and take-profit levels: Place stop-loss
orders below the recent swing low (for long positions) i.e for Buy positions or above the recent
swing high (for short positions) i.e for Sell positions.
Example:
A trader identifies an uptrend in the EUR/USD pair using a 50-day moving average. The price is consistently above the 50-day MA. The trader enters a long position and places a stop-loss below the latest swing low.
The rectangle represents the latest swing low, while the arrow represents the entry area. Therefore, the trader places stop-loss below the rectangle after placing his order at the arrow point.
4. Range Trading Strategy:
This strategy involves identifying currency pairs that are trading within a range and buying at the support level while selling at the resistance level.
How
to Implement This Strategy:
Identify the range: Use support and resistance levels to define the range.
Remember this is not an uptrend, and neither is it a downtrend where you apply vertical support and resistance levels.
In a range-bound market, you use horizontal lines to mark the support and resistance levels.
Where to Enter the trade: Buy at the support level and sell at the resistance level.
Manage Risk:
Set stop-loss and take -profit levels: Place stop-loss orders below the support level for long positions and above the resistance levels for short positions.
Example:
A trader notices that the USD/JPY pair is trading in a range, between 155.553 and 156.280.
The trader buys at 155.641 (support), places a stop-loss at 155.304, then takes profit at 156.280 and sells at 156.207 (resistance), takes profit at 155.553, placing a stop-loss at 156.489.
See screenshot example below:
5. Breakout Trading Strategy:
This strategy involves entering trades when the price breaks out of a defined support or resistance level. The expectation is that the price will continue in the direction of the breakout.
How to Implement Breakout Trading Strategy:
Identify breakout levels: Use support and resistance levels to identify potential breakout points.
Enter the trade: Enter a trade when the price breaks above resistance or below support.
Set stop-loss and take-profit levels: Place stop-loss orders just below the breakout level for long positions and just above the breakout level for short positions.
Example:
A trader observes that the GBP/USD pair is struggling to break above the 1.4000 resistance level. Once the price breaks above 1.4000, the trader enters a long position with a stop-loss at 1.3950.
Most breakout traders use this approach: they make use of the Asian tight range to determine their entry point.
For instance, if they want to buy a currency pair, they will place their stop-loss below the Asian range and
a pending order mainly 10 pips above the Asian range. They will then target 25 to 50 pips profit.
See the illustration of GBP/USD in the screenshot below:
The rectangle is the Asian range. So breakout traders place their stop-loss below the Asian range.
Then, the second arrow above the Asian range is pointing at the area where they place a pending order which is 10 pips above the Asian range.
As soon as the price triggers the order it will continue in the direction of the second arrow above the Asian range which at the end of the second arrow is 30 pips profit.
They do the same thing but in reverse. when they want to Sell a currency pair, this time they place a stop-loss above the Asian range, then place their pending order 10 pips below the Asian range.
Again, once price triggers the order, price will continue downwards until it hits their take-profit.
6. Carry Trade Strategy:
This strategy is also known as Arbitrage in the financial industry. It involves borrowing funds in a currency with a low interest rate and investing them in a currency with a higher interest rate.
How to Implement This Strategy:
Identify currencies: Choose currencies with significant interest rate differentials.
Enter the trade: Borrow in the low-interest-rate currency and invest in the high-interest-rate currency.
Manage risk:
Be aware of exchange rate risks and economic changes that could affect interest rates.
That means you should be more concerned about fundamental analysis because you are going to be mainly focusing on central banks' interest rates.
Example:
At trader borrows Japanese Yen (JPY) at a low interest rate and invests in Australian Dollar (AUD) with a higher interest rate. The trader profits from the interest rate differentials as long as the exchange rate remains favorable.
7. Swing Trading Strategy:
This strategy involves holding positions for several days to take advantage of expected price swings.
How to Implement This Strategy:
Identify potential swings: Use technical analysis tools like Fibonacci retracement, support and resistance levels, and moving averages.
Enter the trade: Enter trades based on identified swing points.
Manage Risk:
Set stop-loss and take-profit levels: Place stop-loss orders below recent swing highs for short positions.
Example:
I applied the Fibonacci retracement tool at the D1 higher timeframe chart first, to identify a 50% retracement to the 50-moving average. The 50-moving average this time is my confluence to determine my entry point.
Again I move to the lower timeframe (H4) for confirmations.
I identified a swing low in the EUR/USD pair at 1.07267 and expects a move to 1.08851. Then we can enter a long position at 1.07475 with a stop-loss at 1.07186 and a take-profit at 1.08851. That's 139 pips.
Enter your trade at the H1 timeframe.
You can apply any Workable approach to this strategy.
8. Position Trading Strategy:
This strategy involves holding trades for weeks, months, or even years, based on long-term market trends.
How to Implement This Strategy:
Analyze long-term trends: Use weekly and monthly charts to identify long-term trends.
Enter the trade: Enter trades based on fundamental and technical analysis of long-term trends.
We've talked about understanding the fundamentals in our previous post on 7 Major Currency Pairs and How to Trade 1 Pair Consistently & Profitably. I believe this topic will help you as an aspiring position trader.
Set stop-loss and take-profit levels: Place stop-loss orders at significant levels to protect against major market reversals.
Example:
A trader identifies a long-term uptrend in the USD/CAD pair. The trader enters a long position, holding it for several months, and places a stop-loss below a major support level on the monthly chart.
In this example, your entry should be inside the rectangle while your stop-loss is below the rectangle, and then you can ride the trend for months.
It doesn't matter the approach you use in currency trading, as long as is profitable you can apply it to any of those strategies successfully. Especially when you understand Macrocosm and Microcosm.
Conclusion:
Each of those forex strategies requires different levels of knowledge, risk tolerance, and time commitment. It's essential for traders to choose a strategy that fits their trading style and to thoroughly test it before committing significant capital.
Now it's your turn. Which of those strategies do you prefer and wish to develop yourself? Let us know and please share the post, using the share button.
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