Best Forex Strategies That Work

Reviewed by Nick Cawley on December 16, 2021

Primary talking points:

What is a Forex Trading Strategy?
Forex Strategies: A Top-level Overview
Price Activeness Trading
Range Trading Strategy
Tendency Trading Strategy
Position Trading
Day Trading Strategy
Forex Scalping Strategy
Swing Trading
Carry Trade Strategy

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What is a Forex Trading Strategy?

A forex trading strategy defines a system that a forex trader uses to determine when to purchase or sell a currency pair. There are diverse forex strategies that traders can use including technical assay or cardinal analysis. A expert forex trading strategy allows for a trader to analyse the marketplace and confidently execute trades with audio risk management techniques.

Forex Strategies: A Top-level Overview

Forex strategies can be divided into a singled-out organisational structure which can assist traders in locating the most applicative strategy. The diagram below illustrates how each strategy falls into the overall construction and the relationship between the forex strategies.

relationship between different forex strategies

Forex Trading Strategies That Piece of work

Forex trading requires putting together multiple factors to codify a trading strategy that works for you. There are countless strategies that tin can be followed, however, understanding and existence comfortable with the strategy is essential. Every trader has unique goals and resources, which must be taken into consideration when selecting the suitable strategy.

There are 3 criteria traders can use to compare dissimilar strategies on their suitability:

Time resources required
Frequency of trading opportunities
Typical altitude to target

To hands compare the forex strategies on the three criteria, we've laid them out in a bubble nautical chart. On the vertical axis is 'Take a chance-Reward Ratio' with strategies at the acme of the graph having higher reward for the take a chance taken on each trade. Position trading typically is the strategy with the highest risk reward ratio. On the horizontal axis is time investment that represents how much time is required to actively monitor the trades. The strategy that demands the nigh in terms of your time resource is scalp trading due to the loftier frequency of trades being placed on a regular basis.

1. Price Activity Trading

Price activity trading involves the report of historical prices to formulate technical trading strategies. Cost activeness can be used equally a stand-alone technique or in conjunction with an indicator. Fundamentals are seldom used; even so, it is non unheard of to incorporate economic events as a substantiating factor. There are several other strategies that fall inside the price action bracket as outlined above.

Length of trade:

Price action trading tin be utilised over varying fourth dimension periods (long, medium and short-term). The ability to employ multiple time frames for assay makes price activeness trading valued by many traders.

Entry/Exit points:

There are many methods to determine support/resistance levels which are generally used equally entry/go out points:

Fibonacci retracement
Using candle wicks
Trend identification
Indicators
Oscillators

Within price action, in that location is range, trend, mean solar day, scalping, swing and position trading. These strategies adhere to unlike forms of trading requirements which will exist outlined in item beneath. The examples prove varying techniques to trade these strategies to show just how diverse trading can be, along with a diverseness of bespoke options for traders to choose from.

ii. Range Trading Strategy

Range trading includes identifying support and resistance points whereby traders volition identify trades around these central levels. This strategy works well in marketplace without significant volatility and no discernible trend. Technical analysis is the primary tool used with this strategy.

Length of trade:

In that location is no set length per trade equally range jump strategies can work for whatsoever time frame. Managing risk is an integral part of this method as breakouts can occur. Consequently, a range trader would similar to close any current range bound positions.

Entry/Exit points:

Oscillators are most ordinarily used every bit timing tools. Relative Strength Alphabetize (RSI ), Article Channel Index (CCI) and stochastics are a few of the more popular oscillators. Toll activity is sometimes used in conjunction with oscillators to further validate range bound signals or breakouts.

Case one: USD/JPY Range Trading

USD/JPY has been exhibiting a prolonged range bound cost level over the past few years. The chart above illustrates a clear back up and resistance ring which traders use as entry/exit points. The RSI oscillator demonstrates timing of entry/exit points as highlighted past the shaded blueish and red boxes – blue: overbought and red: oversold.

Range trading tin can outcome in fruitful adventure-advantage ratios however, this comes along with lengthy time investment per trade. Use the pros and cons below to align your goals equally a trader and how much resources you have.

Pros:

Substantial number of trading opportunities
Favourable hazard-to reward ratio

Cons:

Requires lengthy periods of time investment
Entails strong appreciation of technical analysis

3. Trend Trading Strategy

Tendency trading is a simple forex strategy used by many traders of all experience levels. Trend trading attempts to yield positive returns by exploiting a markets directional momentum.

Length of trade:

Trend trading more often than not takes identify over the medium to long-term fourth dimension horizon as trends themselves fluctuate in length. As with price action, multiple time frame analysis can be adopted in tendency trading.

Entry/Exit points:

Entry points are usually designated past an oscillator (RSI, CCI etc) and exit points are calculated based on a positive risk-reward ratio. Using cease level distances, traders can either equal that altitude or exceed it to maintain a positive take a chance-reward ratio e.thousand. If the terminate level was placed 50 pips away, the take profit level wold be set at 50 pips or more away from the entry point.

Instance 2: Identifying the Trend

In the simple example above, EUR/USD exhibits an upwardly trend validated past higher highs and college lows. The reverse would be true for a down trend.

EUR/USD Trading the Trend

When you see a stiff trend in the market, trade information technology in the direction of the tendency. For example, the strong uptrend in EUR/USD above.

Using the (CCI) as a tool to time entries, observe how each time CCI dipped beneath -100 (highlighted in blue), prices responded with a rally. Not all trades will work out this way, but considering the tendency is being followed, each dip caused more buyers to come into the market place and push prices higher. In decision, identifying a strong trend is of import for a fruitful trend trading strategy.

Tendency trading tin can exist reasonably labour intensive with many variables to consider. The list of pros and cons may assist you lot in identifying if trend trading is for yous.

Pros:

Substantial number of trading opportunities
Favourable risk-to reward ratio

Cons:

Requires lengthy periods of time investment
Entails strong appreciation of technical analysis

4. Position Trading

Position trading is a long-term strategy primarily focused on fundamental factors however, technical methods can be used such as Elliot Wave Theory. Smaller more minor market fluctuations are not considered in this strategy as they do not touch the broader market moving-picture show. This strategy can be employed on all markets from stocks to forex.

Length of merchandise:

As mentioned above, position trades have a long-term outlook (weeks, months or fifty-fifty years!) reserved for the more persevering trader. Agreement how economic factors affect markets or thorough technical predispositions, is essential in forecasting trade ideas.

Entry/Exit points:

Key levels on longer time frame charts (weekly/monthly) concord valuable data for position traders due to the comprehensive view of the market. Entry and leave points tin be judged using technical analysis equally per the other strategies.

Example 3: Frg 30 (DAX) Position Trading

The Germany thirty nautical chart higher up depicts an approximate two year head and shoulders pattern, which aligns with a probable fall below the neckline (horizontal red line) subsequent to the correct-hand shoulder. In this selected example, the downward fall of the Germany 30 played out as planned technically also every bit fundamentally. Towards the end of 2018, Germany went through a technical recession forth with the U.s.a./China trade war pain the automotive industry. Brexit negotiations did not assistance matters as the possibility of the Great britain leaving the European union would nearly probable negatively impact the German economy as well. In this case, understanding technical patterns every bit well every bit having stiff fundamental foundations allowed for combining technical and fundamental assay to structure a strong trade thought.

List of Pros and Cons based on your goals as a trader and how much resource you have.

Pros:

Requires minimal fourth dimension investment
Highly positive take chances-to advantage ratio

Cons:

Very few trading opportunities
Entails strong appreciation of technical and fundamental analysis

5. Day Trading Strategy

Day trading is a strategy designed to merchandise financial instruments inside the same trading twenty-four hours. That is, all positions are closed before marketplace shut. This tin be a single trade or multiple trades throughout the 24-hour interval.

Length of merchandise:

Trade times range from very brusk-term (matter of minutes) or short-term (hours), as long as the trade is opened and airtight within the trading mean solar day.

Entry/Exit points:

Traders in the case below will look to enter positions at the when the toll breaks through the 8 flow EMA in the direction of the trend (blue circle) and exit using a 1:i risk-reward ratio.

Example four: EUR/USD Day Trading

The chart to a higher place shows a representative twenty-four hours trading setup using moving averages to identify the trend which is long in this case equally the cost is above the MA lines (red and black). Entry positions are highlighted in blue with stop levels placed at the previous toll interruption. Have profit levels will equate to the stop altitude in the direction of the trend.

The pros and cons listed below should exist considered before pursuing this strategy. Twenty-four hours trading involves much time and endeavour for picayune reward, every bit seen from the EUR/USD example above.

Pros:

Substantial number of trading opportunities
Median chance-to advantage ratio

Cons:

Requires lengthy periods of fourth dimension investment
Entails potent appreciation of technical analysis

6. Forex Scalping Strategy

Scalping in forex is a mutual term used to draw the process of taking modest profits on a frequent basis. This is achieved by opening and closing multiple positions throughout the day. This can be done manually or via an algorithm which uses predefined guidelines every bit to when/where to enter and exit positions. The almost liquid forex pairs are preferred as spreads are generally tighter, making the brusque-term nature of the strategy plumbing fixtures.

Length of trade:

Scalping entails curt-term trades with minimal return, usually operating on smaller time frame charts (30 min – 1min).

Entry/Go out points:

Like most technical strategies, identifying the tendency is step 1. Many scalpers use indicators such as the moving average to verify the trend. Using these key levels of the tendency on longer fourth dimension frames allows the trader to see the bigger picture. These levels will create back up and resistance bands. Scalping within this band can then exist attempted on smaller fourth dimension frames using oscillators such as the RSI. Stops are placed a few pips abroad to avert large movements confronting the trade. The MACD indicator is another useful tool that can be exercised past the trader to enter/go out trades.

Case v: EUR/USD Scalping Strategy

The EUR/USD 10 infinitesimal in a higher place shows a typical example of a scalping strategy. The long-term tendency is confirmed by the moving average (toll above 200 MA). The smaller time frame is then used to target entry/exit points. Timing of entry points are featured by the ruby rectangle in the bias of the trader (long). Traders can also close long positions using the MACD when the MACD (blue line) crosses over the signal line (ruby-red line) highlighted by the blue rectangles.

Traders use the same theory to set their algorithms notwithstanding, without the manual execution of the trader.

With this practical scalp trading instance higher up, utilise the list of pros and cons below to select an advisable trading strategy that best suits you.

Pros:

Greatest number of trading opportunities from all forex strategies

Cons:

Requires lengthy periods of time investment
Entails potent appreciation of technical assay
Lowest risk-to reward ratio

7. Swing Trading

Swing trading is a speculative strategy whereby traders look to take advantage of rang leap as well as trending markets. By picking 'tops' and 'bottoms', traders tin enter long and short positions accordingly.

Length of trade:

Swing trades are considered medium-term every bit positions are more often than not held anywhere between a few hours to a few days. Longer-term trends are favoured as traders can capitalise on the trend at multiple points along the trend.

Entry/Exit points:

Much like the range bound strategy, oscillators and indicators can be used to select optimal entry/get out positions and times. The just difference being that swing trading applies to both trending and range bound markets.

Example half dozen: GBP/USD Swing Trading Strategy

A combination of the stochastic oscillator, ATR indicator and the moving boilerplate was used in the case in a higher place to illustrate a typical swing trading strategy. The upward trend was initially identified using the 50-24-hour interval moving average (price above MA line). In the case of an uptrend, traders will expect to enter long positions with the old adage of 'purchase low, sell high'.

Stochastics are then used to identify entry points by looking for oversold signals highlighted by the blue rectangles on the stochastic and chart. Take chances management is the last footstep whereby the ATR gives an indication of stop levels. The ATR figure is highlighted by the blood-red circles. This figure represents the approximate number of pips away the finish level should be set up. For example, if the ATR reads 41.8 (reflected in the last ATR reading) the trader would expect to place the finish 41.viii pips away from entry. At DailyFX, we recommend trading with a positive chance-reward ratio at a minimum of 1:two. This would mean setting a take profit level (limit) at least 83.6 (41.viii 10 2) pips away or farther.

After seeing an example of swing trading in action, consider the following list of pros and cons to determine if this strategy would suit your trading way.

Pros:

Substantial number of trading opportunities
Median hazard-to reward ratio

Cons:

Entails strong appreciation of technical analysis
Yet requires extensive fourth dimension investment

8. Acquit Trade Strategy

Carry trades include borrowing ane currency at lower rate, followed past investing in another currency at a higher yielding charge per unit. This will ultimately outcome in a positive carry of the trade. This strategy is primarily used in the forex market.

Length of trade:

Carry trades are dependent on interest rate fluctuations betwixt the associated currencies therefore, length of trade supports the medium to long-term (weeks, months and possibly years).

Entry/Exit points:

Strong trending markets work all-time for carry trades as the strategy involves a lengthier fourth dimension horizon. Confirmation of the trend should exist the starting time pace prior to placing the trade (higher highs and higher lows and vice versa) – refer to Example one above. There are 2 aspects to a carry merchandise namely, exchange charge per unit risk and involvement charge per unit hazard. Appropriately, the best fourth dimension to open the positions is at the get-go of a trend to capitalise fully on the exchange charge per unit fluctuation. Regarding the interest rate component, this will remain the same regardless of the tendency every bit the trader will still receive the interest rate differential if the start named currency has a higher interest rate against the second named currency due east.chiliad. AUD/JPY.

Could carry trading piece of work for you? Consider the following pros and cons and see if it is a forex strategy that suits your trading style.

Pros:

Piddling time investment needed
Median risk-to reward ratio

Cons:

Entails strong appreciation of forex market
Infrequent trading opportunities

Forex Strategies: A Summary

This article outlines eight types of forex strategies with practical trading examples. When considering a trading strategy to pursue, it can be useful to compare how much time investment is required behind the monitor, the risk-reward ratio and regularity of total trading opportunities. Each trading strategy will appeal to different traders depending on personal attributes. Matching trading personality with the advisable strategy will ultimately allow traders to take the first pace in the right direction.

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