Trading forex without a strategy is a bit like starting out on a trip without a map since you never know where your account will end up. You might make money or lose money, but you have no idea which is more likely.
The big advantage of having a forex trading strategy is that you can take some of the guesswork out of trading currencies. Read on to find out more about the best forex trading strategies and how to choose among them to trade currencies successfully.
Contents
- Picking a Forex Strategy
- Best Forex Trading Strategies
- 1. Scalping
- 2. Day Trading
- 3. News Trading
- 4. Swing or Momentum Trading
- 5. Trend Trading
- 1. Scalping
- Best Forex Brokers for Trading
- How to Get Started Trading Forex
Picking a Forex Strategy
Picking a forex strategy is one of the most important things you can do to help assure your profitability as a currency trader, so you will definitely want to choose a successful strategy.
You’ll also want to select a strategy that best suits your lifestyle and personality type — not everyone wants to watch trading screens all day or is suited for the stress of fast-paced or high-risk strategies.
Once you’ve decided on one or more forex strategy options, you should check out how they perform. First, test each strategy via backtesting, which can be done with the popular MetaTrader forex platforms if you have modest programming skills.
Vet your strategy in a demo account that most online brokers will allow you to open without risk. If any strategies still look profitable, you can start trading them in a live account for the ultimate test.
It’s usually best to start with smaller trades and then work your way up to larger amounts as you gain confidence in the strategy’s performance and your ability to implement it in a disciplined way when trading live.
Best Forex Trading Strategies
Many successful strategies for trading forex exist, but not all of them are suitable for every trader. Select a strategy that best suits your particular situation, including your available time, personality type and risk tolerance. These are covered below based on the typical time involved, ranging from short to long term.
1. Scalping
Scalping is a very short-term trading strategy that involves taking multiple small profits on trading positions with a very short duration. Scalpers need ultra quick reaction times because they usually enter and exit trades in just seconds or minutes. This very fast paced and a rather stressful activity that may not suit everyone.
Scalpers also closely monitor price charts for patterns that can help them predict future exchange rate movements. They tend to use very short-term tick charts similar to that shown below for EUR/USD for analysis. Scalpers generally do best using a broker with tight spreads, quick guaranteed order executions and minimal or 0 order slippage.
2. Day Trading
Day trading is another short-term trading strategy that is followed only during a particular trading session. Day traders generally do not take overnight positions, so they close out all trades each day. This helps reduce exposure to market movements when the trader is inattentive to the market.
Most day traders use trading plans based on technical analysis on short-term charts that show intraday price action. Many day trading strategies exist, but a popular one, is known as breakout trading. Trades get triggered when the exchange rate moves beyond a given level on the chart for a currency pair and are confirmed when accompanied by an increase in volume.
The 30-minute candlestick chart of GBP/USD shows a breakout below the level of the lower of the 2 converging trend lines of a triangle pattern drawn in red. Note that trading volume also increased when the breakout occurred, thereby confirming it.
3. News Trading
Some forex traders with deep pockets and a decent appetite for risk might use news trading strategies, although they are probably not ideal for forex beginners. These strategies can be based on fundamental and technical analysis and they generally benefit from the notable volatility often seen in the forex market immediately after key news releases.
News traders typically need to monitor economic calendars for key data releases. They then watch the market closely before the event to determine key support and resistance levels so that they can react quickly after the event based on the results. News traders need to maintain strict discipline when managing their currency positions during such fast markets and often place stop-loss and take profit orders in the market.
An example of an economic calendar and a data release event that a news trader might use is U.S. unemployment claims. This data was especially volatile during the COVID-19 shutdown in the U.S. and created considerable fluctuations in the forex market after its release. Although those jobs numbers were dismal, what mattered most to the market is how the result differed from the market’s consensus.
In the situation below, the previous unemployment claims number was 3,176K, the expected number was 2,500K, and the result was worse than expected at 2,981K. This should have put pressure on the U.S. dollar after its release versus other currencies.
4. Swing or Momentum Trading
Swing trading, sometimes also known as momentum trading, consists of a medium-term trading strategy that aims to capture more market moves. Swing traders do this by trading both with major trends and also against them when the market is correcting, so they should be willing to hold overnight positions.
Swing traders tend to focus on entering and existing positions based on momentum indicators that provide buy and sell signals. Traders use them to find overbought or oversold markets they can sell or buy. Swing traders might also buy ahead of support or sell before resistance levels that develop on the charts of the exchange rate for a currency pair.
Some commonly used momentum indicators include the Moving Average Convergence Divergence (MACD) histogram and the relative strength index (RSI). The daily candlestick chart shown below for the GBP/USD exchange rate also displays the MACD and RSI in indicator boxes.
5. Trend Trading
Trend trading is a popular longer-term forex trading strategy that involves following the prevailing trend or directional movement in the market for a particular currency pair. This strategy often involves buying on pullbacks in up trends or selling on rallies in down trends.
After a trend trader has taken a position in the direction of the trend, you will probably hold onto it until the market reaches their objective or the trend starts reversing. Trend traders often use trailing stop loss orders to guard their profits if a significant reversal materializes.
Many trend traders use technical analysis indicators like the Average Directional Movement Indicator (ADX) and/or moving averages that smooth out the price action so they can better identify trends. They might also use longer and shorter term moving averages and watch for crossovers to signal a potential reversal.
The 4-hour candlestick chart for EUR/JPY below shows an upward trend in progress after a significant decline with a 10-day moving average shown in red and the ADX in the indicator box underneath.
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