The 10 Best Forex Trading Strategies That Work
Every trader usually has a strategic plan or a forex trading strategy to follow. In this page of our guide, we will go through the best forex trading strategies that work.
This includes technical analysis, day trading, price action, news trading and many more.
After this chapter, you can start trading by following one or more of the forex trading strategies mentioned here.
Choosing the right forex trading platform and having a trading strategy are the most important steps to begin your forex trading adventure.
Let’s take a look now!
The Best Forex Trading Strategies That Work
When talking about a forex strategy, it’s important for a beginner to develop a trading style.
The trading style means the trading technique. So when you’re starting out, you need to decide how many trades you’re willing to open each time. You also need to consider if these are short-term or long-term trades.
You must consider the following factors to help you select your forex strategy:
- The amount of money available
- The time to spend on forex trading
- Goals to achieve
- Risk management plan
It’s up to each individual trader to answer these points in order to choose their strategy. Once these factors are clear, the strategy can be picked.
Below are the most common strategies traders use:
- Technical analysis: this forex strategy is the analysis of the graphic chart in order to predict its future movement. It is the most common with the fundamental analysis.
- News trading: the forex trading strategy to trade when there are important economic decisions worldwide
- Price Action: this forex trading strategy is the technique to find the same repetitive movement of a pattern
- Day trading: a forex trading strategy where trades are open and closed during the same day
- Scalping: with this forex strategy trades open and close in a very short time, usually within a few minutes
- Bollinger Bands: this is the most common indicator for forex trading
- Fibonacci: this forex strategy consists of analysing the chart with a sequence of lines in order to open a trade
- Carry Trade Strategy: consists of opening 2 trades on the same asset to speculate on the interest rate
- Trending Strategy: this technique is to open a position that follows the market trend
- Transition Trading: this trading strategy is based on moving the stop loss and take profit depending on the market
These are some of the most common forex trading strategies that work.
Let’s go through each of them now in detail.
The technical analysis is the core of all the forex strategies.
It consists of the analysis of a chart in different time frames in order to predict the future movement of its graphic.
It’s the main forex strategy used by expert traders.
If a chart is analysed, it’s possible to see that it moves different times near a price to then bounce back.
The level where this price is, is called the support, if it’s below the actual price. To spot it, you must watch the chart in a daily or hourly time frame. If during this period the price appears to go below a certain level 3 or more times, that level is the support.
After spotting it, you need to wait until the price touches and suddenly bounces back, to then buy at that moment.
However, if the chart tries to go above a certain price many times to then bounce back, that level takes the name of resistance.
With this forex strategy, a trader waits to sell till the price will touch again that exact price.
The technical analysis is a long term forex trading strategy because it’s based on waiting for the right moment to invest in the market. This moment could happen within few hours or in some months time.
To trade with this forex strategy, it’s very useful to set up some pending orders to save the time spent actively watching.
News Trading Strategy
This forex strategy is based on the upcoming economic news emerging during the day.
When watching the economic calendar, you can see that there are many events during the day. These are marked with one, two or three bulls (or stars in some cases).
The more bulls there are, the highest movement there will be in the market.
Every forex trader knows that in situations of high volatility, there will a big movement in the market.
This forex trading strategy doesn’t require a big amount of time to trade.
However, it’s important to be ready at the right time. This is easy though because the economic calendar is always available online, so a currency trader can plan in advance their future forex trading strategy.
Usually, the positions are closed within 20 minutes. This is the time a market moves from one price to another and then finds its stability at a new level.
Economic calendars can be a great trading strategy to follow as it also helps you to get in the mindset of being a trader. By staying aware of events and international news, you can plan better your reaction to market events to benefit your trades.
Staying aware is pivotal in mastering this method. It’s worth mentioning that besides checking the economic calendars provided by broker platforms, it’s also good to keep an eye on the general news.
Occasions such as elections, trade deals or new governments are all prime examples of when market volatility is likely to happen. For example, the Brexit political situation has greatly affected the GBP price in the Forex market.
Keeping up to date is the key!
Price Action Strategy
The price action is one of the forex trading strategies that work, it’s also used by many traders. It uses the technical analysis and it consists of finding a repetitive movement for a specific price on the chart.
For instance, if the price of Gold in the short-term goes systematically up and down in a price range, a trader will find it easier to predict Gold’s future movement because it will probably always be inside that range.
This is a forex strategy used in the short-term and it requires some time spent in front of the computer. However, it is very useful because it’s easy to set up the take profit and stop loss prices, knowing that the price will stay within the range.
Day Trading Strategy
Day trading is one of the fastest forex strategies. As you can probably understand from its name, it consists of opening and closing trades on the same day. This is why it’s also called intraday.
It’s a short term forex strategy used by the majority of traders, mainly because if a position stays open overnight there isn’t any commission to pay.
However, with the day trading strategies, the profits are normally smaller than the long-term trades ones. This is because in a shorter time frame the movements are usually smaller too. That’s why in forex, a trader opens more trades during a single day than a long term trader does.
A good tool to use following this strategy is the economic calendar. This means that this strategy is often combined with the news trading one.
A day trader spends a lot of time in front of their account. This helps them to catch the market opportunities and make the most out of them.
Scalping or scalp trading is the fastest option out of all the forex strategies.
It consists of opening many trades during the same day, and then closing them in a very short period. This is done usually within a few minutes or even seconds.
Whoever follows this strategy has to naturally spend a lot of time in front of the charts. Investing with a stop loss and take profit doesn’t even make sense because the trades are closed manually in such a short time.
A lot of traders combine this forex strategy with currency indicators and most of all the Bollinger Bands.
Many traders also take check the economic calendar to see if there’s any big news coming up in the interested markets.
Because scalping is usually done in a stable market, without any high volatility involved.
Its goal is to exploit the chart analysis in a very small-time frame, normally 1 minute.
This is instead of investing according to any economic news which day forex trading strategy is based on.
Scalping is more about the quantity rather than the quality. Who follows it wants to make a lot of small profits.
The Bollinger Bands are considered to be an indicator more than a forex trading strategy.
They are used to identify the levels of buy and sell prices on the chart.
If an asset price touches the top band, we are in an over-buy situation. In this case, the price should go down soon.
On the other side, if the price touches the bottom band there is an over-sell situation. Here the price should grow up again shortly.
The 3 Bollinger Bands
The Bollinger Bands are made up of 3 different bands and each one defines different parameters:
- the middle line represents the prices average movement
- the top line represents the resistance which the price is supposed to touch and bounce back from
- the bottom line is the support. The price should touch it and then bounce up again
We have seen these terms and their importance in the technical analysis chapter.
The Bollinger Bands are very useful to trade with. If they’re properly analysed they can also show if there were high movements.
In fact, if the gap between the top and bottom bands is very large, it means there has been high volatility. On the other view, it means that the price movement has been pretty much steady.
This is very useful because in low volatility moments the bands are very close to each other. This means the price could go up or down so it’s not easy to predict.
If the bands aren’t close, it’s more probable that they’re near to a support or resistance, so it’s easier to predict its future movement.
Using the Bollinger Bands is a popular forex strategy compared to all the other forex strategies. The time spent using this strategy can be managed very well with pending orders.
In fact if the price is near the top band, you can set a sell limit order. However, if the price is near the bottom band, a buy limit order can be set.
Every Fx (Currency) Broker provides the Bollinger Bands in its indicators list.
Fibonacci Trading Strategy
The technique of using Fibonacci bands is one of the most used forex trading strategies that work.
The use of Fibonacci should be done together with the technical analysis. To make this strategy more effective a trader should enter the market only when a Fibonacci band is at the same level as a support or resistance.
Let’s take a look at the picture below to understand better the meaning of this.
As we can see, in this example we have an example of Fibonacci overlapped with resistance and support on the bottom.
This situation gives the opportunity to a trader to enter the market in 2 different ways:
- Buying at the support price with a take profit to the next Fibonacci level
- Selling at the resistance price with a take profit to the Fibonacci level below
Fibonacci analysis is really about spotting patterns and waves that are showing within the trends. You can also judge from the movement how much pull back there will be when markets return to a previously traded level.
One interesting fact, this strategy was invented by Leonardo De Pisa, an Italian mathematician who discovered this logical sequence over 800 years ago!
Carry Trade Strategy
Another alternative forex trading method is the Carry Trade strategy.
We want to mention this one because it requires little investment time, which is great if you’re too busy to be forex trading all day.
It also offers a fairly good risk to reward ratio, however you’ll need a strong understanding of the Forex market in order to do well with it.
Carry trades rely on interest rate changes between the Forex currencies. This is why the length of trade bolsters long to medium time periods, ranging from weeks to even years.
To use the Carry Trade strategy you’ll need to trade one type of currency pair at a lower price rate. After this you’ll need to invest in a different currency pair which has a greater yielding rate.
Doing this could result in a positive carry through of the trade. Before you make a start it’s important that you consider both the interest and exchange rate risk. This is so you can make the most out of the exchange rate changes by opening a position at the start of a trend.
Concerning the interest rate though, this will not change – regardless of the trend. This is because you’ll still get the interest rate difference if the first chosen currency has a higher rate of interest than the second selected currency.
Trend Trading Strategy
Besides these main trading strategies, there are also other ones that you may come across. It’s always good to keep trying various methods in order to find the best forex trading technique to suit you.
The trend trading strategy is good because it follows the trend of the forex market. For example, the market can either show downtrend or uptrend movements.
All you need to do is to follow the pattern of the trend lines. To succeed at this strategy you need to sell when the trend line is ‘high’ and ‘buy’ when it’s low.
Trend trading allows you to analyse the market simply by monitoring the trend and its drawdowns.
The main thing is to find a good entry point. This will help you to succeed with trend trading. One indicator that can help you to do this is the Moving Average. When combined with this strategy you should be able to select the entry point very well.
Transition Trading and Trailing Stop Loss
The transition trading strategy consists of moving the take profit and stop loss following the market movement.
How does this trading strategy work?
Let’s imagine that you have bought EUR/USD at 1.11000 aiming to take the profit at 1.12000.
If the price will grow as planned towards 1.12000 and it could potentially grow more, you move the stop loss closer to the actual price and place the take profit higher than 1.12000.
By doing this you do 2 things:
- ensure some profits already made
- aim to a bigger potential profit
This strategy works mainly with medium-long term trading.
One of the cons of it is the amount of time needed, but again it’s also possible to set up a trailing stop loss.
A Trailing stop loss is a stop loss which will move along with the market movement, with a set amount of pips.
Using again our previous example, with a trailing stop loss at 20 pips, it the price grows from 1.11000 to 1.11900, the stop loss will move at 1.11700 (1.11900 – 1.11700 = 20 pips) and stop there.
If the price suddenly drops, the trade will be closed at 1.11700 and bring a profit of 70 pips (1.11700 – 1.11000).
As always, remember to test your strategies first and trade with the right trading strategy for you. It is also possible to test them all in a free demo account first without risking real funds.
To learn more about how to trade forex and currency click here: https://tradingonlineguide.com/what-is-forex-trading/