Every trader usually has a strategic plan or forex trading strategies to follow. In this page of our guide, we will go through the best forex trading strategies that work (technical analysis, day trading, price action, news trading, etc).
After this chapter, every user can start trading by following one or more forex trading strategies mentioned here.
Choosing the right forex trading platform, and having a trading strategy is one of the most important steps to begin your trading adventure.
The 7 Best Forex Trading Strategies that work
When talking about a trading strategy, it’s important for a beginner to develop a trading style.
The trading style means the trading technique, so when starting out a user has to decide how many trades they are willing to open each time, and if these are short-term or long-term.
You must consider different factors to decide your strategy:
- The amount of money available
- The time to spend trading
- Goals to achieve
- Risk management plan
It’s up to each individual trader to answer these factors in order to choose their strategy. Once these factors are clear, below are the most common strategies traders use.
The most common ones that work are:
- Technical analysis: this consists of the analysis of the graphic chart in order to predict its future movement
- News trading: the strategy to trade when there are important economic decisions worldwide
- Price Action: the technique to find the same repetitive movement of a pattern
- Day trading: forex trading strategy where trades are open and closed during the same day
- Scalping: trades open and close in a very short time, usually within a few minutes
- Bollinger Bands: this is the most common indicator for trading
- Fibonacci: this trading strategy consists in analyzing the chart with a sequence of lines in order to open a trade
Let’s see each of them in detail.
1 – Technical analysis
The technical analysis is the core of all the forex trading 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 trading strategy used by expert traders.
If a chart is analyzed, it’s possible to see that it moves different times near a price to then bounce back.
The level where this price is, it’s called support if it’s below the actual price. To spot it, it’s necessary to watch the chart in a daily or hourly timeframe. If during this period the price appears to go below a certain level for 3 or more times, that level is the support.
After finding it a trader usually waits until the price touches and suddenly bounces back, to then buy at that moment.
On the other side though, if the chart tries to go above a certain price many times to then bounce back, that level takes the name of resistance.
In this case a trader waits to sell till the price will touch again that exact price.
The technical analysis is a long term strategy because it’s based on waiting for the right moment to invest in the market. This moment could happen in few hours or in some months time.
To trade in this way, it’s very useful to set some pending orders to save the time spent actively watching.
2 – News trading
This currency 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, 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 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 trading strategy.
Usually, the positions are closed within 20 minutes. This is the time a market moves from one price to another and then find its stability at a new level.
3 – Price Action
The price action is the investing technique used by many traders. It uses the technical analysis and it consists in finding a repetitive movement of 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, for a trader will be easier to predict its future movement because it will probably be always inside that range.
This is a trading technique used in the short-term and it requires and high time spent in front of the computer. However, it is very useful because it’s very easy to set up the take profit and stop loss prices knowing the price will stay in the range.
4 – Day trading
The day trading is one of the fastest forex trading 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 is a short term forex strategy used by the majority of traders because if a position stays open overnight there isn’t any commission to pay.
However, with the day trading strategy, the profits are normally smaller than the long-term trades ones, because in a shorter time frame the movements are usually smaller. This is 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, ready to catch the market opportunities and make the most out of them.
5 – Scalping
Scalping or scalp trading is the fastest option out of all the forex trading strategies.
It consists of opening many trades during the same day, and then closing them in a very short period, within usually a few minutes or even seconds.
Whoever follows this strategy has to spend a lot of time in front of the charts naturally. 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 strategy with currency indicators and most of all the Bollinger Bands.
Many traders also take a look at the economic calendar to see if there is 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 timeframe (normally 1 minute) instead of investing according to any economic news as the day trading strategy is based on.
Scalping is more about the quantity than the quality. Who follows it wants to make a lot of small profits.
6 – Bollinger Bands
The Bollinger Bands are considered to be an indicator more than a forex trading strategy.
They are used to identify 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 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 are properly analyzed they 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 it.
If the bands aren’t close, it’s more probable that they are near to a support or resistance, so it’s easier to predict its future movement.
Using the Bollinger Bands is a popular technique between all the forex trading 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.
7 – Fibonacci
The technique of using Fibonacci bands is one of the most used among traders.
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
As always remeber to test your strategies first and trade with the right trading strategy for you.
To learn more about how to trade forex and currency click here.