Forex Trading Strategy That Works

Reviewed by Nick Cawley on December xvi, 2021

Main talking points:

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

Discover what blazon of forex trader is buried within your DNA with our interactive DNA FX Quiz

What is a Forex Trading Strategy?

A forex trading strategy defines a system that a forex trader uses to determine when to buy or sell a currency pair. In that location are various forex strategies that traders tin can apply including technical analysis or fundamental assay. A skilful forex trading strategy allows for a trader to analyse the market and confidently execute trades with sound risk management techniques.

Forex Strategies: A Top-level Overview

Forex strategies can be divided into a distinct organisational structure which can assist traders in locating the almost applicable strategy. The diagram below illustrates how each strategy falls into the overall structure and the human relationship between the forex strategies.

relationship between different forex strategies

Forex Trading Strategies That Work

Forex trading requires putting together multiple factors to codify a trading strategy that works for y'all. There are endless strategies that can be followed, even so, understanding and existence comfy with the strategy is essential. Every trader has unique goals and resources, which must exist taken into consideration when selecting the suitable strategy.

In that location are three criteria traders can employ to compare different strategies on their suitability:

Fourth dimension resource required
Frequency of trading opportunities
Typical distance to target

To easily compare the forex strategies on the iii criteria, we've laid them out in a chimera nautical chart. On the vertical axis is 'Risk-Advantage Ratio' with strategies at the top of the graph having higher reward for the risk taken on each trade. Position trading typically is the strategy with the highest take a chance 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 virtually in terms of your time resource is scalp trading due to the high frequency of trades existence placed on a regular basis.

1. Cost Action Trading

Price activeness trading involves the report of historical prices to formulate technical trading strategies. Price activeness can be used as a stand-alone technique or in conjunction with an indicator. Fundamentals are seldom used; however, information technology is non unheard of to incorporate economic events every bit a substantiating factor. There are several other strategies that fall within the price action bracket as outlined higher up.

Length of trade:

Price action trading can be utilised over varying time periods (long, medium and curt-term). The ability to use multiple time frames for analysis makes price activeness trading valued by many traders.

Entry/Exit points:

There are many methods to determine support/resistance levels which are generally used as entry/leave points:

Fibonacci retracement
Using candle wicks
Trend identification
Indicators
Oscillators

Within toll activeness, there is range, tendency, day, scalping, swing and position trading. These strategies adhere to different forms of trading requirements which volition exist outlined in detail below. The examples testify varying techniques to merchandise these strategies to testify but how diverse trading can be, forth with a variety of bespoke options for traders to choose from.

2. Range Trading Strategy

Range trading includes identifying back up and resistance points whereby traders will place trades around these key levels. This strategy works well in market without significant volatility and no discernible tendency. Technical assay is the principal tool used with this strategy.

Length of trade:

There is no set length per merchandise every bit range spring strategies tin can work for whatever time frame. Managing take a chance is an integral part of this method equally breakouts can occur. Consequently, a range trader would similar to close any electric current range spring positions.

Entry/Leave points:

Oscillators are well-nigh normally used as timing tools. Relative Strength Index (RSI ), Article Aqueduct Index (CCI) and stochastics are a few of the more than popular oscillators. Cost action is sometimes used in conjunction with oscillators to farther validate range bound signals or breakouts.

Example 1: USD/JPY Range Trading

USD/JPY has been exhibiting a prolonged range bound price level over the past few years. The chart above illustrates a clear support and resistance band which traders use as entry/exit points. The RSI oscillator demonstrates timing of entry/get out points equally highlighted by the shaded blueish and ruby boxes – blue: overbought and cherry: oversold.

Range trading can result in fruitful risk-reward ratios withal, this comes forth with lengthy time investment per trade. Use the pros and cons below to align your goals as a trader and how much resources yous have.

Pros:

Substantial number of trading opportunities
Favourable risk-to reward ratio

Cons:

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

iii. Tendency Trading Strategy

Trend 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:

Tendency trading generally takes identify over the medium to long-term time horizon as trends themselves fluctuate in length. As with price activeness, multiple time frame analysis can be adopted in trend trading.

Entry/Exit points:

Entry points are usually designated by an oscillator (RSI, CCI etc) and exit points are calculated based on a positive risk-reward ratio. Using stop level distances, traders can either equal that distance or exceed it to maintain a positive risk-reward ratio east.g. If the stop level was placed 50 pips away, the take profit level wold be set at 50 pips or more away from the entry bespeak.

Case ii: Identifying the Trend

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

EUR/USD Trading the Trend

When you encounter a strong trend in the market, trade it in the direction of the trend. For example, the strong uptrend in EUR/USD above.

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

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

Pros:

Substantial number of trading opportunities
Favourable risk-to reward ratio

Cons:

Requires lengthy periods of fourth dimension investment
Entails stiff appreciation of technical assay

4. Position Trading

Position trading is a long-term strategy primarily focused on fundamental factors withal, technical methods can be used such as Elliot Moving ridge Theory. Smaller more than small market fluctuations are not considered in this strategy as they do not bear upon the broader market picture. This strategy tin can be employed on all markets from stocks to forex.

Length of trade:

As mentioned to a higher place, position trades take a long-term outlook (weeks, months or even years!) reserved for the more persevering trader. Understanding how economical 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) hold valuable information for position traders due to the comprehensive view of the market. Entry and get out points can be judged using technical assay as per the other strategies.

Example 3: Deutschland 30 (DAX) Position Trading

The Germany thirty nautical chart above depicts an guess two year head and shoulders blueprint, which aligns with a probable fall beneath the neckline (horizontal red line) subsequent to the right-hand shoulder. In this selected example, the downward fall of the Frg xxx played out as planned technically every bit well equally fundamentally. Towards the end of 2018, Germany went through a technical recession along with the US/China trade state of war pain the automotive industry. Brexit negotiations did not help matters as the possibility of the UK leaving the European union would most likely negatively impact the High german economic system also. In this case, understanding technical patterns likewise as having strong primal foundations allowed for combining technical and primal analysis to structure a strong trade idea.

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

Pros:

Requires minimal fourth dimension investment
Highly positive take a chance-to reward ratio

Cons:

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

5. Day Trading Strategy

Day trading is a strategy designed to trade financial instruments within the same trading day. That is, all positions are closed before market close. This can be a unmarried merchandise or multiple trades throughout the twenty-four hours.

Length of trade:

Merchandise times range from very curt-term (matter of minutes) or brusque-term (hours), equally long as the trade is opened and closed within the trading twenty-four hours.

Entry/Exit points:

Traders in the example below will wait to enter positions at the when the price breaks through the viii catamenia EMA in the direction of the trend (bluish circle) and exit using a 1:1 take chances-reward ratio.

Example 4: EUR/USD Day Trading

The chart above shows a representative mean solar day trading setup using moving averages to identify the trend which is long in this instance as the price is higher up the MA lines (red and blackness). Entry positions are highlighted in blue with stop levels placed at the previous toll break. Have profit levels will equate to the end distance in the direction of the trend.

The pros and cons listed below should be considered earlier pursuing this strategy. Twenty-four hour period trading involves much fourth dimension and endeavor for piffling advantage, as seen from the EUR/USD example above.

Pros:

Substantial number of trading opportunities
Median take chances-to reward ratio

Cons:

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

half-dozen. Forex Scalping Strategy

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

Length of trade:

Scalping entails short-term trades with minimal render, usually operating on smaller time frame charts (thirty min – 1min).

Entry/Exit points:

Similar virtually technical strategies, identifying the trend is step ane. Many scalpers utilize indicators such every bit the moving average to verify the trend. Using these primal levels of the trend on longer fourth dimension frames allows the trader to see the bigger motion picture. These levels will create back up and resistance bands. Scalping within this ring tin and so exist attempted on smaller fourth dimension frames using oscillators such every bit the RSI. Stops are placed a few pips abroad to avert large movements against the trade. The MACD indicator is another useful tool that can be exercised by the trader to enter/exit trades.

Example 5: EUR/USD Scalping Strategy

The EUR/USD x minute higher up shows a typical example of a scalping strategy. The long-term trend is confirmed by the moving average (toll above 200 MA). The smaller time frame is then used to target entry/go out points. Timing of entry points are featured by the blood-red rectangle in the bias of the trader (long). Traders tin also close long positions using the MACD when the MACD (blue line) crosses over the betoken line (scarlet line) highlighted by the blue rectangles.

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

With this applied scalp trading case above, use the list of pros and cons beneath to select an advisable trading strategy that all-time suits yous.

Pros:

Greatest number of trading opportunities from all forex strategies

Cons:

Requires lengthy periods of fourth dimension investment
Entails strong appreciation of technical analysis
Lowest take chances-to reward ratio

7. Swing Trading

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

Length of trade:

Swing trades are considered medium-term as positions are generally 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 forth the trend.

Entry/Exit points:

Much like the range bound strategy, oscillators and indicators can exist used to select optimal entry/go out positions and times. The merely divergence existence that swing trading applies to both trending and range leap markets.

Example half dozen: GBP/USD Swing Trading Strategy

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

Stochastics are so used to identify entry points past looking for oversold signals highlighted past the blue rectangles on the stochastic and nautical chart. Take chances management is the final step whereby the ATR gives an indication of stop levels. The ATR figure is highlighted by the red circles. This figure represents the gauge number of pips abroad the cease level should exist set. For example, if the ATR reads 41.viii (reflected in the last ATR reading) the trader would expect to place the stop 41.8 pips away from entry. At DailyFX, nosotros recommend trading with a positive risk-reward ratio at a minimum of ane:2. This would hateful setting a have profit level (limit) at least 83.vi (41.8 x 2) pips away or further.

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

Pros:

Substantial number of trading opportunities
Median risk-to advantage ratio

Cons:

Entails strong appreciation of technical analysis
Still requires extensive time investment

eight. Carry Merchandise Strategy

Carry trades include borrowing one currency at lower rate, followed past investing in another currency at a higher yielding rate. This will ultimately result in a positive acquit of the trade. This strategy is primarily used in the forex market place.

Length of merchandise:

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

Entry/Get out points:

Stiff trending markets work all-time for bear trades as the strategy involves a lengthier fourth dimension horizon. Confirmation of the trend should exist the first step prior to placing the trade (higher highs and higher lows and vice versa) – refer to Example 1 higher up. There are two aspects to a carry trade namely, exchange rate adventure and interest rate risk. Accordingly, the best fourth dimension to open the positions is at the start of a trend to capitalise fully on the exchange charge per unit fluctuation. Regarding the interest charge per unit component, this will remain the same regardless of the trend as the trader volition still receive the interest rate differential if the first named currency has a higher involvement rate against the second named currency e.yard. AUD/JPY.

Could comport trading work for you? Consider the post-obit pros and cons and see if information technology is a forex strategy that suits your trading style.

Pros:

Petty time investment needed
Median gamble-to reward ratio

Cons:

Entails strong appreciation of forex market
Infrequent trading opportunities

Forex Strategies: A Summary

This article outlines 8 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-advantage ratio and regularity of full 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 footstep in the right direction.

Heighten your forex trading

If you're new to forex trading, download our Forex for Beginners Trading guide.
Register for gratuitous to view our live trading webinars which encompass various topics related to the Forex market like fundamental bank movements, currency news, and technical chart patterns.
Stay upward to date with major news events and economic releases by viewing our economic calendar.
Successful trading requires sound take a chance management and self-discipline. Discover out how much capital you lot should hazard on your open trades.
We also recommend viewing our Traits of Successful Traders guide to discover the secrets of successful forex traders.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.