The best Forex trading strategies | Trading forex without having a strategy is a bit like starting a journey without a map, as you never know where your account might end up: you can win or lose money, but you don’t know which of the two possibilities 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. As you continue reading, you will learn more about the best forex trading strategies and understand which ones to choose to trade currencies effectively.
Select a Forex Strategy
Choosing a forex strategy is one of the most important things to do to ensure your profitability as a currency trader, so you will need to choose a successful strategy.
We also recommend that you select the strategy that best fits your lifestyle and personality type—not everyone wants to watch trading screens all day or endure the stress of hectic or high-stakes strategies.
Once you have decided on one or more forex strategies, you also need to monitor their performance: test each strategy through backtesting. You will be able to do this through popular forex platforms if you don’t have special programming skills.
Review your strategy using a risk-free demo account; most online brokers will allow you to open one. If one of the strategies you have considered continues to look profitable for you, you can start trading on a live account to definitely test it out.
Most of the time, it’s best to start with smaller trades and work your way up to bigger ones as you get more comfortable with how the strategy works and your ability to use it in a disciplined way when trading on a real account.
The best Forex trading strategies
There are many successful forex trading strategies, but not all of them are suitable for all traders. Select the strategy that best fits your particular situation, considering factors such as your time, personality type, and risk tolerance. The strategies discussed below are based on time typically spent, from short to long term.
Scalping is a very short-term trading strategy that involves taking many small profits on trading positions that have a very short duration. Scalpers need lightning-fast reaction times because they often enter and exit trades in seconds or minutes. This very fast-paced and quite stressful activity may not be suitable for everyone.
In addition, scalpers 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 the one shown below for EUR/USD for their analysis. Scalpers generally do best using a broker with tight spreads, guaranteed fast order execution, and little to no slippage.
2. Trading day
Day trading is another short-term trading strategy that is followed only during a specific trading session. Day traders usually don’t take positions that last from day to day, so they close every trade every day. This helps to reduce exposure to market movements when the trader is not keeping an eye on them.
Most day traders use trading plans based on technical analysis with short-term charts that show intraday price movement. One of the most well-known day trading strategies is called “breakout trading.”
With this strategy, trades are made when the exchange rate of a currency pair goes above a certain level on the chart, and they are confirmed when trading volume goes up at the same time.
The GBP/USD 30-minute candlestick chart shows a break below the lower of the 2 converging trend lines of the red triangle pattern. Note that the trading volume also increased when the breakout occurred, confirming it.
Also Read: The 10 best forex brokers
3. News trading
News trading strategies can be used by some forex traders with a lot of money and a healthy risk appetite, but they are probably not suitable for forex beginners.These strategies can be based on either fundamental or technical analysis, and they often take advantage of the fact that the forex market is often very volatile right after big news stories.
News traders often need to monitor economic calendars so they don’t miss key data release events, so they carefully watch the market before a certain event to determine key support and resistance levels so they can react quickly after the event, based on the results.
News traders must maintain strict discipline when managing their currency positions during these fast-paced markets and often place stop loss and take profit orders in the market.
An example of an economic calendar and data publishing event that a news trader might use is jobless claims in the United States. This data was particularly volatile during the COVID-19 shutdowns in the US and created significant fluctuations in the forex market after its spread. While these employment numbers were dismal, what mattered most to traders was how the outcome differed from the market consensus.
In the situation below, the previous number of jobless claims was 3,176,000, the forecast number was 2,500,000, and the result was worse than expected at 2,981,000—the release of this data must have put pressure on the dollar. The US dollar versus other currencies.
4. Swing trading (or momentum trading).
Swing trading, sometimes also known as momentum trading, is a medium-term trading strategy that aims to capture different market movements; swing traders do this by trading major market trends and against them when the market is correcting, so they must be willing to hold positions for more than a day.
Swing traders tend to focus on entry and existing positions based on momentum indicators that provide buy and sell signals; traders use these indicators to find overbought or oversold markets to sell or buy. Swing traders can also buy ahead of support levels or sell ahead of resistance levels that develop on a currency pair’s exchange rate charts.
Some commonly used momentum indicators include the MACD (Moving Average Convergence Divergence) histogram and the Relative Strength Index (RSI). The daily candlestick chart shown below for the GBP/USD exchange rate also shows the MACD and RSI in the indicator boxes.
5. Trend trading
Trend trading is a popular long-term forex trading strategy that involves following the prevailing trend or directional movement of the market for a particular currency pair. Most of the time, this strategy is used to buy on pullbacks in uptrends or sell on rallies in downtrends.
Once a trend trader takes a position in the direction of the trend, he is likely to hold it until the market reaches its target or the trend begins to reverse; Trend traders often use stop loss orders to protect their profits if a major reversal materializes.
Many trend traders use technical analysis indicators like the average directional movement (ADX) indicator and/or moving averages that smooth out price movement to better spot trends. They can also use long-term and short-term moving averages and watch for crossovers to spot a possible reversal.
This 4-hour candlestick chart of the EUR/JPY exchange rate shows a continued uptrend after a significant decline, with the 10-day moving average shown in red and the ADX in the indicator box below.
How to Start Trading Forex
If you have chosen a strategy and a broker to use in forex trading, remember that money management and your trader mindset are key success factors – take the time to learn about these aspects of forex trading as well.
When you’re ready to get started, visit the broker’s website to open a demo account so you can start practicing and learning how to use their trading platform. If you feel confident in your strategy and the broker you have chosen, you can open and fund a real account to start trading with real money.