Best Strategy To Use In Forex Trading

Reviewed by Nick Cawley on December xvi, 2021

Master talking points:

• What is a Forex Trading Strategy?
• Forex Strategies: A Meridian-level Overview
• Cost Activity Trading
• Range Trading Strategy
• Trend Trading Strategy
• Position Trading
• 24-hour interval Trading Strategy
• Forex Scalping Strategy
• Swing Trading
• Carry Trade Strategy

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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. There are various forex strategies that traders can use including
technical analysis or fundamental analysis. A skillful forex trading strategy allows for a trader to analyse the market place and confidently execute trades with audio risk direction techniques.

Forex Strategies: A Acme-level Overview

Forex strategies can exist divided into a distinct organisational construction which can assist traders in locating the most applicable strategy. The diagram below illustrates how each strategy falls into the overall structure and the relationship betwixt the forex strategies.

Forex Trading Strategies That Work

Forex trading requires putting together multiple factors to formulate a trading strategy that works for you. In that location are countless strategies that can be followed, however, understanding and being comfortable with the strategy is essential. Every trader has unique goals and resources, which must be taken into consideration when selecting the suitable strategy.

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

1. Time resource required
2. Frequency of trading opportunities
3. Typical distance to target

To easily compare the forex strategies on the three criteria, we’ve laid them out in a bubble chart. On the vertical centrality is ‘Risk-Reward Ratio’ with strategies at the top of the graph having higher advantage for the take a chance taken on each merchandise. Position trading typically is the strategy with the highest risk 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 nearly in terms of your time resource is scalp trading due to the high frequency of trades beingness placed on a regular basis.

1. Toll Action Trading

Price activeness trading
involves the study of historical prices to codify technical trading strategies. Cost action can exist used every bit a stand up-alone technique or in conjunction with an indicator. Fundamentals are seldom used; however, information technology is not unheard of to incorporate economic events as a substantiating factor. There are several other strategies that autumn within the price action bracket every bit outlined above.

Length of trade:

Price action trading can be utilised over varying time periods (long, medium and short-term). The ability to apply multiple fourth dimension frames for analysis makes price action trading valued past many traders.

Entry/Leave points:

At that place are many methods to determine support/resistance levels which are mostly used as entry/get out points:

• Fibonacci retracement
• Using candle wicks
• Tendency identification
• Indicators
• Oscillators

Inside price activity, in that location is range, trend, mean solar day, scalping, swing and position trading. These strategies adhere to unlike forms of trading requirements which will be outlined in detail below. The examples show varying techniques to merchandise these strategies to bear witness just how diverse trading can exist, forth with a diversity of bespoke options for traders to choose from.

two. Range Trading Strategy

Range trading
includes identifying support and resistance points whereby traders will place trades around these fundamental levels. This strategy works well in market place without significant volatility and no discernible tendency. Technical analysis is the primary tool used with this strategy.

Length of trade:

There is no set up length per trade every bit range leap strategies tin piece of work for any time frame.
Managing adventure
is an integral part of this method equally breakouts tin can occur. Consequently, a range trader would similar to close any current range jump positions.

Entry/Exit points:

Oscillators are virtually commonly used as timing tools.
Relative Strength Index (RSI
),
Commodity Channel Index (CCI)
and
stochastics
are a few of the more popular oscillators. Price action is sometimes used in conjunction with oscillators to further validate range bound signals or breakouts.

Case 1: USD/JPY Range Trading

USD/JPY
has been exhibiting a prolonged range bound price level over the past few years. The nautical chart to a higher place illustrates a clear
support and resistance
band which traders utilize as entry/exit points. The RSI oscillator demonstrates timing of entry/exit points as highlighted by the shaded blue and crimson boxes –
blue: overbought
and
ruddy: oversold.

Range trading tin can result in fruitful risk-reward ratios however, this comes along with lengthy time investment per trade. Employ the pros and cons beneath to align your goals equally a trader and how much resources you have.

Pros:

• Substantial number of trading opportunities
• Favourable hazard-to reward ratio

Cons:

• Requires lengthy periods of time investment
• Entails potent appreciation of technical assay

iii. Tendency Trading Strategy

Trend trading
is a simple forex strategy used by many traders of all feel levels. Trend trading attempts to yield positive returns by exploiting a markets directional momentum.

Length of trade:

Trend trading more often than not takes place over the medium to long-term time horizon every bit trends themselves fluctuate in length. Every bit with cost action, multiple fourth dimension frame analysis can be adopted in trend trading.

Entry/Leave points:

Entry points are unremarkably designated by an oscillator (RSI, CCI etc) and leave points are calculated based on a positive risk-reward ratio. Using stop level distances, traders can either equal that altitude or exceed it to maintain a positive hazard-advantage ratio e.grand. If the stop level was placed 50 pips away, the take profit level wold be set at 50 pips or more than away from the entry betoken.

Instance ii: Identifying the Trend

In the unproblematic instance above,
EUR/USD
exhibits an upward trend validated by
higher highs and higher lows. The opposite would be true for a downward tendency.

EUR/USD Trading the Trend

When you run across a stiff trend in the market, trade it in the direction of the tendency. For example, the stiff uptrend in EUR/USD above.

Using the
(CCI)
every bit a tool to time entries, observe how each time CCI
dipped beneath -100 (highlighted in blue), prices responded with a rally. Not all trades will work out this mode, but because the tendency is beingness 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.

Tendency trading can exist reasonably labour intensive with many variables to consider. The list of pros and cons may assist yous in identifying if trend trading is for you.

Pros:

• Substantial number of trading opportunities
• Favourable risk-to reward ratio

Cons:

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

four. Position Trading

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

Length of trade:

Every bit mentioned above, position trades take a long-term outlook (weeks, months or even years!) reserved for the more persevering trader. Understanding how economic factors affect markets or thorough technical predispositions, is essential in forecasting trade ideas.

Entry/Exit points:

Fundamental levels on longer time frame charts (weekly/monthly) concur valuable information for position traders due to the comprehensive view of the market. Entry and get out points tin exist judged using technical analysis as per the other strategies.

Case three: Germany 30 (DAX) Position Trading

The
Frg thirty
chart above depicts an approximate 2 year
head and shoulders pattern, which aligns with a likely autumn beneath the neckline (horizontal blood-red line) subsequent to the right-hand shoulder. In this selected case, the downward autumn of the Germany 30 played out as planned technically as well as fundamentally. Towards the end of 2018, Deutschland went through a technical recession along with the US/China merchandise war hurting the automotive manufacture.
Brexit
negotiations did not help matters as the possibility of the U.k. leaving the EU would well-nigh likely negatively impact the High german economy also. In this case, agreement technical patterns as well as having strong primal foundations allowed for
combining technical and key analysis
to structure a stiff trade idea.

List of Pros and Cons based on your goals every bit a trader and how much resources you have.

Pros:

• Requires minimal time investment
• Highly positive take a chance-to reward ratio

Cons:

• Very few trading opportunities
• Entails strong appreciation of technical and fundamental analysis

five. Day Trading Strategy

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

Length of trade:

Merchandise times range from very short-term (matter of minutes) or short-term (hours), every bit long as the trade is opened and closed inside the trading mean solar day.

Entry/Exit points:

Traders in the instance below will look to enter positions at the when the price breaks through the 8 period EMA in the management of the tendency (blue circle) and exit using a 1:i hazard-reward ratio.

Case four: EUR/USD Day Trading

The chart above shows a representative day trading setup using moving averages to place the trend which is long in this instance as the price is above the MA lines (cerise and blackness). Entry positions are highlighted in blue with finish levels placed at the previous cost break. Take profit levels will equate to the stop distance in the direction of the tendency.

The pros and cons listed below should be considered earlier pursuing this strategy. Mean solar day trading involves much time and endeavour for little reward, as seen from the EUR/USD example higher up.

Pros:

• Substantial number of trading opportunities
• Median risk-to reward ratio

Cons:

• Requires lengthy periods of fourth dimension investment
• Entails strong appreciation of technical analysis

6. Forex Scalping Strategy

Scalping
in forex is a common term used to describe the process of taking pocket-size profits on a frequent basis. This is accomplished by opening and closing multiple positions throughout the day. This tin can exist done manually or via an algorithm which uses predefined guidelines equally to when/where to enter and exit positions. The well-nigh liquid forex pairs are preferred equally spreads are more often than not tighter, making the short-term nature of the strategy plumbing fixtures.

Length of trade:

Scalping entails short-term trades with minimal return, usually operating on smaller time frame charts (30 min – 1min).

Entry/Leave points:

Like most technical strategies, identifying the trend is step one. Many scalpers use indicators such as the moving average to verify the trend. Using these key levels of the trend on longer fourth dimension frames allows the trader to see the bigger picture. These levels will create support and resistance bands. Scalping inside this ring can and so be attempted on smaller fourth dimension frames using oscillators such equally the RSI. Stops are placed a few
pips
away to avoid large movements against the merchandise. The
MACD indicator
is another useful tool that tin be exercised by the trader to enter/exit trades.

Example 5: EUR/USD Scalping Strategy

The EUR/USD ten minute above shows a typical case of a scalping strategy. The long-term tendency is confirmed past the moving boilerplate (cost above 200 MA). The smaller time frame is so used to target entry/go out points. Timing of entry points are featured past the reddish rectangle in the bias of the trader (long). Traders can besides close long positions using the MACD when the MACD (blue line) crosses over the betoken line (red line) highlighted by the blue rectangles.

Traders use the same theory to ready their algorithms however, without the manual execution of the trader.

With this applied scalp trading example higher up, use the list of pros and cons below to select an appropriate trading strategy that best suits yous.

Pros:

• Greatest number of trading opportunities from all forex strategies

Cons:

• Requires lengthy periods of time investment
• Entails stiff appreciation of technical analysis
• Lowest run a risk-to reward ratio

7. Swing Trading

Swing trading
is a speculative strategy whereby traders look to take advantage of rang jump equally well as trending markets. Past picking ‘tops’ and ‘bottoms’, traders can enter long and short positions appropriately.

Length of trade:

Swing trades are considered medium-term every bit 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 along the trend.

Entry/Leave points:

Much similar the range bound strategy, oscillators and indicators can be used to select optimal entry/exit positions and times. The only difference being that swing trading applies to both trending and range jump markets.

Example 6: 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 upwards trend was initially identified using the l-solar day moving average (price above MA line). In the case of an uptrend, traders volition look to enter long positions with the old adage of ‘buy low, sell high’.

Stochastics are then used to identify entry points by looking for oversold signals highlighted by the blue rectangles on the stochastic and chart. Risk direction is the final step whereby the ATR gives an indication of stop levels. The ATR figure is highlighted past the red circles. This figure represents the approximate number of pips away the cease level should be set. For instance, if the ATR reads 41.eight (reflected in the last ATR reading) the trader would look to place the cease 41.8 pips abroad from entry. At DailyFX, we recommend trading with a positive risk-reward ratio at a minimum of 1:two. This would mean setting a take profit level (limit) at least 83.6 (41.eight x 2) pips away or further.

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

Pros:

• Substantial number of trading opportunities
• Median risk-to reward ratio

Cons:

• Entails potent appreciation of technical analysis
• Notwithstanding requires extensive time investment

viii. Carry Merchandise Strategy

Acquit trades
include borrowing one currency at lower rate, followed past investing in another currency at a higher yielding rate. This volition ultimately consequence in a positive carry of the trade. This strategy is primarily used in the forex market.

Length of trade:

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

Entry/Exit points:

Potent
trending
markets piece of work all-time for acquit trades every bit the strategy involves a lengthier fourth dimension horizon. Confirmation of the trend should exist the start pace prior to placing the merchandise (higher highs and higher lows and vice versa) –
refer to Example 1 above. At that place are 2 aspects to a carry trade namely, exchange rate risk and interest rate risk. Appropriately, the best time to open the positions is at the start of a trend to capitalise fully on the exchange charge per unit fluctuation. Regarding the interest rate component, this volition remain the same regardless of the trend as the trader will still receive the interest rate differential if the offset named currency has a higher involvement charge per unit confronting the second named currency eastward.grand.
AUD/JPY.

Could carry trading piece of work for you? Consider the following pros and cons and see if it is a forex strategy that suits your trading style.

Pros:

• Little fourth dimension investment needed
• Median risk-to advantage ratio

Cons:

• Entails strong appreciation of forex market place
• Exceptional 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-reward ratio and regularity of full trading opportunities. Each trading strategy volition appeal to different traders depending on personal attributes. Matching
trading personality
with the appropriate strategy volition ultimately let traders to accept the first step in the right management.

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