5 Best Forex Trading Strategies
Many successful strategies for trading forex exist, but not all of them are suitable for every trader. Select a strategy that best suits your particular situation, including your available time, personality type and risk tolerance. These are covered below based on the typical time involved, ranging from short to long term.
1. Scalping
Scalping is a very short-term trading strategy that involves taking several small profits on very short-term trading positions. Scalpers need extremely fast reaction times as they typically enter and close trades within seconds or minutes. This very fast-paced and quite stressful activity may not be suitable for everyone.Scalpers also 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 analysis. Scalpers generally do best with a broker with tight spreads, guaranteed fast order execution, and minimal or no order slippage.
2. Day Trading
Day trading is another short-term trading strategy that is only pursued during a specific trading session. Day traders generally don't take positions overnight, so they close all trades each day. This helps reduce the risk of market movements when the trader is inattentive to the market.
Most day traders use trading plans based on technical analysis on short-term charts that show intra-day price movements. There are many day trading strategies, but one of them is known as breakout trading. Trades are triggered when the exchange rate crosses a certain level on a currency pair's chart and are confirmed when accompanied by an increase in volume.
The 30 minute candlestick chart of the GBP/USD pair shows a break below the level of the lower of the 2 converging trend lines of a triangular pattern, which is drawn in red. Note that trading volume was also up when the breakout occurred, confirming this.
3. News Trading
Some forex traders with deep pockets and a reasonable appetite for risk could use new trading strategies, although they are probably not ideal for beginners in forex. These strategies can be based on fundamental and technical analysis and typically benefit from the remarkable volatility that is often seen in the forex market immediately following major news releases.
News traders should generally watch economic calendars for key data releases. They then closely monitor the market before the event to determine key support and resistance levels so that they can react quickly after the event based on the results. News traders must maintain strict discipline in managing their currency positions in these fast-moving markets and often place stop-loss and take-profit orders in the market.
An example of an economic calendar and data release event that a news operator might use is US Unemployment Claims. This data was particularly volatile during the COVID-19 shutdown in the United States and caused significant fluctuations in the forex market after its release. While those payroll numbers were grim, what mattered most to the market was how the outcome differed from market consensus.
In the following situation, the previous number of UI claims was 3,176,000, the expected number was 2,500,000 and the result was worse than expected at 2,981,000. This should have put pressure on the US dollar against other currencies after its publication.
4. Swing or Momentum Trading
Swing trading, sometimes known as momentum trading, is a medium-term trading strategy that aims to capture more market movement. Swing traders do this by trading both with the major trends and against them when the market corrects, so be prepared to take positions overnight.
Swing traders tend to focus on entering and exiting positions based on momentum indicators that provide buy and sell signals. Traders use them to find overbought or oversold markets to sell or buy. Swing traders can also buy before support levels or sell before resistance levels developing on exchange rate charts for a currency pair.
Some commonly used momentum indicators are the Moving Average Convergence Divergence (MACD) histogram and the Relative Strength Index (RSI). The GBP/USD exchange rate daily candlestick chart shown below also displays the MACD and RSI in indicator boxes.
5. Trend Trading
Trend trading is a popular long-term forex trading strategy that involves following the prevailing trend or directional movement in the market for a specific currency pair. This strategy often involves buying pullbacks in uptrends or selling rallies in downtrends.
Once a trend trader has taken a position in the direction of the trend, you will likely hold it until the market hits its target or the trend reverses. Trend traders often use trailing stop-loss orders to protect their profits when a large trend reversal occurs.
Many trend traders use technical analysis indicators such as the Average Directional Movement Indicator (ADX) and/or moving averages, which smooth out price action to help them spot trends. They could also use longer and shorter term moving averages and look for crossovers to signal a possible reversal.
The EURJPY 4-hour candlestick chart below shows a continued uptrend after a steep decline with the 10-day moving average in red and the ADX in the indicator panel below.
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