In the current financial landscape, the foreign exchange market is the biggest and most liquid in the world. While there are several risks, this type of trade promises great rewards for those who bravely face the challenge.
To succeed in the marketplace, a trader should have strong strategies to implement. However, not everyone has the tools to create the perfect plan to begin with, making it tricky. Thus, you must find trading styles that can work effectively for you.
Do you want to find the best forex trading strategies that fit your methods as a trader? You can discover it by reading this guide!
Forex trading strategies—what are they?
Every foreign exchange trader has a specific set of strategies that work specifically for them. It means that some systems may work for some, but not for others. That said, there are several rules that can help traders determine when to buy, sell, close, or manage their trades.
Technical analysis is one of the primary tools in trading that matters when building a strategy. This technique enables you to set entry and exit rules to follow. Some traders use fundamental analysis, although it’s more complex to utilize as it requires discretion. Either way, deploying various tools and systems is the first step to creating a solid strategy.
Ways to choose the best forex trading strategies
In most cases, you would have to spend time testing a few strategies before coming up with the best one. You will likely do a lot of trial and error on your part, especially since there are several methodologies available. For this reason, it’s ideal to have a demo trading account or perform backtesting before trading in full swing.
Also, it’s important to remember that not all effective strategies will stick with you for a long time. Since the market is volatile, you’d need to modify some of your processes to make up for the changes.
A word of advice: choose simple forex strategies if you are a new forex trader. Also, beginners should stay cautious about signals and how to apply them. It’s a pitfall for a trader to overly combine too many suggestions thinking that it would mean more profit. Again, testing the strategies before applying them fully is a good start.
6 Best forex trading strategies
There’s a fitting strategy for traders of every skill level. Here is the list of methods and examples of how to apply them.
1. Trend trading strategy
One of the best and most simple forex styles is trend trading. Its lone criterion is to follow the current trends when making your moves. Trading instruments may have an uptrend, or consistently rising values, or a downtrend, indicating a decline in prices.
Firstly, you should identify in which direction the currency pair leans and trade based on the price action. Still, it’s crucial that you also observe the movement of other FX trading trends. That way, you can make a timely exit or entry when necessary.
Example
Say the EUR/USD currency pair shows a back-and-forth movement of prices and heading to a downtrend. Chart patterns will reflect these fluctuations, which you can use as a signal to open a trend.
2. Scalping strategy
For short-term trades, it’s ideal to use a forex scalping strategy to limit the losses. It takes advantage of price movement in small intraday bursts. The target is only a few pips, and the trading activity may last only for a few seconds and concentrate on specific markets. All these factors make it a great addition to the best forex trading strategies.
Scalping is short-lived but you won’t have to wait a long time to interpret the market. However, these trades are rapid-fire and would likely trigger emotional responses. Not many beginners will feel comfortable using this style from the get-go. Hence, it’s better suited for intermediate and advanced traders.
Example
Scalping aims to ‘cross the spread’ rapidly. If you decide to go long EUR/USD and set 2 pips for your bid-ask, your unrealized loss is also at 2 pips. You should turn this loss into a gain by noticing when the bid price rises. Once it has a higher value than the ask price, you can generate profit.
Check out the best scalping brokers.
3. Day trading strategy
Day trading is one of the best forex trading strategies that involves only a few trades daily. It’s not as quick as scalping but also focuses on specific periods within the day. What you earn or lose is dependent on the price changes of the intraday market. There are no positions open overnight in this trading style.
It’s not uncommon for forex day traders to stay in the market for a 30-minute or hour window. They mainly prioritize quality over quantity and consistently watch out for news that may influence market movement.
Example
When you buy EUR/USD at 9 in the morning, it qualifies as a day trade if you sell by 2 PM.
4. Position trading
While the methodologies above rely heavily on day-to-day market activities, position trading has long-term targets. The goal is to make profits by holding an open trade for weeks or months. In some cases, traders opt to stay open for years. Thus, it requires discipline and intense focus, especially amid the volatile market noise.
Some of the factors to consider in this trading style are political events, monetary strategies, and more. In this method, you can open only a few positions throughout the year. Still, profit targets for every trade can reach several hundred pips and take longer to achieve.
Example
You notice the EUR/USD pair has been trending upwards over the past six months due to positive economic data from the Eurozone. Believing this trend will continue, you buy 1 lot at 1.1500. You set a stop loss at 1.1300 to manage risk and a take profit at 1.2000 to capitalize on the expected trend. You hold the position for several months, and the price eventually reaches 1.2000, where you close the trade for a profit.
5. Carry trade strategy
Currency pairs are bound to have a difference in interest. Traders that utilize a carry trade strategy look at the currency’s interest and decide from there. Typically, they will buy high-interest currencies and sell currencies with low interest. It’s one of the best forex trading strategies that is less complex to follow.
Holding your position open while using this method can have you earning significant interest. Experts suggest this strategy in bullish markets and is suitable for traders looking to undertake high risk activities.
Example
For example, EUR sets a 0.00% interest rate, while the Bank of Canada sets a 1.25% rate for CAD. Consequently, you can benefit from the 1.25% difference in interest if you sell EUR/CAD.
6. Swing trading strategy
Swing trading is among the best forex trading strategies because the opportunities are quality. The only downside is that it takes days or weeks to run the positions. If you have the patience and discipline to close trades at the right time, this methodology will work for you.
There’s a possibility of running open losses in forex swing trading. Still, you can apply fundamental analysis such as events involving politics or monetary policies. These indicators can help you greatly in your decision-making strategies.
Example
In several quarters, you notice a downtrend in the GBP value. It then experiences a period of recovery, followed by another fall in prices. Swing traders could take this as an indication that an opportunity is looming. Essentially, they will take it as a signal to close the trade and make a profit in the next uptrend.
7. Bounce strategy
A bounce strategy follows the notion that when a market drops at a certain level, it can bounce back later. Forex traders treat it as a support level that can become a good indication to buy. If the currency pair reaches the level prior to the bounce-back, it could signify a great trading opportunity.
While this method is simple enough to understand, executing it is more suitable for advanced traders. Nevertheless, it’s among the best forex trading strategies because of its efficiency.
Example
You anticipate that the EUR/USD price will bounce back after falling to a specific support level. Judging historical price points, the trajectory could pick up and give you the sign to buy or sell to make a profit.
Modifying forex trading strategies
The different trading styles mentioned above are only guides to help you create a personalized strategy. That means adapting techniques and solutions that match your characteristics as a trader. That said, you can use specialized strategies along with other tried-and-tested methods to improve your results.
Comparing forex strategies
Ultimately, it boils down to how you move as a trader. Do you pride yourself on patience and discipline? Is your attention span short or long? How much stress can you handle in terms of trading? All the answers to these questions will weigh in on which strategies are viable for you to use.
The best forex trading strategies that suit your style may change as the ever-evolving market changes, too. Therefore, it’s best to always keep your options open and test a strategy in a demo environment.
