So you want to trade forex but not sure where to start? Don’t worry, you’re not alone. Forex trading can be challenging at first, but with the right forex strategies, you’ll be on your way to success in no time!
The forex market is the biggest and most liquid financial market worldwide, with a daily trading volume averaging $6.6 trillion – that’s more than twice the New York Stock Exchange. No wonder so many people are drawn to it!
Although trading currencies can be profitable, there are many traps beginners should avoid if they want to succeed in the long run. This is where having the right trading style comes in handy.
Read on to find out some tried-and-true forex trading strategies that work and learn what you need to do to be a successful forex trader. But first, let’s understand what a forex trading strategy is and how to pick the best one for you.
What is Forex Trading Strategy?
One key aspect of trading is developing a good trading strategy. A trading strategy is basically a set of rules that guide your trading decisions, from when to enter a trade, how to manage it, and when to exit.
Now, a trading strategy can be as simple or as complex as you want it to be. It’s all up to you! Whether you prefer technical analysis or fundamental analysis, having a clear trading plan can help you achieve consistency and accurately measure your performance.
If you’re more into technical analysis, it’s easier to define your entry and exit rules, whereas if you’re a fundamental analysis type of trader, you might need to exercise more discretion.
Regardless of which side you’re on, the key takeaway is that having a solid trading strategy is a must-have for every trader out there.
Further reading: A Beginner’s Guide To Forex Trading
How to Choose The Best Forex Trading Strategy?
If you want to find the best Forex trading strategy, keep in mind that there isn’t a one-size-fits-all solution. The strategy that works for someone else may not be the best fit for you. Therefore, it’s essential to consider the following factors:
1. Your Personality and Preferences
The most effective Forex trading strategies depend on your individual needs and preferences. Your personality plays a crucial role in determining which trading system suits you best. Experiment with different Forex trading strategies to see which ones work and which ones don’t. Sometimes, the strategies that others have dismissed might be the right ones for you.
2. Time Frame
Another important aspect to consider is the time frame for your trading style. There are several types of Forex trading strategies, ranging from short to long timeframes. Successful Forex traders are always aware of the different styles and strategies and adapt them to their trading style.
3. Complete Trading Plan
When people talk about Forex trading strategies, they typically mean a specific trading method that is just one part of a complete trading plan. A Forex trading strategy provides entry signals, but it’s also crucial to consider other factors like position sizing, risk management, and how to exit a trade.
Top 10 Forex Trading Strategies For Beginners
1. Price Action Trading Strategy
Price action trading is a popular strategy among traders as it involves focusing on price movements of an instrument without relying heavily on technical indicators. Traders utilizing this strategy look for various price action patterns to make their trading decisions.
The main advantage of price action trading is that it helps you avoid information overload as you only use a few indicators or none at all. This can be especially beneficial for beginners who might feel overwhelmed with too many technical indicators on their charts.
Moreover, by observing price action patterns, traders can get a better sense of market conditions and identify patterns more quickly. This strategy is particularly useful for day traders who need to make quick decisions and prefer to have a “clean chart.”
2. Range Trading Strategy
The range trading strategy is another approach that traders use to make profitable trades. In this strategy, traders look for trading instruments that are consolidating in a certain range. The goal is to identify consistent support and resistance areas within the range where the price is bouncing off support and getting rejected at resistance.
Traders using this strategy must first look for trading instruments that are not trending. They can do this by observing the price action of the instrument or using indicators such as the moving average and Average Direction Index (ADX).
Once a trader has found a suitable trading instrument, they need to identify the range within which the instrument is consolidating. A classic range trading strategy involves selling when the price hits the area of key resistance and buying when the price hits the area of key support.
Some traders focus on two specific levels, while others trade “bands” or “areas.” By focusing on a range of prices instead of a specific level, traders can identify more trading opportunities and avoid missing out on profitable trades.
3. Trend Trading Strategy
Trend trading strategy is a popular technique used by forex traders to identify trade opportunities in the direction of the trend. This strategy involves looking for opportunities to trade in the direction of the prevailing trend of the trading instrument. Traders can use supporting tools such as moving averages to identify the trend.
The 200 DMA is a popular moving average that traders use to determine the trend. When the price is trading above or below the moving average, this can be an indication of a trend. Also, traders can use the MA crossovers as entry signals. The 50 DMA crossing above the 200 DMA, for instance, could signal the beginning of an uptrend.
4. Position Trading Strategy
Position trading strategy aims to capture profits from long-term trend moves by holding positions open for weeks, months, and sometimes even years. This strategy requires a high level of discipline, as traders need to be able to ignore noise and remain calm even when a position moves against them for several hundred pips. Traders must remain focused on their long-term goals and not get distracted by short-term price movements.
To illustrate, imagine shorting the S&P 500 at the beginning of the year with the intention of keeping the position open for the rest of the year. While there may be some price movements, traders need to have the discipline to keep their positions open for such a long-time period.
5. Day Trading Strategy
Day trading strategy involves opening and closing trades within the same trading day. Day traders typically focus on a specific session or time of the day to act on opportunities.
This strategy is suitable for traders who like to close their positions before the trading day ends, but do not want to have the high level of pressure that comes with scalping. Day traders tend to use charts ranging from the M15 up to the H1 chart to identify trading opportunities. They take it slower than scalpers, opening only 2-3 good opportunities per day.
6. News Trading
News trading is a strategy where traders try to profit from a market move that has been triggered by a major news event. This could be anything from a central bank meeting and an economic data release to an unexpected event like a natural disaster or geopolitical tensions escalating. However, this strategy can be very risky as the market tends to be extremely volatile during those times.
To trade the news, traders need to determine which event they want to trade and which currency pair(s) it will affect the most. Traders can approach news trading with or without a bias. Having a bias means that traders have an idea where they think the market might move depending on how the event unfolds. Trading without a bias means that traders will try to capture the big move regardless of its direction.
It’s important to note that news trading is not for everyone, and traders need to be prepared for the risks involved. Due to liquidity evaporating, traders are at risk of slippage, meaning their trade could be executed at a significantly worse price than expected, or they may struggle to get out of their trade at the level they had in mind. The spread of the affected trading instruments may also widen significantly during volatile times.
7. Scalping Strategy
Scalping is a trading strategy that involves taking advantage of small intraday price movements. Scalpers aim to make a profit on trades that could last for just a few seconds to a few minutes. This trading style requires a trader to be good with numbers, make quick decisions, and have the ability to handle pressure. Scalpers usually focus on one or a few specific markets, allowing them to monitor the market closely.
The advantage of scalping is that it enables traders to focus on the market in a specific timeframe, without worrying about holding positions overnight or interpreting long-term fundamentals. However, scalping comes with a lot of pressure, and it is easier to make mistakes and react emotionally when trades run only for minutes. Therefore, it might not be the best trading style for beginners.
8. Swing Trading
Swing trading is a strategy that involves holding positions open for multiple days. Traders use this strategy on anything from an hourly to a weekly chart. Popular trading strategies for swing traders include trend following, range trading, or breakout trading.
To be a successful swing trader, one needs patience and discipline. It could take days for a quality opportunity to show up, or traders might end up holding a trade open for a week or more while running an open loss. Swing trading provides an opportunity to include fundamental analysis, which is futile when scalp trading.
9. Carry Trade Strategy
Carry trade strategy involves profiting from the difference in interest rates between two different currencies that make up a currency pair. Traders buy a currency with a high-interest rate and sell a currency with a low-interest rate. For instance, a popular example is going long AUD/JPY, as Australia has historically high-interest rates, while Japan has historically low-interest rates. By doing so, the trader will receive an interest rate payment based on the size of their position.
The benefits of a carry trade strategy are that traders can earn substantial interest from just holding a position. However, traders need the right market environment for this to work. If AUD/JPY is in a strong downtrend and traders hold a long position, the interest payments will not make up for the overall negative PnL.
Carry trades perform well in a bullish market environment when traders are seeking high risk. The Japanese Yen is a traditional safe haven, which is why many carry trades involve being short on the Yen against another “risk-on” currency.
Traders should also be familiar with the characteristics of the currency they are buying. For example, the Australian Dollar will benefit from rising commodity prices, while the Canadian Dollar has a positive correlation with oil prices.
10. Breakout Strategy
The breakout strategy involves entering a trade as soon as the price breaks out of its range. Traders will look for strong momentum and use the breakout as a signal to enter the position and profit from the market movement that follows.
Traders may enter the position at the market or by placing buy stop and sell stop orders. They will usually place the stop just below the former resistance level or above the former support level. To set their exit targets, traders may use classic support/resistance levels.
How to Create a Forex Trading Strategy?
For many traders, forex trading can be an exciting and potentially lucrative venture. However, success in forex trading requires careful planning and the development of an effective trading strategy. Here are some tips to help you create an effective forex trading strategy:
- Select the right market: Choose currency pairs that you are familiar with and become an expert at reading those currency pairs.
- Determine position sizing: Decide on the size of your positions to control for the amount of risk taken in each trade.
- Develop entry and exit points: Create rules for when to enter and exit positions, as well as when to cut losses.
- Choose your trading tactics: Set rules for buying and selling currency pairs and use the right execution technologies.
- Automate your strategy: Use programs like MetaTrader to automate rule-following and backtest your trading strategies to see how they would have performed in the past.
It’s important to remember that successful forex trading requires discipline, patience, and a willingness to learn from mistakes. Don’t be afraid to adjust your strategy as you go, and always stay informed about the latest market trends and news.
When Should You Change Strategies?
While sticking to the rules is important, sometimes a strategy may not work for everyone all the time. Here are a few things to consider before changing your game plan:
- Risk Management: Make sure your risk management aligns with your trading style. If the risk vs. reward ratio isn’t suitable, it may be time to switch things up.
- Market Conditions: Keep in mind that market trends can shift quickly, and a trading strategy that was once effective may become obsolete. If this happens, it might be time to make some tweaks or modifications.
- Comprehension: It’s essential to fully understand your strategy, or it won’t work. If you’re having trouble following the rules or don’t fully comprehend your strategy, it’s time to hit the books.
Remember, change can be good, but modifying your strategy too often can be costly. So take your time and make informed decisions. Happy trading!
So there you have it, 10 different forex trading strategies for beginners to consider. But before you dive in, it’s important to think about which strategy is the right fit for you.
One key factor to consider is the amount of time you’re willing to invest in monitoring the market. Some strategies require constant attention, while others can be more hands-off. It’s also important to consider the risk-reward ratio of each strategy, as well as how often trading opportunities arise.
Ultimately, the best trading strategy is one that matches your personal attributes and trading personality. By taking the time to find the right fit, you can set yourself up for success and take the first step in the right direction.