Best Forex Trading Strategies

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Whether you just began trading in the forex market or you’re a seasoned expert, becoming familiar with the best forex trading strategies could significantly improve your bottom line. 

In this article we examine the best forex trading strategies and explore which strategies tend to work best for different types of traders. Even if you’ve never traded forex before, this guide will help you get familiar with the different strategies so you can pick the most suitable strategy to incorporate into your forex trading plan.

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Best Forex Strategies

A wide variety of trading strategies are used successfully by forex traders. If you’re a seasoned trader thinking about using a new strategy or a novice looking to get started trading currencies with one of the more basic forex strategies, then you will probably find one of the strategies listed below suitable for inclusion in your trading plan, although they are not ranked in any particular order since preferences and situations differ widely among forex traders.  

• Trend Trading
• Range Trading
• News Trading
• Retracement Trading
• Grid Trading
• Carry Trading
• Day Trading
• Breakout Trading
• Swing Trading
• Scalping

1. Trend Trading

In the forex market, trend trading strategies typically involve medium- or long-term positioning in a currency pair aligned with the overall prevailing direction of its exchange rate movements to realize profits once the trend concludes. The typical trend trader relies on first identifying an established trend on the medium-term charts and then watching the forex market for the optimum time and exchange rate to establish their trading position in the same direction as the trend. 

Once a position is taken, the trend trader then follows the evolution of the trend, often buying corrective dips in a bullish market and selling rallies in a bearish one. Proper risk management is an essential element in trend trading, as in all other forex trading strategies, so using stop-loss and trailing stop orders once positions are established can be vital for long-term success. 

Identifying a trend to trade with often involves reviewing forex charts for persistent trendlines and using technical analysis tools such as simple and exponential moving averages, the Directional Movement Index (DMI) and other analysis tools to determine the stage and strength of the trend. 

In addition to performing technical analysis on exchange rate charts, an experienced forex trend trader typically studies the underlying fundamental economic conditions of both countries and how that might affect the exchange rate of their national currencies before establishing a trend trading position and deciding when to add to, scale back on or liquidate such positions.

Since trend traders generally position for the long term, the different interest rates for each currency will impact their trading positions via the daily swap points. Basing a long-term forex trade on that interest rate differential is another strategy called the carry trade, which is covered in greater detail below. 

As an example of the impact of swap points on a trend trade, if the interest rate on the long currency in the currency pair is lower than that of the short currency, then a daily swap fee is paid to the party taking the other side of the transaction that depends in magnitude on the difference between the two interest rates. On the other hand, if the long currency’s interest rate is higher than the short currency’s interest rate, then the trend trader will receive swap points at the end of each day the position is held. 

In general, trend trading is well-suited for traders able to perform long-term market analysis and equipped with the patience to hold positions for extended periods. While trend trading is typically a medium- to long-term trading strategy, some strategies do aim to profit from trading shorter-term trends. 

“The trend is your friend” is an oft-repeated trading adage. While this may be true overall, keep in mind that trends do end and reverse, and the forex market can trade sideways for an extended period. The market for a currency pair must be analyzed suitably for each unique trading situation before establishing a trend-following position. 

2. Range Trading

Arguably the most popular forex trading style, the range trading strategy involves a trader first identifying the upper and lower exchange rate levels of the prevailing trading range for a currency pair and then going long the pair near the base of the range and short the pair near the top. The approximate timeframe required for the exchange rate to trade from peak to trough within the range is another important factor range traders can take into account when positioning. 

Once a trading range has been identified, the range trader typically aims to execute trades within the confined range by buying low and selling high or by selling high and buying low. Profits accumulate as the trader astutely takes advantage of the recurring exchange rate oscillations within the range’s identified boundaries. 

A range trader’s stop-loss orders would typically be placed safely below support seen at the base of the range for long positions and safely above the key resistance level at the top of the range for short positions.  

The typical range trader goes both long and short the exchange rate at different times depending on the level of the exchange rate as it fluctuates within the identified trading range. Range traders may determine the support and resistance levels lying on either side of the trading range’s midpoint since they typically aim to sell ahead of resistance and buy above support.

Implementing the range trading strategy profitably will generally require sideways market conditions, as well as a thorough understanding of the market’s support and resistance levels that lay within an identified trading range.

Overall, this moderately active FX strategy is best suited for observant traders who understand technical analysis and have a keen eye for trading opportunities. Range traders should also be decisive and able to pull the trigger quickly since they need to establish positions near the extreme levels within the range and have a good idea of when to exit the trade optimally. 

3. News Trading

Not a strategy for the faint of heart, forex news trading takes advantage of the rapid and sharp reactions the forex market often displays when significant news and economic data are released. News traders typically pore over economic indicators in the hope of anticipating market moves catalyzed by an influx of news that affects the market. Market reactions can be especially strong if the news deviates significantly from the forex market’s consensus expectations. 

News trading demands that a trader deals well with stress, can make quick decisions and has a well-based and comprehensive knowledge of the economic context underlying each news event traded. This grasp of context gives the news trader insight into the impact the event may have on the forex market and how it would affect the currency pairs they are trading. 

Economic news that directly affects exchange rates tends to move the market in relevant currency pairs very quickly as it gets discounted by forex market makers. This gives fast-acting news traders profit opportunities, although other traders often prefer to avoid the added risk and stress involved in trading the news item by squaring their positions during the news event. 

Due to the nature and impact of fundamental economic news releases, many seasoned news traders use a trading strategy they can execute quickly. Successful news traders often rely on having rapid decision-making abilities and reactions to allow them to enter and exit trades quickly. The market can move sharply and discontinuously during a news event, which can quickly turn a profit into a loss, so the urgency and stress involved in news trading will not suit everyone.

Traders that use news trading strategies often familiarize themselves with the underlying fundamental aspects of the economy impacted by the news release and how any currency pairs they have positions in may be affected. This knowledge gives them insight into whether a particular currency pair will be positively or negatively impacted by the news so they can position accordingly. 

4. Retracement Trading

Retracements, also sometimes called corrections, consist of a temporary change in the direction of an exchange rate’s overall trend. Not to be confused with trend reversals, which have lasting effects on the direction of a currency pair, retracements have a shorter timeframe and give observant traders opportunities for short-term profits. 

For trend traders, retracement trading can involve waiting for a pullback in a major or intermediate trend to establish positions in the direction of the major trend. Observing retracements can give trend traders a helpful suggestion regarding where they should place the level of their stop-loss orders. In contrast, swing traders may identify a pending retracement or one in progress and then trade along with it to add to their profits. 

Many retracement traders keep a keen eye on levels of support and resistance to the major trend. They then place their orders just ahead of these levels to initiate or liquidate positions.  

To better discern support and resistance levels and find retracement trading opportunities, retracement traders will often use the Fibonacci retracement levels that can be computed from the high and low points of the preceding trend. A typical Fibonacci retracement indicator will draw lines at the 0%, 23.6%, 38.2%, 50%, 61.8%, 78.6% (or 76.4%) and 100% retracement levels. Once one Fibonacci retracement level breaks during the correction, then the next level in the series becomes the subsequent target. 

These indicator levels are often used to trade retracements. For example, suppose EUR/USD experiences a sharp uptrend, rising from 1.1000 to 1.2000 over two weeks, but then enters a declining correction phase. A savvy retracement trader decides to compute the Fibonacci retracement levels of that initial market rise to find potential support zones for the currency pair during its corrective pullbacks. 

They calculate the retracement levels by measuring the full extent of the move from 1.1000 to 1.2000 and then multiplying that 0.1000 move by the key Fibonacci retracement percentages and subtracting the result from the peak level of 1.2000 to obtain the relevant horizontal lines. They would thus compute the initial 23.6% retracement level as 1.2000-(0.236*0.1000) = 1.1764, and the subsequent 38.2% retracement level as 1.2000-(0.382*0.1000) = 1.1618. 

After breaking below the initial 23.6% retracement level of 1.1764, the trader then goes short with an objective of the market reaching the next 38.2% level of 1.1618. The trader then enters a take-profit order just above this area, with a stop loss safely above 1.1764. 

This example demonstrates the value of incorporating Fibonacci retracement levels into your forex trading arsenal since it provides insightful reference points during corrections that can help inform a retracement trader’s strategic decisions. Their use can be combined with momentum indicators like the Relative Strength Index (RSI) that can suggest if a particular Fibonacci\ level will either break and allow the correction to progress or resist the prior corrective move from continuing. 

5. Grid Trading

The grid trading strategy involves placing buy-stop orders at intervals below the market, while also placing sell-stop orders at intervals above the market. The reasoning behind the grid strategy is that when exchange rates start to trend, they usually continue trending for some time. 

Two main types of trading grids are used by forex traders. The Pure trading grid places both buy and sell orders at set intervals regardless of whether the market is trending or consolidating. The Modified trading grid is influenced by market direction and so is best set up to capitalize on a trending market.  

Regardless of the grid type you use when grid trading, you choose the key levels and intervals where you want to enter the forex market and allow the grid to work. By placing multiple orders, the grid strategy will have you increasing your position in the direction of the trend in small increments, thereby adding to your winning trades and boosting profits. 

The key to successful grid trading is knowing when to exit the grid and take profits. Many grid traders stagger their orders in wide exchange rate increments thereby limiting the number of orders. They then immediately exit the position when the last order is filled. 

In contrast, other grid traders might cancel an opposite order every time an order is filled. This serves to limit their exposure on the other side of the market, as well as any swap or trade execution costs if the order were to be filled.  

6. Carry Trading

The carry trade takes advantage of the interest rate differential between the two countries’ currencies. In this strategy, the trader typically borrows funds by going short a currency with a low interest rate, while going long a currency with a high interest rate. 

The carry trader can subsequently invest the high-yielding currency into corresponding government securities, allowing the trader to pocket the interest earnings while long the high-yielding currency. At the conclusion of the carry trade, the trader repays the borrowed funds along with any interest owed by being short the lower-yielding currency. 

While the carry trader receives a net benefit from the trade due to the positive interest rate differential, they do take exchange rate risk unless they use a hedging strategy. Accordingly, they generally want to select a currency pair where the higher interest rate currency is expected to remain roughly stable or rise in value relative to the lower interest rate currency.  

An example of a forex carry trade idea would be to buy the U.S. dollar and sell the Japanese yen (USD/JPY) over a 1-year timeframe using a notional amount of 1 million USD and assuming a USD/JPY spot rate of 147, a 1-year Japanese Government Bond yield of 0.03% and a 1-year U.S. Treasury Bill bid rate of 5.25%. The yen is a very popular short currency in carry trades due to the cheap borrowing interest rates in Japan, while the U.S. dollar serves as the higher-yielding base currency in the pair. 

A carry trader seeing this opportunity borrows JPY 147,000,000 (equivalent to 1 million USD at the spot rate of 147) at the prevailing 1-year interest rate of 0.03% in Japan, which will cost them JPY 147,044,100 at maturity. They then use those loan proceeds to purchase a 1-year U.S. Treasury Bill worth $1 million with a return of 5.25%. 

After one year, the trader collects the principal repayment on that T-bill along with accumulated interest, resulting in a total sum of $1,052,500 after earning $52,500 in interest. The carry trader then converts those USD funds back into JPY at the prevalent spot rate for USD/JPY of 145 to get JPY 152,612,500. They then use part of this amount to repay the outstanding debt of JPY 147,044,100. Under these circumstances, the trader obtains a net profit of 152,612,500 - 147,044,100 = 5,568,400 JPY, which equals $38,402.76 at a USD/JPY exchange rate of 145. 

Although experiencing an adverse effect caused by the decreased spot rate, the carry trader still realizes a net positive income attributable to the favorable differential between U.S. and Japanese 1-year interest rates. This example shows the benefits of carry trading while underlining the necessity of considering exchange rate moves as well as highlighting the fact that pinpointing opportune carry trade entry and exit points is vital for the success of forex carry trades.

As an alternative, given the current exchange rate for USD/JPY of 147, a carry trader can go long USD/JPY and roll it out for a year at the current swap points of -735.82 yielding a final exchange rate at maturity of 139.6418. Their profit in JPY if the USD/JPY exchange rate remains stable would be 7.3582 JPY multiplied by their position size in USD, or $50,055.78 for a $1 million carry trade size.  

While the forex carry trade may at first seem complex, its risk profile can be lower than other long-term forex trading strategies due to the buffer provided by the favorable interest rate differential. In addition, using leverage when carry trading can significantly increase your profit potential, as well as magnify your losses. Another advantage of the carry trade is that most central banks announce the direction of their interest rates before their release, giving carry traders information they can use to their advantage. 

Keep in mind that the carry trade strategy involves maintaining an open forex position over a long period of time, which could incur significant directional market risk unless prudently hedged when necessary. A significant move in the wrong direction for the exchange rate could easily jeopardize a carry trader’s profits, even wiping them out entirely if they used a high degree of leverage. 

7. Day Trading

A day trading strategy is a short-term forex trading strategy that typically involves analyzing recent currency pair exchange rate movements and taking positions over relatively small time frames that do not extend beyond the close of your trading day. This means day traders can avoid losing sleep and the risk of having their positions exposed to unmonitored market moves by not taking overnight forex positions.

Many day trading strategies exist, but a key common element among successful day traders involves paying close attention to short-term exchange rate changes. Day traders tend to use reliable technical analysis indicators like simple or exponential moving averages to recognize trends along with momentum oscillators like the RSI, MACD and Stochastic Oscillator to recognize when trends are losing momentum and hence seem likely to reverse.

If you intend to start day trading the forex market, you will want to develop a trading plan so that you can decide ahead of time when you'll enter and exit trades to avoid acting on impulse. Using technical analysis can be extremely helpful in identifying potentially profitable trade setups when day trading. Observing and monitoring the 5-, 10-, 15-minute and 1-hour charts can provide indications of suitable entry and exit points for your trades. Remember to stay committed to your plan and exercise self-control to resist impulsive behavior.

Day traders will want to choose a reasonable position size depending on their account size and risk tolerance. Practice good risk management by placing stop-loss and take-profit orders to help protect your trading account and secure your gains. Resolve to limit your daily losses to prevent major setbacks and manage your leverage wisely since it can magnify losses as well as profits. 

Forex day traders generally need to follow the latest relevant economic news, including changes in monetary policies, economic data releases or geopolitical events, to get a clearer sense of how they might affect exchange rates. They need to remain patient, use prudent money management practices, wait for confirmation of a trading signal before placing a trading order and think carefully before making decisions since rushing into trades without solid reasons can cause losses.

When starting out as a day trader, strive to learn and grow by regularly reviewing your trades and improving your strategies. Since forex market conditions change regularly, your day trading strategy needs to adapt to them promptly. Remember, day trading requires quick responses, dedication, experience and adaptability, so plan on building a strong foundation for your day trading business based on the above guiding principles.

8. Breakout Trading

Breakout trading involves identifying exchange rate levels where a currency pair is likely to break through known resistance or support areas. These levels indicate areas where buyers are likely to enter the market in the case of support or sellers are likely to exit the market in the case of resistance. 

When the market breaks through key support and resistance levels, it often leads to increased volatility and potentially significant exchange rate movements. Traders who successfully anticipate breakouts can profit from rapid price changes.

To identify potential breakout points, traders can find support and resistance levels on charts by seeing where the market has previously reversed direction or consolidated. They can look for classic chart patterns such as triangles, rectangles, head and shoulder tops and bottoms, double tops and bottoms, wedges and flags that have breakout points and measured move objectives. In addition, technical indicators like the Bollinger Bands or the Average True Range (ATR) can help confirm a breakout once it occurs. 

As with all trading strategies, proper risk management is essential when implementing a breakout strategy. Stop-loss and take-profit orders should be set appropriately to limit potential losses while allowing sufficient room for a profitable exchange rate movement to occur.

9. Swing Trade or Momentum Trading

The swing trading strategy, also sometimes called momentum trading, generally focuses on taking advantage of short- or medium-term exchange rate swings seen in the forex market, so positions are taken both in the direction of the prevailing trend and against it during corrections. This approach can involve holding positions overnight or for several days at a time. 

Swing traders tend to focus largely on market momentum to inform their trading activities, seeking to capitalize on rapidly changing exchange rates driven by market momentum arising from strong buying or selling pressure. This strategy requires an understanding of market dynamics and the ability to analyze exchange rate charts and technical momentum indicators effectively.

When implementing a swing or momentum trading strategy, it is important to pay close attention to fundamental analysis, as well as technical analysis. Central bank announcements, GDP reports, employment data and inflation figures can significantly impact exchange rate levels and provide valuable insights into future exchange rate movements, including market corrections and trend shifts. Identifying trends and corrections early while managing risks carefully using stop-loss levels can lead to substantial returns when operating as a swing trader.

10. Scalping

The forex scalping strategy is an unusually fast-paced forex trading strategy where traders using it aim to profit from small exchange rate fluctuations seen in the currency market throughout the trading day. A scalper can also be a day trader, although some scalp traders quit trading after making a certain amount of money. 

Scalp trading requires unusually quick reflexes, so it will not suit all traders. Scalpers typically open and close multiple positions within minutes or even seconds, often relying on fast decision-making skills, an extensive knowledge of market conditions and the factors that move them and even technological tools like market analysis algorithms. 

If you are considering using a scalping strategy to trade forex, remember that effective scalping requires fast reflexes, discipline and intense market focus. Traders using a scalping strategy must develop strict entry and exit criteria and adhere to those rules consistently. 

While the many transactions involved in implementing a scalping trading strategy offer numerous opportunities for profit, a scalping strategy can result in higher transaction costs related to per-trade fees, commissions, dealing spreads and order slippage, when applicable.

Using advanced charting tools, trading algorithms and order types can help improve efficiency and minimize trading errors that can arise from the need to respond quickly to scalping opportunities. Finally, practicing prudent risk and money management techniques is a key element of scalping required to avoid incurring excessive losses.

Picking a Forex Strategy

Choosing the right forex trading strategy depends on various factors, including your available timeframe, desired level of involvement and risk tolerance. For instance, if you only have limited time to devote to trading, then longer-term trading strategies like swing or trend trading might be more suitable. Conversely, if you prefer frequent engagement with the market, then day trading or even scalping could be a better fit.

In addition, consider the number of opportunities presented by different strategies. More active approaches like scalping offer numerous chances to generate small profits but they may require constant market monitoring that could easily become tiresome. 

On the other hand, forex strategies that involve less frequent executions like trend trading may provide fewer opportunities but allow for greater flexibility in balancing your trading activities with other time commitments and aspects of your life.

You will want to use prudent money management techniques by selecting an appropriate position size for your forex trades based on your risk appetite and overall currency pair portfolio composition. You should manage your risk in a disciplined manner by having stop-loss levels either in mind if you are closely watching the market or placed in the market as orders if your attention may wander. 

Another key thing to take into account when picking a forex strategy is the constantly evolving nature of the financial markets and the need for forex traders to adapt their strategies accordingly. Beginners may want to keep in mind the benefit of starting with simple strategies and adjusting them to add complexity as they gain experience operating in the forex market.

Finally, maintaining proper diversification levels across the different asset classes and currency pairs can help mitigate your portfolio’s risks associated with individual forex trades. 

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