Trading forex without a strategy is like starting a journey without a map since you never know where your account will end up. You could make money or lose money, but you have no idea which is more likely.
The big advantage of having a forex trading strategy is that you can take some of the guesswork out of currency trading. Read on to learn more about the best forex trading strategies and how to choose among them to trade currencies successfully.
Choosing a Forex Strategy
Choosing a forex strategy is one of the most important things you can do to ensure your profitability as a forex trader, so you will definitely want to choose a successful strategy.
You will also want to select a strategy that best suits your lifestyle and personality type – not everyone wants to stare at trading screens all day or is not suited to the stress of fast or high-speed strategies. risk.
Once you have chosen one or more forex strategy options, you should check their performance. First, test each strategy through backtesting, which can be done with popular MetaTrader forex platforms if you have modest programming skills.
Check your strategy in a demo account which most online brokers will allow you to open risk-free. If any strategies still seem profitable, you can start trading them on a live account for the ultimate test.
It is generally best to start with smaller trades and then progress to larger amounts as you gain confidence in the performance of the strategy and your ability to implement it in a disciplined manner when trading live .
5 Best Forex Trading Strategies
There are many effective strategies for trading forex, but not all are suitable for all traders. 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.
Scalping is a very short-term trading strategy that involves taking several small profits on very short-term trading positions. Scalpers need super fast reaction times as they usually enter and exit trades within seconds or minutes. It’s a very fast-paced and rather stressful activity that 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 those shown below for EUR/USD for analysis. Scalpers generally do best using a broker with tight spreads, guaranteed fast order executions, and minimal or no order slippage.
2. Trading day
Day trading is another short-term trading strategy that is only followed during a particular trading session. Day traders generally do not take positions overnight, so they close all trades every day. This helps reduce exposure to 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 intraday price action. There are many day trading strategies, but one of them is known as breakout trading. Trades are triggered when the exchange rate breaks above a given level on the chart for a currency pair 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 drawn in red. Note that the trading volume also increased when the breakout occurred, thus confirming it.
3. News Trading
Some forex traders with deep pockets and a decent appetite for risk might use news trading strategies, although they’re probably not ideal for forex beginners. These strategies can be based on fundamental and technical analysis and they typically benefit from the noticeable volatility often seen in the forex market immediately following key 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 when managing their currency positions in such fast-paced 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 created considerable fluctuations in the forex market after its release. While those jobs numbers were dismal, what mattered most to the market was how the outcome differed from the market consensus.
In the situation below, the number of previous jobless claims was 3,176,000, the expected number was 2,500,000 and the outcome was worse than expected at 2,981,000. This should have put pressure on the US Dollar after its publication against other currencies.
4. Swing or Momentum Trading
Swing trading, sometimes also 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 also against them when the market corrects, so they must be prepared to take positions overnight.
Swing traders tend to focus on entering and existing positions based on momentum indicators that provide buy and sell signals. Traders use them to find overbought or oversold markets that they can sell or buy. Swing traders can also buy before support or sell before resistance levels that develop on exchange rate charts for a currency pair.
Some commonly used momentum indicators include the Moving Average Convergence Divergence (MACD) Histogram and the Relative Strength Index (RSI). The daily candlestick chart shown below for the GBP/USD exchange rate also displays the MACD and RSI in indicator boxes.
5. Trend Trade
Trend trading is a popular long-term forex trading strategy that involves following the prevailing trend or directional movement in the market for a particular currency pair. This strategy often involves buying on declines in uptrends or selling on 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 reaches its target or the trend begins to reverse. Trend traders often use trailing stop loss orders to protect their profits if a large reversal materializes.
Many trend traders use technical analysis indicators like the Average Directional Movement Indicator (ADX) and/or moving averages that smooth out price action so they can better identify trends. They can also use longer and shorter term moving averages and watch for crossovers to signal a potential reversal.
The 4-hour candlestick chart for EUR/JPY below shows an ongoing uptrend after a significant decline with the 10-day moving average shown in red and the ADX in the indicator box below.
Best Forex Brokers for Trading
If you want to start trading forex immediately or are looking for a better online broker to partner with, check out Benzinga’s top picks for forex brokers in the table below. You can start the account opening process today and most brokers will allow you to open a demo account first to try out their services and trade risk free before depositing your money. As an example of what to look for in a good forex broker, you can check out Benzinga’s FOREX.com review.
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How to start trading Forex
If you have chosen your forex trading strategies and a broker to use to trade forex, remember that money management and your trading mindset are key determinants of success. Also take the time to learn about these facets of forex trading.
When you’re ready to start, visit the broker’s website to open a demo account so you can start practicing trading and learn how to use their trading platform. If you are confident in your strategy and the broker you have chosen, you can open and fund a real account to start trading with real money.
Frequently Asked Questions
questions and answers
How profitable is forex trading?
Your profitability on the forex depends on you! To make a profit from forex trading, you need to know how to trade smartly and you also need a trading strategy. Trade only with venture capital – this is money you can afford to lose.
Ideally, forex trading should not exceed more than 15% of your entire investment portfolio.
What are the best forex trading tips?
Regardless of the market you plan to trade in, the online broker you choose is extremely important to your success. The broker you choose should be well regulated.
Develop a trading plan that defines an appropriate position sizing method and clear risk parameters. You can design a trading plan and practice using it in a demo account. If you prefer to use someone else’s plan and copy trades, then you will need to open an account with a broker that includes a social trading platform.
Learn from your mistakes, but don’t let them push you over the edge.
What are some forex trading strategies?
The most popular are scalping, day trading and position trading.
What are forex trading mistakes?
The most important are lack of sufficient capital and over-indebtedness with margin.