Forex Trading Strategies
Successful Forex trading strategies hinge on a keen understanding of price movements in the forex market. Whether you adopt a day trading strategy, position trading, or swing trading, each approach requires a tailored response to market moves.
Forex traders often use the strength index RSI to identify trading opportunities, particularly in popular pairs like EUR/USD. A robust strategy involves not only recognizing the right entry and exit points but also implementing effective risk management techniques, such as setting stop losses.
While a breakout trading strategy looks for a higher high to enter, a trend trading strategy rides the market’s momentum. Ultimately, your trading style should dictate the strategy you choose, ensuring it aligns with your goals and risk tolerance, whether it’s carefully placing a stop loss order or seizing a fleeting opportunity.
Before we tackle the most popular Forex trading strategies we will look at several important market analysis concepts. These concepts are the backbone for almost every trading strategy in Forex.
Support and Resistance Levels
Before we step into actual forex trading strategies, let’s start first with the basics. Like the widely used concepts in forex, support and resistance.
Here’s the most basic concept illustration:
As you can see, the bull market is a zigzag pattern making its way up.
When the market moves up and then pulls back, the highest point before it went down is the resistance. And when the market continues up again, the lowest point reached before it went up is the support.
Over time, support and resistance are continually formed as the market oscillates. The reverse is true for the downtrend.
Bullish and Bearish Trend
Whether the trend is bearish or bullish, you can identify the levels of support and resistance in your chart.
With the help of charts, they are very easy to identify.
In a bullish market, you are going to buy when you see a turn at past resistance becoming future support. In a bearish market, you are going to sell when you see a turn at past support becoming future resistance.
Forex trading strategies for beginners
Forex day trading strategy
Concretely, and as its name suggests, day trading refers to a trading method in which the investor buys securities and resells them during a single trading day. All long positions acquired during the session are thus liquidated before the close. The opposite is also true: a “short” or bearish trader can also sell his positions, then buy them back as soon as a significant drop in price occurs before the close. The goal of day trading is then to take advantage of the slightest selling or buying opportunity during a trading session to make profits, whether on short or long positions.
Forex position trading
Forex position trading is ideal for traders who prefer a long-term approach, focusing less on short-term market volatility and more on the gradual appreciation of currency pairs. This strategy involves holding positions for weeks, months, or even years, and suits individuals who may not have the time for daily trading but possess a deep understanding of market fundamentals.
Forex swing trading strategy
In the forex market, swing trading offers optimal returns only if the trader focuses on a volatile currency pair. Choosing a pair subject to incessant movements increases the investment possibilities, an asset which perfectly corresponds to the philosophy of swing trading. Pairs like EUR/USD and GBP/JPY are particularly suitable for this method of investments.
Also, swing trading places particular importance on supports and resistances. These benchmarks allow the trader to clearly identify the fluctuation channel of the price of the traded pair and to adapt their positions accordingly. The greater the gap between supports and resistances, the greater the profits possible from trading.
Scalping in Forex
Forex scalping involves trading currency pairs over very short periods of time, in large numbers. Many forex scalpers will focus on high volatility events around economic data and breaking news, where large market movements are almost guaranteed.
A standard lot in forex is 100,000 units of the base currency, but with leverage, scalpers can continue to take larger positions and dodge smaller market movements. The average value of a pip is approximately , so holding a trade for a move; a pip ten times a day would be equivalent to $100.
Normally, forex scalpers will have a set number of pips in mind and will close their position once the currency pair has moved that amount in either direction.
Advanced Forex trading strategies
Inside Bar Strategy
The Inside Bar Strategy is another effective approach for beginner forex traders.
An inside bar is a chart period that is fully contained within the range of the preceding period. Essentially, the previous candle, or ‘mother bar’, completely covers the high to low range of the inside bar.
Focus on the high and low of the mother bar, rather than the open or close of either bar.
Time Frames and Their Importance
This strategy is most effective on higher time frames.
The reason is to avoid the ‘noise’ prevalent in lower time frames. Daily charts help filter out this noise, resulting in clearer price action patterns, which are crucial for this strategy.
Additionally, the strategy is particularly effective on the daily time frame or higher. Inside bars are less frequent, making significant trade setups more noticeable and easier to identify. Typically, you’ll find one or two inside bars on the daily chart.
But if you look at a 1-hour chart, you’ll find multiple inside bars in a single day. That would only make it harder for you.
The third key in identifying an inside bar is that it must happen within a strong trend.
Here are two examples that show the difference between having a strong trend and a weak trend.
The price action inside the bar that happened within a strong trend was pretty obvious. The example above was an uptrend but they are just as effective in a strong downtrend.
In the illustration above, the inside bars that happened within consolidation were not obvious. This would make every trade difficult because it doesn’t provide a clear directional bias.
To summarize, using this strategy is about looking for inside bars that happen on the daily time frame in a STRONG trending market. This is effective either on a strong uptrend or downtrend. After that, you enter the inside bar trade on a break of the mother bar high or low.
Placing a stop loss
The best place to put a stop-loss is below the inside bar low. With this placement, you’ll receive the best reward and it’s relatively a safe place to hide your stop-loss order.
Another thing is that the relative size of the inside bar is important and it has something to do with the entry and stop-loss placement. This is because of profit targets and the risk to reward ratio.
The ratio you should always aim for is a 1:2 risk to reward, at a minimum. If your stop loss needs to be 50 pips away, then your profit target must be at least 100 pips.
Let’s try an example where the relative size of the price action inside the bar would negate the setup based on your profit target.
From what you can see above, it does look like a valid inside bar setup. With the daily chart on the strong downtrend, everything looks nice.
Next, let’s try with the same setup, but this time we will look back the past weeks to see why this setup wasn’t valid.
That’s right, previous support and resistance levels play a crucial part here. You can use them to determine whether an inside bar is worth trading. So, not only the relative size of the inside bar to the mother bar is important, support and resistance levels are also important. These two levels help you know what previous price action has done that can truly help you with your trades. Not only is this effective for inside bars but also for any kind of price action setup.
Trend Trading Strategy
The trend trading strategy is one of the simplest yet effective ones. It relies on trendlines in analytic charts. If lines are drawn correctly, they can be as accurate as any other strategy.
The concept is simple. An uptrend line is drawn along the bottom of support areas (valleys). What you have to do is connect two or more low points.
In a downtrend line, a line is drawn along the top of resistance areas (peaks). In other words, a line is drawn over the chart also connecting two or more high points.
When a trend line is broken, this is likely an indication of a change of the mainstream.
Basically, the whole point of trend lines is to locate two major highs or lows and connect them. That’s it, really. And yes, it’s that simple.
Here are trend lines in action:
Points to Remember using Trend Lines
Keep in mind that drawing a valid trend line requires at least two highs or lows, and three to confirm the trend line’s validity.
Be aware that the steeper the trend line, the less reliable it becomes, increasing the likelihood of a break.
However, when combined with consistent horizontal support and resistance levels, trend lines grow stronger with each test.
Above all, it’s crucial not to force trend lines to match market movements. If a trend line doesn’t naturally fit, then it’s not a valid indicator.
Range trading strategy
In a range trading strategy, traders search for instruments that are consolidating within a specific range, which can vary from as little as 20 pips to several hundred, depending on the trading timeframe. The key is to identify instruments showing consistent support and resistance levels, where prices repeatedly bounce off the support and face rejection at the resistance.
For this strategy, it’s crucial to choose instruments that are not in a strong trend. Traders can determine this by observing the price action or using indicators like the moving average and the Average Directional Index (ADX), with a lower ADX value indicating a weaker trend.
Once a suitable trading instrument is identified, the next step is to ascertain the range within which it is consolidating.
A fundamental aspect of the classic range trading strategy is to sell at key resistance points and buy at key support points. While some traders may concentrate on two specific levels, others might trade within broader “bands” or “areas.”
Forex trading strategies lay the groundwork for navigating the Forex markets. These strategies not only help in identifying your trading style but also assist in determining key factors like your preferred trading times and indicators.
Developing a solid Forex strategy enables you to spot market patterns and assess the strategy’s effectiveness. It’s important to recognize that no single ‘best forex strategy’ exists; traders often blend various strategies or apply modifications to suit different scenarios. This adaptability allows forex traders to tailor their approach to a wide range of market conditions.