Best Forex Trading Strategies
Many successful strategies for trading forex exist, but not all of them are suitable for every trader. 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 multiple small profits on trading positions with a very short duration. Scalpers need ultra quick reaction times because they usually enter and exit trades in just seconds or minutes. This very fast paced and a rather stressful activity that may not suit 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 that shown below for EUR/USD for analysis. Scalpers generally do best using a broker with tight spreads, quick guaranteed order executions and minimal or 0 order slippage.
EUR/USD tick chart and trade entry box
2. Day Trading
Day trading is another short-term trading strategy that is followed only during a particular trading session. Day traders generally do not take overnight positions, so they close out all trades each 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. Many day trading strategies exist, but a popular one, is known as breakout trading. Trades get triggered when the exchange rate moves beyond 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 GBP/USD shows a breakout below the level of the lower of the 2 converging trend lines of a triangle pattern drawn in red. Note that trading volume also increased when the breakout occurred, thereby confirming it.
Triangle pattern breakout in GBP/USD
3. News Trading
Some forex traders with deep pockets and a decent appetite for risk might use news trading strategies, although they are probably not ideal for forex beginners. These strategies can be based on fundamental and technical analysis and they generally benefit from the notable volatility often seen in the forex market immediately after key news releases.
News traders typically need to monitor economic calendars for key data releases. They then watch the market closely 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 need to maintain strict discipline when managing their currency positions during such fast markets and often place stop-loss and take profit orders in the market.
An example of an economic calendar and a data release event that a news trader might use is U.S. unemployment claims. This data was especially volatile during the COVID-19 shutdown in the U.S. and created considerable fluctuations in the forex market after its release. Although those jobs numbers were dismal, what mattered most to the market is how the result differed from the market’s consensus.
In the situation below, the previous unemployment claims number was 3,176K, the expected number was 2,500K, and the result was worse than expected at 2,981K. This should have put pressure on the U.S. dollar after its release versus other currencies.
Forex calendar showing a massive rise in U.S. Unemployment Claims data during the COVID-19 shutdown
4. Swing or Momentum Trading
Swing trading, sometimes also known as momentum trading, consists of a medium-term trading strategy that aims to capture more market moves. Swing traders do this by trading both with major trends and also against them when the market is correcting, so they should be willing to hold overnight positions.
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 they can sell or buy. Swing traders might also buy ahead of support or sell before resistance levels that develop on the charts of the exchange rate 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.
Daily chart for GBP/USD with MACD and RSI indicators shown below
5. Trend Trading
Trend trading is a popular longer-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 pullbacks in up trends or selling on rallies in down trends.
After a trend trader has taken a position in the direction of the trend, you will probably hold onto it until the market reaches their objective or the trend starts reversing. Trend traders often use trailing stop loss orders to guard their profits if a significant reversal materializes.
Many trend traders use technical analysis indicators like the Average Directional Movement Indicator (ADX) and/or moving averages that smooth out the price action so they can better identify trends. They might 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 upward trend in progress after a significant decline with a 10-day moving average shown in red and the ADX in the indicator box underneath.
4-hour chart for EUR/JPY showing a down trend followed by an up trend
Profit making in trading is a function of the market matching your methodology. We trade with a philosophy and we profit when it correlates with the current market environment. We make money when our winning percentage is high and our losses are kept small, or when or wins are big and are losses are small. If we have the discipline to follow a system consistently and manage our risk, then the profits will come when the market is conducive to our method. Until then it is our job to keep our losses and drawdowns under control. 1.Day traders have trouble making money in markets that lack intra-day volatility. 2.Trend followers can’t make money when markets don’t trend in one direction for any length of time. 3.Momentum traders lose money when stocks fail to breakout over resistance and trend. 4.Traders that use chart patterns don’t make money when trend line breaks don’t lead to sustained trends. 5.Swing traders don’t make money when support levels fail and stop losses are hit before a reversal. 6.Dip buyers don’t make money when downtrends begin and lows get lower. 7.Option trades lose money when markets fail to trend before the option expires. 8.Option sellers lose money when parabolic moves put the sold options in the money. 10.Investors lose money in bear markets. 10.Perma-bears lose money in bull markets.
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Want to learn how to trade the spinning top and doji candlestick pattern? In this article, I will show you how to identify the spinning top and doji candlestick pattern, and how to trade them successfully. This article will be the first in a series of price action posts in which I will reveal to you guys everything that I’ve learned about trading price action candlestick patterns and other chart patterns. Doji candlesticks are those who’s opening and closing price is the same. They usually have relatively small upper and lower shadows, although there are exceptions. In the picture below, you can see some doji patterns. In the same picture, you will also notice some spinning tops. Spinning tops are similar to dojis, and in Forex they can be traded the same way. Spinning top candlesticks are those who’s opening and closing prices differ by only a few pips. They, like doji candles, also usually have relatively small upper and lower shadows. How to Trade the Spinning Top and Doji Candlestick Pattern Many misinformed traders treat the spinning top or doji as a reversal pattern. The fact is that, although a doji or spinning top may often be followed by a reversal in price, the only thing it tells us for sure is that the market is unsure about what direction price should be going. In the example above, price did reverse each time; however, often a doji or spinning top candlestick pattern signifies that price is simply slowing down at a level of support or resistance. Price could always continue in the direction it was heading. The most important thing you should take from the lesson is that dojis and spinning tops signify neutrality in the market – not a reversal in price. Dojis and spinning tops can be used to prepare for a possible entry, and you can use them to note areas of support and resistance; however, you should never make a trade decision based on a doji formation or spinning top candlestick alone. As with a few other price action techniques that will be taught in this series, multiple occurrences of these two candlestick formations increase the odds of a reversal in price. Keep in mind that the market can do anything at any time. The majority of my knowledge in price action and candlestick patterns came from Steve. He is credited with introducing the western world to candlestick charts. He is THE expert on price action. I’ve also studied Nial Fuller’s price action course and a few others, but I highly recommend Steve Nison’s courses. I hope you see how trading the spinning top and doji candlestick pattern can be useful to you. Learning these price action techniques is a great way to profit in the Forex market, especially when combined with another profitable trading system.