Best Forex Trading Strategies for Traders
Why Having a Trading Strategy is Important?
To Make Trading Simpler
- You will precisely know when to open/close a position as your trading strategy will list out all the criteria that should be present for you to be trading.
- When you know what you need to look out for in the market, you will know what exactly you should be doing to achieve your goals.
- You can make trading easier by following a certain direction with a forex strategy, and not deviate from it even if new market conditions appear.
To Make Trading Simpler
- Having a strategy will ensure you are not driven by emotions which can be extremely harmful while trading.
- Emotions can lead you to make impulsive decisions which you might regret later on.
- You will always make objective and not subjective decisions with the help of a trading strategy.
To Highlight What’s Important
- Trading involves psychology, risk as well as capital management. And a well-defined trading strategy journals all these aspects of your trading activity, which helps in analyzing which area of your trading needs more of your attention.
- Without looking back at your past trades you cannot become a profitable trader in the long run. And this is where trading strategy will essentially help you pinpoint the aspects of you as a trader that need to be highlighted.
Basics of Creating Any Trading Strategy
Analysis of Personal Strengths as a Trader
Before you decide which trading strategy should you be using, first assess your personal strength as well as weaknesses as a trader. For instance, are you someone with patience or are you impulsive as a trader? Ask yourself these types of questions and get to know yourself as a trader. and you can find out the best forex strategy for yourself.
Goals to Achieve
What do you intend to achieve as a trader? Do you want to make trading your full-time profession? Answers to these kinds of questions will give you a fair analysis of the kind of trading strategy you should be using. Also, forex trading strategies for beginners might be different from those with experience under their belt.
Not everyone can be equally devoted to trading when it comes to spending time towards trading. You need to be clear on how much time you can invest on learning about the market movements and analyzing the market every single day that the market is open.
Willingness to Risk Capital
The trading strategy you are likely to use will also be determined by the percentage of your capital that you are willing to risk per trade.
21 Most Widely Used Effective Trading Strategies
Price Action Trading
- It’s a strategy based on price movements.
- Does not make use of any indicators.
- Entry and exit are based solely on 1 factor – price.
- If as per price analysis, the price is forecasted to rise, take a long position.
- A short position is taken if the price is predicted to fall.
- Calculate certain high and low points in price in a specific time period.
- Major support and resistance levels are identified before opening a position.
- Technical analysis is used to establish a range.
- This strategy is ideally used for pairs with lower volatility.
- Trade triggers or filters are used for avoiding false breaks and bounces.
- It’s a long-term strategy where a position is held for weeks or even months.
- This strategy makes use of both technical and fundamental analysis and is therefore considered relatively safer.
- It works best in trending markets and is not suited for a sideways market.
- Wider stop loss values are used in this strategy.
- There are two types of trends: uptrend (higher highs and lows) and downtrend (lower highs and lows)
- Trends can also be classified into strong, weak, and healthy.
- A strong trend has shallow pullbacks and buyers are in control.
- In a healthy trend there is selling pressure and retracement is towards 50MA.
- A weak trend is where buyers have a bigger advantage, with steep pullbacks.
- A pullback or breakout can be used for entering the trend, depending on the kind of trend.
- Placing a stop loss is also dependent on the kind of trend prevailing in the market. In an uptrend, SL can be placed below the
- previous low, and in case of downtrend, above the previous high.
- It’s a short term strategy where positions are opened and closed on the same day.
- The aim here is to profit off the volatility of the instrument.
- A day trader should be able to make quick decisions and have strong trading psychology.
- The biggest advantage of forex day trading is elimination of rollover or swap fees.
- Liquidity, volatility, and trading volume are the 3 main factors to consider before initiating day trading.
- When the price goes beyond a certain level, it’s called a breakout.
- When you open a position when the momentum is in your favor, you are engaging in breakout trading.
- It helps you be aware of all the trends in the market.
- Buy into a breakout only with buildups.
- Make sure to not buy a breakout post a bullish momentum, as this is an indication of market reversing.
Moving Average Crossover
- A moving average (MA) is a lagging indicator – based on past prices.
- The two types of moving averages are Simple Moving Averages and Exponential Moving Averages.
- Golden cross: This happens when the 50-day MA crosses the 200-day MA.
- Death cross: This is when 50-day MA goes under 200-day MA.
- While a golden cross signifies oncoming bullish momentum, a death cross is indicative of bearish trend direction.
- This strategy involves earning profits on interest rate differentials between currency pairs.
- One currency is borrowed to buy another currency.
- Lower interest rate is paid on sold/borrowed currency and a higher interest rate is collected on the bought currency.
- This involves looking at all the factors that could have an impact on the price of the currency pair in the future.
- Fundamental Analysis is of 2 Types:
- Top-down analysis: this takes into consideration the entire economy and studies the market as a whole.
- Bottom-up analysis: this starts with studying a specific pair and then considers all those things that can affect its price.
- Strategy involving fundamental analysis is more suited for long-term trading rather than short, as it can be time-consuming.
- In momentum trading recent price trends are observed and positions are opened/closed.
- It is based on the premise that if the price has been moving in an upward direction, it would continue to do so.
- The position is usually closed when the trend starts losing its strength.
- In order to study the momentum, volume, volatility, and time frame are the three factors that are considered.
- Momentum indicators along with relative strength index and stochastic oscillators are commonly used in this strategy.
Forex Scalping Strategy
- It’s a short-term strategy aiming to make profits off the small price movements in the market.
- Using leverage is favored in scalping.
- Only active traders can engage in this strategy.
- Signals are also commonly used to alert scalpers on profitable trading opportunities.
- When there’s a swing in price, swing traders take advantage of this change in value to earn profit.
- It means opening a position when the market is likely to rise, and exiting when the price is suspected to fall.
- In this strategy, you enter at a smaller timeframe and increase the Target Profit at a high timeframe.
- This strategy is considered low-risk because of entry at a low point.
- Whenever there’s important economic news, there is volatility and price changes in the market.
- Some traders seek to take advantage of this volatility to trade, although it is considered highly risky as it is event-driven.
- Whether the financial news is scheduled (like elections, data releases, etc.) or sporadic (financial crunch, pandemic, etc.) trading at that time involves risk. But out of the two types of news releases, scheduled can still be planned and risk can be mitigated. Economic calendars are helpful in this regard.
- For trading during news releases, ensure that your trade aligns with the expected price movement post the news release.
- Retracements are nothing but pullbacks that you find in a trend.
- By using trendlines, you will be able to find the trend as well as resistance.
- Fibonacci retracements can be used for entering the market.
- If you are taking a short-term position, ensure your entry level is more than 50% of retracement level.
- For a long position, the entry-level should be under 50% retracement level.
- It’s a semi-automated trading strategy.
- The grid is set up by the trader.
- Once this is done, traders need not manually enter and exit positions.
- The effectiveness of this strategy depends on the right placement of the buy and sell stop orders in different intervals, both above and below a specific price level.
- For this strategy to be effective, you need to identify support on daily or other higher timeframes.
- Next, watch out for an accumulation stage on an hourly or other lower timeframe.
- Trend reversal setups can be traded in 3 ways: breakout, pullback, and support and resistance.
- Remember to not trade the downtrend’s first pullback.
- Entering on a limit order is a good way to open a position.
- You can also use the candlestick reversal pattern to spot your entry.
- For exiting the market, you can either go with the trend or seek a swing.
- Pivot points are helpful in finding out the market’s direction.
- For calculating pivot points, following 5 elements are needed:
- Previous high
- Previous low
- Previous close
- 2 support levels
- 2 resistance levels
- Previous price charts and market data are used for analyzing the market and making future projections.
- Helpful signals for price trends can be generated using technical analysis.
- It is a helpful tool in short-term trading where there is no scope for including fundamental analysis in the trading plan.
Pullback Trading Strategy
- Always remember – trade in the trend’s direction.
- It is important to know the area of value for the type of trend you are looking at.
- Look for the trigger to enter and even exit the market.
Narrow Range Patterns
- This strategy comprises NR4 and NR7.
- Prices normally follow a certain pattern, instead of large moves, they go through certain periods of volatility where prices are confined to narrow ranges.
- As volatility lessens, along with a narrowing range a breakout is expected.
- NR4 is the most narrow candlestick of the last 4 trading days.
- NR7 is the most narrow candlestick of the last 7 trading days.
Most traders use a combination of different trading strategies to achieve their individual trading goals. By making use of a trading journal, a trader can easily identify the kind of trading strategy that works best for them. As the market is continually changing, a trader also needs to constantly make changes in their forex trading system in order to align it with their intended profits and goals.