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Reviewed by Nick Cawley on 16 Dec 2021.
Key talking points:
What is a Forex Trading Strategy?
Forex Strategies: High-Level Overview
price action trading
range trading strategy
Trend Trading Strategy
position trading
day trading strategy
Forex Scalping Strategies
swing trading
Arbitrage Trading Strategy
Find out what kind of Forex trader hides in your DNA with our interactive DNA FX quiz
What is a Forex Trading Strategy?
A Forex trading strategy defines the system that Forex traders use to determine when to buy and sell currency pairs. Traders can use a variety of forex strategies, including technical analysis or fundamental analysis. A good forex trading strategy allows traders to analyze the market and execute trades with confidence using sound risk management techniques.
Forex Strategies: A Top-level Overview
Forex strategies can be broken down into specific organizational structures that can help traders find the most suitable strategy. The chart below illustrates how each strategy fits into the overall structure and the relationship between Forex strategies.
Forex Trading Strategies That Work
When trading forex, there are several factors that need to be taken into consideration to develop a trading strategy that works for you. There are countless strategies that can be followed, but it is important to understand and become familiar with the strategy. Every trader has unique goals and resources that must be considered when choosing an appropriate strategy.
There are three criteria that traders can use to compare the suitability of different strategies:
required time resources
Frequency of trading opportunities
Typical distance to target
To easily compare forex strategies based on three criteria, we present them in a bubble chart. The vertical axis is the “risk/reward ratio,” and the strategies at the top of the chart offer higher returns for the risk taken per trade. Position trading is usually the highest risk/reward strategy. The horizontal axis shows the time investment, which represents the time required to actively monitor the transaction. Due to the high frequency of trades made on a regular basis, the most demanding strategy on your time resources is scalping.
1. Price Action Trading
Price action trading involves studying historical prices to develop technical trading strategies. Price action can be used as a stand-alone technique or in combination with indicators. Fundamentals are rarely used; however, it is not uncommon to include economic events as causative factors. As mentioned above, there are several other strategies that fall into the price action category.
transaction hour:
Price action trading can be used for different time periods (long term, medium term and short term). The ability to analyze using multiple time frames makes price action trading appreciated by many traders.
Entry/Exit Points:
There are many ways to identify support/resistance levels, which are often used as entry/exit points:
In price action, there are ranges, trends, day trading, scalping, swing trading and position trading. These strategies follow different types of trading requirements detailed below. These examples show different techniques for trading these strategies to demonstrate the variety of trading, as well as various customization options for traders to choose from.
2. Range Trading Strategy
Range trading involves identifying points of support and resistance, and traders trade around these key levels. This strategy works well in the market with no significant volatility and no clear trend. Technical analysis is the main tool used in this strategy.
transaction hour:
There is no fixed length for each trade, as the range limit strategy can work on any time frame. Risk management is an integral part of this approach, as breakthroughs can occur. Therefore, range traders want to close all current range bound positions.
Entry/Exit Points:
Oscillators are the most commonly used timing tools. The Relative Strength Index (RSI), Commodity Channel Index (CCI), and Stochastic are some of the most popular oscillators. Price action is sometimes used in conjunction with oscillators to further validate range limit signals or breakouts.
Example 1: USD/JPY range trading
USD/JPY has shown persistent range-bound price levels over the past few years. The chart above shows clear support and resistance bands that traders use as entry/exit points. The RSI oscillator shows the time of entry/exit points, highlighted by a blue and red shaded box – blue: overbought, red: oversold.
Range trading can produce risk/reward trades with good returns, but this comes with a long-term investment in each trade. Use the advantages and disadvantages below to align your goals as a trader with the resources available to you.
advantage:
Plenty of Trading Opportunities
Favorable risk-reward ratio
shortcoming:
Requires a longer investment of time
Including strong comments on technical analysis
3. Trend Trading Strategy
Trend trading is a simple forex strategy used by many traders of all experience levels. Trend trading attempts to generate positive returns by exploiting the market’s directional momentum.
transaction hour:
Trend trades usually take place on medium to long-term time frames, as the length of the trend itself varies. Like price action, multi-time frame analysis can be applied to trend trading.
Entry/Exit Points:
Entry points are usually determined by oscillators (RSI, CCI, etc.), and exit points are calculated based on a positive risk-reward ratio. By using the stop loss horizontal distance, traders can reach or exceed this distance to maintain a positive risk reward ratio, for example if the stop loss is set 50 pips away, the take profit will be set 50 pips or more from the entry point s position.
Example 2: Identifying Trends
In the simple example above, EUR/USD is trending up, confirmed by higher highs and higher lows. In a downtrend, the opposite is true.
EUR/USD trading trend
When you see a strong trend in the market, trade with it. Such as the strong uptrend in EUR/USD above.
Using (CCI) as an entry time tool, notice how the price reacts with a bounce every time the CCI falls below -100 (highlighted in blue). Not all trades will go this way, but as the trend develops, each dip will cause more buyers to enter the market and push prices higher. In conclusion, identifying a strong trend is important for a successful trend trading strategy.
Trend trading can be quite labor-intensive as there are many variables to consider. A list of pros and cons can help you decide if trend trading is right for you.
advantage:
Plenty of Trading Opportunities
Favorable risk-reward ratio
shortcoming:
Requires a longer investment of time
Including strong comments on technical analysis
4. Position Trading
Position trading is a long-term strategy that focuses primarily on fundamental factors, but can use technical methods such as Elliott Wave Theory. This strategy does not take into account smaller, smaller market movements as they do not affect the broader market picture. This strategy can be used in all markets from stocks to foreign exchange.
transaction hour:
As mentioned above, position trading has a long-term perspective (weeks, months, or even years!) and is reserved for more persistent traders. Understanding how economic factors affect the market or comprehensive technical prerequisites is crucial to predicting trading ideas.
Entry/Exit Points:
Key levels on longer time frame charts (weekly/monthly) contain valuable information for position traders due to a comprehensive understanding of the market. As with other strategies, technical analysis can be used to evaluate entry and exit points.
Example 3: Germany 30 (DAX) position trade
The German 30 chart above shows an approximate two-year head-and-shoulders pattern, which is consistent with a possible break below the neckline (horizontal red line) of the right shoulder. In this selected example, the crash of Deutschland 30 was technically and fundamentally planned. By the end of 2018, Germany had experienced a technical recession, along with the U.S.-China trade war, which had hurt the auto industry. The Brexit talks did not help, as the UK’s possible exit from the EU is also likely to have a negative impact on the German economy. In this case, an understanding of technical patterns and the presence of strong fundamentals enables the combination of technical and fundamental analysis to construct a powerful trading idea.
A list of pros and cons based on your goals as a trader and the amount of resources you have.
5. Day Trading Strategy
Day trading is a strategy designed to trade financial instruments on the same trading day. That is, all positions are closed before the market closes. This can be a single transaction or multiple transactions throughout the day.
transaction hour:
Trading time ranges from very short term (minutes) to short term (hours) as long as the trade starts and ends within the trading day.
Entry/Exit Points:
The trader in the example below will attempt to open a position when the price breaks the 8-period EMA in the direction of the trend (blue circle) and exits with a 1:1 risk-reward ratio.
Example 4: EUR/USD intraday trading