Best Forex Strategy For Consistent Profits

Reviewed by Nick Cawley on December 16, 2021

Chief talking points:

• What is a Forex Trading Strategy?
• Forex Strategies: A Tiptop-level Overview
• Price Action Trading
• Range Trading Strategy
• Trend Trading Strategy
• Position Trading
• Twenty-four hours Trading Strategy
• Forex Scalping Strategy
• Swing Trading
• Carry Trade Strategy

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What is a Forex Trading Strategy?

A forex trading strategy defines a system that a forex trader uses to decide when to purchase or sell a currency pair. In that location are diverse forex strategies that traders can use including technical analysis or fundamental assay. A good forex trading strategy allows for a trader to analyse the marketplace and confidently execute trades with sound risk management techniques.

Forex Strategies: A Top-level Overview

Forex strategies can exist divided into a singled-out organisational construction which can assist traders in locating the most applicable strategy. The diagram beneath illustrates how each strategy falls into the overall structure and the relationship between the forex strategies.

Forex Trading Strategies That Piece of work

Forex trading requires putting together multiple factors to codify a trading strategy that works for you. At that place are endless strategies that tin can exist followed, however, agreement and existence comfortable with the strategy is essential. Every trader has unique goals and resources, which must be taken into consideration when selecting the suitable strategy.

There are three criteria traders can use to compare different strategies on their suitability:

1. Time resource required
2. Frequency of trading opportunities
3. Typical distance to target

To hands compare the forex strategies on the three criteria, we've laid them out in a chimera nautical chart. On the vertical axis is 'Risk-Reward Ratio' with strategies at the summit of the graph having higher reward for the take chances taken on each trade. Position trading typically is the strategy with the highest hazard advantage ratio. On the horizontal axis is fourth dimension investment that represents how much time is required to actively monitor the trades. The strategy that demands the most in terms of your fourth dimension resource is scalp trading due to the high frequency of trades beingness placed on a regular basis.

1. Price Action Trading

Price activeness trading involves the report of historical prices to codify technical trading strategies. Price action can exist used as a stand up-lonely technique or in conjunction with an indicator. Fundamentals are seldom used; however, it is non unheard of to incorporate economical events equally a substantiating cistron. At that place are several other strategies that fall inside the toll action bracket equally outlined above.

Length of trade:

Toll action trading tin can exist utilised over varying time periods (long, medium and brusk-term). The ability to utilize multiple time frames for analysis makes price action trading valued past many traders.

Entry/Exit points:

At that place are many methods to determine support/resistance levels which are more often than not used as entry/exit points:

• Fibonacci retracement
• Using candle wicks
• Tendency identification
• Indicators
• Oscillators

Within price activity, at that place is range, tendency, day, scalping, swing and position trading. These strategies attach to dissimilar forms of trading requirements which will be outlined in detail below. The examples evidence varying techniques to trade these strategies to show merely how diverse trading can be, along with a variety of bespoke options for traders to choose from.

2. Range Trading Strategy

Range trading includes identifying support and resistance points whereby traders volition place trades around these cardinal levels. This strategy works well in market without significant volatility and no discernible trend. Technical analysis is the primary tool used with this strategy.

Length of trade:

There is no set length per trade as range bound strategies can work for any time frame. Managing risk is an integral function of this method every bit breakouts can occur. Consequently, a range trader would similar to close whatever electric current range jump positions.

Entry/Get out points:

Oscillators are most commonly used equally timing tools. Relative Force Index (RSI ), Article Channel Index (CCI) and stochastics are a few of the more than popular oscillators. Price action is sometimes used in conjunction with oscillators to farther validate range spring signals or breakouts.

Example 1: USD/JPY Range Trading

USD/JPY has been exhibiting a prolonged range bound price level over the by few years. The chart above illustrates a articulate support and resistance band which traders utilize as entry/exit points. The RSI oscillator demonstrates timing of entry/exit points equally highlighted past the shaded blue and ruby boxes – bluish: overbought and red: oversold.

Range trading can effect in fruitful risk-reward ratios however, this comes along with lengthy time investment per trade. Use the pros and cons below to marshal your goals as a trader and how much resources you lot have.

Pros:

• Substantial number of trading opportunities
• Favourable take a chance-to advantage ratio

Cons:

• Requires lengthy periods of time investment
• Entails strong appreciation of technical analysis

three. Tendency Trading Strategy

Trend trading is a unproblematic forex strategy used by many traders of all experience levels. Tendency trading attempts to yield positive returns by exploiting a markets directional momentum.

Length of trade:

Trend trading generally takes place over the medium to long-term time horizon every bit trends themselves fluctuate in length. Equally with toll action, multiple time frame analysis can be adopted in tendency trading.

Entry/Leave points:

Entry points are usually designated by an oscillator (RSI, CCI etc) and exit points are calculated based on a positive risk-advantage ratio. Using stop level distances, traders can either equal that distance or exceed it to maintain a positive risk-reward ratio e.k. If the stop level was placed l pips away, the take profit level wold be set at 50 pips or more than away from the entry bespeak.

Case two: Identifying the Tendency

In the unproblematic example above, EUR/USD exhibits an upward trend validated past college highs and college lows. The opposite would be true for a downwards trend.

EUR/USD Trading the Trend

When you see a stiff trend in the market, trade information technology in the management of the trend. For instance, the strong uptrend in EUR/USD higher up.

Using the (CCI) as a tool to time entries, notice how each time CCI dipped beneath -100 (highlighted in blue), prices responded with a rally. Non all trades will work out this way, but because the trend is beingness followed, each dip caused more than buyers to come up into the market and push prices higher. In decision, identifying a strong tendency is important for a fruitful trend trading strategy.

Trend trading can be reasonably labour intensive with many variables to consider. The list of pros and cons may assistance you in identifying if tendency trading is for you.

Pros:

• Substantial number of trading opportunities
• Favourable risk-to reward ratio

Cons:

• Requires lengthy periods of time investment
• Entails strong appreciation of technical analysis

4. Position Trading

Position trading is a long-term strategy primarily focused on cardinal factors nonetheless, technical methods can exist used such as Elliot Wave Theory. Smaller more than modest market fluctuations are not considered in this strategy equally they do non impact the broader market picture. This strategy tin be employed on all markets from stocks to forex.

Length of trade:

Equally mentioned above, position trades have a long-term outlook (weeks, months or even years!) reserved for the more than persevering trader. Understanding how economic factors affect markets or thorough technical predispositions, is essential in forecasting trade ideas.

Entry/Leave points:

Key levels on longer fourth dimension frame charts (weekly/monthly) hold valuable information for position traders due to the comprehensive view of the market. Entry and exit points can be judged using technical analysis as per the other strategies.

Case 3: Deutschland thirty (DAX) Position Trading

The Federal republic of germany xxx chart above depicts an approximate 2 year head and shoulders pattern, which aligns with a likely autumn beneath the neckline (horizontal red line) subsequent to the correct-hand shoulder. In this selected instance, the downward fall of the Federal republic of germany 30 played out as planned technically likewise every bit fundamentally. Towards the end of 2018, Germany went through a technical recession along with the US/China trade war pain the automotive manufacture. Brexit negotiations did not help matters as the possibility of the UK leaving the EU would most likely negatively touch the German language economic system also. In this case, understanding technical patterns as well equally having stiff fundamental foundations allowed for combining technical and fundamental analysis to construction a strong trade idea.

List of Pros and Cons based on your goals as a trader and how much resource you take.

Pros:

• Requires minimal fourth dimension investment
• Highly positive chance-to reward ratio

Cons:

• Very few trading opportunities
• Entails strong appreciation of technical and cardinal analysis

5. Twenty-four hours Trading Strategy

Twenty-four hours trading is a strategy designed to trade financial instruments inside the same trading twenty-four hours. That is, all positions are closed before market shut. This can be a single trade or multiple trades throughout the solar day.

Length of trade:

Trade times range from very short-term (matter of minutes) or brusque-term (hours), every bit long as the trade is opened and closed within the trading day.

Entry/Exit points:

Traders in the example below will wait to enter positions at the when the cost breaks through the 8 period EMA in the direction of the tendency (bluish circle) and exit using a 1:one risk-reward ratio.

Example 4: EUR/USD Day Trading

The chart above shows a representative day trading setup using moving averages to identify the trend which is long in this case equally the toll is above the MA lines (red and blackness). Entry positions are highlighted in blue with stop levels placed at the previous toll break. Take profit levels will equate to the stop distance in the management of the trend.

The pros and cons listed below should be considered before pursuing this strategy. Day trading involves much time and effort for niggling reward, as seen from the EUR/USD example above.

Pros:

• Substantial number of trading opportunities
• Median risk-to advantage ratio

Cons:

• Requires lengthy periods of fourth dimension investment
• Entails stiff appreciation of technical analysis

half-dozen. Forex Scalping Strategy

Scalping in forex is a common term used to depict the process of taking small profits on a frequent basis. This is achieved by opening and closing multiple positions throughout the 24-hour interval. This can be done manually or via an algorithm which uses predefined guidelines as to when/where to enter and go out positions. The most liquid forex pairs are preferred as spreads are generally tighter, making the brusk-term nature of the strategy plumbing equipment.

Length of merchandise:

Scalping entails short-term trades with minimal return, commonly operating on smaller time frame charts (30 min – 1min).

Entry/Exit points:

Like most technical strategies, identifying the tendency is step one. Many scalpers use indicators such as the moving average to verify the trend. Using these key levels of the trend on longer time frames allows the trader to see the bigger picture. These levels will create support and resistance bands. Scalping within this band tin then exist attempted on smaller time frames using oscillators such as the RSI. Stops are placed a few pips away to avoid large movements against the trade. The MACD indicator is another useful tool that tin can exist exercised by the trader to enter/exit trades.

Example 5: EUR/USD Scalping Strategy

The EUR/USD 10 minute above shows a typical example of a scalping strategy. The long-term trend is confirmed by the moving average (price above 200 MA). The smaller time frame is then used to target entry/go out points. Timing of entry points are featured by the ruddy rectangle in the bias of the trader (long). Traders can also close long positions using the MACD when the MACD (blue line) crosses over the bespeak line (cerise line) highlighted past the blueish rectangles.

Traders use the same theory to set upwards their algorithms however, without the transmission execution of the trader.

With this practical scalp trading case higher up, use the listing of pros and cons below to select an appropriate trading strategy that best suits y'all.

Pros:

• Greatest number of trading opportunities from all forex strategies

Cons:

• Requires lengthy periods of time investment
• Entails strong appreciation of technical assay
• Lowest risk-to reward ratio

7. Swing Trading

Swing trading is a speculative strategy whereby traders look to accept advantage of rang leap besides as trending markets. By picking 'tops' and 'bottoms', traders can enter long and brusk positions accordingly.

Length of trade:

Swing trades are considered medium-term as positions are generally held anywhere betwixt a few hours to a few days. Longer-term trends are favoured as traders tin can capitalise on the tendency at multiple points forth the trend.

Entry/Exit points:

Much like the range bound strategy, oscillators and indicators tin be used to select optimal entry/leave positions and times. The but divergence existence that swing trading applies to both trending and range bound markets.

Instance half dozen: GBP/USD Swing Trading Strategy

A combination of the stochastic oscillator, ATR indicator and the moving average was used in the case above to illustrate a typical swing trading strategy. The upward trend was initially identified using the l-day moving average (cost above MA line). In the case of an uptrend, traders will look to enter long positions with the old adage of 'purchase low, sell loftier'.

Stochastics are then used to identify entry points by looking for oversold signals highlighted past the blue rectangles on the stochastic and chart. Take a chance direction is the final footstep whereby the ATR gives an indication of finish levels. The ATR figure is highlighted by the ruby-red circles. This figure represents the judge number of pips abroad the stop level should exist ready. For case, if the ATR reads 41.eight (reflected in the last ATR reading) the trader would await to identify the finish 41.8 pips away from entry. At DailyFX, nosotros recommend trading with a positive risk-reward ratio at a minimum of ane:ii. This would mean setting a have profit level (limit) at least 83.6 (41.eight x 2) pips away or farther.

Later on seeing an example of swing trading in activeness, consider the following list of pros and cons to determine if this strategy would suit your trading style.

Pros:

• Substantial number of trading opportunities
• Median risk-to advantage ratio

Cons:

• Entails stiff appreciation of technical analysis
• Still requires extensive time investment

8. Conduct Trade Strategy

Carry trades include borrowing one currency at lower rate, followed past investing in another currency at a college yielding rate. This volition ultimately result in a positive comport of the merchandise. This strategy is primarily used in the forex market.

Length of trade:

Carry trades are dependent on involvement rate fluctuations between the associated currencies therefore, length of trade supports the medium to long-term (weeks, months and possibly years).

Entry/Leave points:

Strong trending markets work best for behave trades equally the strategy involves a lengthier time horizon. Confirmation of the trend should exist the first step prior to placing the merchandise (higher highs and college lows and vice versa) – refer to Case 1 above. There are two aspects to a carry trade namely, substitution rate run a risk and interest rate gamble. Accordingly, the best time to open the positions is at the start of a trend to capitalise fully on the commutation rate fluctuation. Regarding the interest rate component, this will remain the same regardless of the trend as the trader will still receive the interest rate differential if the first named currency has a higher involvement rate against the second named currency due east.g. AUD/JPY.

Could comport trading piece of work for yous? Consider the following pros and cons and see if it is a forex strategy that suits your trading fashion.

Pros:

• Trivial time investment needed
• Median risk-to advantage ratio

Cons:

• Entails strong appreciation of forex marketplace
• Infrequent trading opportunities

Forex Strategies: A Summary

This article outlines 8 types of forex strategies with practical trading examples. When considering a trading strategy to pursue, it can exist useful to compare how much time investment is required backside the monitor, the adventure-reward ratio and regularity of total trading opportunities. Each trading strategy will appeal to different traders depending on personal attributes. Matching trading personality with the appropriate strategy volition ultimately allow traders to take the first step in the right direction.

Raise your forex trading

• If you're new to forex trading, download our Forex for Beginners Trading guide.
• Annals for free to view our alive trading webinars which cover various topics related to the Forex market place like cardinal depository financial institution movements, currency news, and technical chart patterns.
• Stay upward to date with major news events and economical releases by viewing our economic agenda.
• Successful trading requires sound risk management and self-discipline. Find out how much capital you should risk on your open trades.
• We also recommend viewing our Traits of Successful Traders guide to notice the secrets of successful forex traders.

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