An effective Forex trading strategy allows a trader to analyze the market and confidently execute trades with sound risk management techniques.
The content of the article covers the main trading strategies:
- Price Action Trading Strategy
- Range trading strategy
- Trend Trading Strategy
- Position trading strategy
- Day trading strategy
- Scalp Trading Strategy (Scalp Trading)
- Swing trading strategy (Swing trading)
- Carry Trading Strategy
What is Forex trading strategy?
A Forex trading strategy is defined as a system that a trader uses to determine when to buy or sell a currency pair. There are different trading strategies that traders can use including technical analysis or fundamental analysis. An effective Forex trading strategy allows a trader to analyze the market and confidently execute trades with sound risk management techniques.
General overview of Forex trading strategies
Trading strategies can be divided into a separate organizational structure that can assist traders in determining the most suitable strategy.
Forex trading strategies
Forex trading requires a combination of many factors to form a suitable trading strategy. There are countless trading strategies that can be applied, however, to understand and feel comfortable using the strategy is important for every trader. Every trader has different goals and resources, so this must be considered when choosing the right strategy.
There are 3 criteria that a trader can use to compare different strategies, and see if they are right for you:
- Time you spend trading
- Frequency of trading opportunities
- Your trading goals
The following overview chart makes it easy to compare trading strategies based on three criteria.
On the vertical axis is the risk/reward ratio. The strategies at the top of the chart have a higher reward/risk ratio than the ones below. Position Trading is usually the strategy with the highest risk/reward ratio.
The horizontal axis depicts the amount of time it takes for the trader to actively monitor trades. The most demanding strategy in terms of your time source is Scalp Trading due to the high frequency of trades being executed frequently.
1. Price Action Trading
Price Action Trading involves studying price history to form trading strategies based on technical analysis. This strategy can be used as a standalone strategy or in combination with another indicator. Fundamental analysis is rarely used; However, it is possible to incorporate economic events as an important factor into price action analysis.
Price Action Trading can be used in different time frames (long term, medium term and short term). The ability to use multiple timeframes for analysis makes this trading strategy valued by many traders.
There are many methods to determine support/resistance levels commonly used as buy/sell points, such as:
- Candlestick pattern
- Identify trends
In Price Action Trading, it can be broken down into strategies: range trading, trend trading, scalping, swing trading, position trading, and day trading. Trading.
These strategies are subject to different trading requirements which will be detailed later. Through examples showing the different techniques to apply the strategies, it helps traders to see how diverse a trading strategy is, along with many trader-specific options to choose from. Selection.
2. Range Trading Strategy
Range trading involves identifying support and resistance levels through which traders will trade around these levels. This strategy works when the market has no significant volatility and no clear trend (sideways market). Technical analysis is the main tool used in this strategy.
There is no specific timeframe imposed on each trade as the range-bound strategy can be applied to any timeframe. Risk management is an integral part of this strategy because there can be break-out points, range breakouts.
The Relative Strength Index (RSI), the Commodity Channel Index (CCI), and the Stochastic are the more popular oscillators. Price Action Trading is sometimes used in conjunction with oscillators to further confirm range-bound signals or break-out points.
USD/JPY has been exhibiting a range-bound price over the past few years. The chart above illustrates clear support and resistance levels that traders use as buy/sell points. The RSI confirms buy/sell points as marked with blue boxes (overbought – take profit on buy or sell order) and red boxes (oversold – take profit on-sell or enter buy order).
However, range trading can offer a high risk/reward ratio, which comes with a long investment time per trade. Use the pros and cons to tailor your goals to the available conditions:
Large number of trading opportunities
High Profit/Risk Ratio
Requires a long time investment
Requires technical analysis
3. Trend Trading Strategy
Trend trading is a simple trading strategy used by many traders of all experience levels. Trend trading tries to make a profit by exploiting market volatility.
Trend trading usually takes place over the medium to long term as the trends themselves vary in the length of time frames. As with Price Action Trading multiple timeframe analysis can be applied in trend trading.
The entry point is usually determined by a set of indicators (RSI, CCI, ….) and the exit point is calculated based on the reward/risk ratio. Once the stop loss distance has been determined, the trader can set a take profit of at least 1 distance equal to the stop loss or greater. For example, if the stop loss is 50 pips away from the entry point, the take profit is at least 50 pips or more.
Through the above example, the EUR/USD exchange rate shows an uptrend confirmed by the following high higher than the previous high, the following low higher than the previous low. The opposite would be true for a downtrend.
When you see a strong trend in the market, trade in the direction of that trend. For example, the strong uptrend of EUR/USD above.
Using the CCI as a timing tool, notice how each time the CCI falls below -100 (highlighted in blue), how the price reacts to a rally. Not all trades will go this way, but since the trend is being followed, each drop in price causes more buyers to enter the market and pushes the price higher. In summary, identifying a strong trend is important to an effective trend trading strategy.
The pros and cons can assist you in determining if this trend trading is for you.
Substantial number of trading opportunities
High Risk/Reward ratio Tỷ
Requires a lot of time and analysis.
4. Position Trading Strategy
A position trading strategy is a long-term strategy that mainly focuses on fundamentals. However, a combination of technical analysis methods such as Elliot wave theory can be used. Small market movements are not considered in this strategy because small fluctuations do not affect the overall market picture. This strategy can be applied on all markets from stocks to forex.
As mentioned above, a position trading strategy with a long-term outlook (weeks, months or even years) is suitable for persistent traders. Understanding how economic factors affect the market or technical trends is essential in forming trading ideas.
The key levels on the long time frame chart (week/month) provide valuable information to traders using this strategy as they provide a comprehensive view of the market. Entry and exit points can be identified using technical analysis like other strategies.
The DAX 30 Index chart above depicts a head and shoulders pattern over a period of almost 2 years, showing signs of a possible drop below the neckline (horizontal red line) next to the side shoulders Right. In this chosen example, the decline of the DAX 30 index goes according to plan technically as well as fundamentally.
At the end of 2018, Germany experienced a recession, as the trade war between the US and China hurt the auto industry. Brexit negotiations are not supportive because the possibility of the UK leaving the EU will most likely have a negative impact on the German economy.
In this case, understanding technical patterns as well as having a solid fundamental foundation allows for a combination of technical and fundamental analysis to form a clear trading idea.
Pros and Cons of Position Trading Strategy
Doesn’t require much chart analysis time
High risk/reward ratio
Very few trading opportunities
Requires both fundamental and technical analysis.
5. Day Trading Strategy
Day Trading is a strategy designed for day trading. That is, all positions are closed before the market closes.
Trading times can range from very short (from a few minutes to a few hours), as long as the trade is opened and closed within one trading day.
Through the example below, traders look for entry points when price breaks through the 8 EMA in the direction of the trend (blue circle) and exit when using a 1:1 risk/reward ratio.
The chart above depicts an intraday trading strategy, using moving averages to identify trends, in this case the price above the moving averages (red and black) represents an uptrend. The entry points are marked in blue with the stop loss levels as the price penetrates down the MA. The take profit level will be equivalent to a profit/risk ratio of at least 1:1
The pros and cons of the Day Trading strategy need to be considered before applying. Day trading requires a lot of time and effort to get small profits, as seen from the EUR/USD example above.
Substantial number of trading opportunities
The risk/reward ratio is average.
Requires a lot of time to monitor and analyze
6. Scalping Trading Strategy
Scalping trading strategy is a common term used to describe the process of achieving small but continuous profits. This is achieved by opening and closing multiple orders during the day.
This strategy can be executed manually or through an algorithm that uses predefined time/position instructions to enter and exit positions. Highly liquid currency pairs are preferred as low spreads suit the short-term nature of the strategy.
This strategy requires short-term trades with small profits, usually applied on small time frame charts of 30 minutes or less.
Like most strategies using technical analysis, identifying trends is the first step. Scalper uses indicators such as moving averages to identify trends. Using key levels in a trend on longer timeframes allows the trader to see the bigger picture.
Important levels act as support and resistance levels. Further range expansion can be applied on smaller timeframes by using an indicator like RSI.
The stops are set a few pips away from the entry point to minimize the risk of contrarian movements. The MACD indicator is also another useful tool that a trader can use to enter/exit trades. .
The 10-minute EUR/USD rate chart above shows a good example of a Scalping trading strategy. The long-term trend is confirmed by the moving average 200 moving average (price above 200 MA). Then, smaller timeframes are used to identify buy/sell points.
The entry points are depicted by the red rectangle. The trader can also close long positions using the MACD when the MACD (blue line) crosses the signal line (red line) marked by the blue rectangles.
However, traders use the same theory to establish buy/sell points without manual trader action.
Here are the pros and cons of the Scalping strategy that can help you choose a trading strategy that works best for you.
The largest number of trading opportunities in the strategies.
It requires a lot of time to monitor and analyze.
Low risk/reward ratio
7. Swing Trading Strategy
Swing trading strategy is a speculative strategy whereby traders seek to take advantage of markets as well as trends. By identifying the ‘top’ and ‘bottom’, traders can enter buy and sell orders respectively.
The Swing Trading strategy is used in the medium-term time frame because positions are usually held between a few hours and a few days.
Like the range trading strategy, the Swing Trading strategy also uses technical indicators to choose the optimal entry/exit point.
The only difference is that the Swing Trading strategy applies to both trending and non-trending markets
The combination of Stochastics indicator, ATR indicator and moving average has been used in the above example to illustrate a typical swing trading strategy. The market trend is defined as an uptrend with the MA(50) pointing up and the price above the MA(50). In this case, the trader is looking for an opportunity to enter a buy order with the popular view of “buy low, sell high”.
Stochastics are used to identify entry points by looking for oversold signals, marked with blue rectangles. Risk management is the final step whereby the ATR gives an indicator of the stop loss.
For example, if the ATR is 41.8 , the trader would look to place a stop loss 41.8 pips away from the entry point. Identify the take profit point, usually a nice risk/reward ratio of at least 2:1. Therefore, the minimum take profit point is 83.6 pips away from the entry point (41.8 x 2).
After seeing an example of the Swing Trading strategy in action, take a look at the following pros and cons to determine if this strategy is right for your trading style.
Substantial number of trading opportunities
Moderate risk/reward ratio
Still requires a lot of monitoring and analysis time.
8. Carry Trade Strategy
Different from the above 7 trading strategies, the Carry Trade trading strategy is a strategy through borrowing one currency with a lower interest rate, and investing in another currency with a higher interest rate. This will ultimately help to make a profit. This strategy is mainly used in the forex market.
Trade execution is subject to interest rate fluctuations between the currencies involved. Hence, medium and long term trading durations (weeks, months and possibly years).
Strong trending markets are best suited for carry trades as this strategy involves a longer time period. Identifying the trend should be the first step before trading. There are two aspects to Carry Trade trading namely exchange rate risk and interest rate risk. Accordingly, the best time to open positions is at the beginning of the trend to take full advantage of the exchange rate fluctuations. Regarding the interest component, the interest rate will remain the same regardless of the trend as the trader will still get the interest rate differential if the base currency interest rate is higher than the quote currency rate, for example: AUD/JPY.
Consider the following pros and cons and see if it’s the right trading strategy for your trading style.
Need a little time investment
Average risk/reward ratio
Irregular trading opportunities
This article presents 8 types of trading strategies with real trading examples. When considering strategy options, we need to compare the time it takes to pursue, the reward/risk ratio and the trading opportunities that strategy offers.
Each trading strategy will suit different traders depending on individual personality. Combining a trading personality with the right strategy will ultimately allow traders to take the first step in the right direction.