7 Forex Trading Strategies Every Trader Should Know

There are several types of forex strategies; however, it is essential to choose the right one based preferred trading style to trade successfully. Some strategies work on short-term trades as well as long-term trades. The type of Forex strategies you choose depends on a few factors like:

  • Entry points – traders need to determine the appropriate time to enter the market
  • Exit point-trader need to develop rules on when to exit the market as well as how to get out of a losing position
  • Time availability

If you have a full-time job, you cannot use day trading or scalping styles.

People who prefer lower winning rates but larger gains should go for position trading, while those who prefer higher winning rates but smaller gains can choose the swing trading

Common Forex Trading strategies include:

1. Range Trading Strategy

Range trading is one of the many viable trading strategies. This strategy is where a trader identifies the support and resistance levels and buys at the support level, and sells at the resistance level. This strategy works when there is a lack of market direction or the absence of a trend. Range trading strategies can be broken down into three steps:

Finding the Range

Finding the range uses the support and resistance zones. The support zone is the buying price of the security, while the resistance zone price is the selling price of a security. A breakout happens if the price goes beyond the trading range, whereas a breakdown occurs if the price goes below the trading range.

Time Your Entry

Traders use a variety of indicators like price action and volume to enter and exit the trading range. They can also use oscillators like CCI, RSI, and stochastic to time their entry. The oscillators track prices using mathematical calculations. Then the traders wait for the costs to reach the support or resistance zones. They often strike when the momentum turns price in the opposing direction.

Managing Risk

The last step is risk management. When the support or resistance level breaks, traders will want to exit any range-based positions. They can either use a stop loss above the previous high or invert the process with a stop below the current low.

PROS:

  • Some ranges can last even for years producing multiple winning trades.

CONS:

  • Long-lasting ranges are not easy to come by, and when they do, every range trader wants to use them.
  • Not all ranges are worth trading.

2. Trend Trading Strategy

Another popular and common Forex Trading strategy is the trend trading strategy. This strategy attempts to make profits by analyzing trends. The process involves identifying an upward or downward trend in a currency price movement and choosing trade entry and exit points based on the currency price within the trend.

Trend traders use these four common indicators to evaluate trends: moving averages, relative strength index (RSI), On-Balance-Volume (OBV), and Moving Average Convergence Divergence (MACD). These indicators provide trend trade signals, warn of reversals, and simplify price information. A trader can combine several indicators to trade.

PROS:

  • Offers a better risk to reward
  • It can be used across any markets

CONS:

  • Learning to trade on indicators can be challenging.

3. Pairs Trade

This is a neutral trading strategy that allows pair traders to gain profits in any market condition. This strategy uses two key strategies:

Convergence trading – this strategy focuses on two historically correlated securities. The trader buys one asset forward and sells a similar asset ahead for a higher price anticipating that prices will become equal. Profits are made when the underperforming position gains value, and the outperforming position’s price deflates.

Statistical trading is a short-term strategy that uses the mean reversion models involving broadly diversified Security Portfolios. This strategy uses data mining and statistical methods.

PROS:

  • If pair trades go as expected, investors can make profits.

CONS:

  • This strategy relies on a high statistical correlation between two securities, which can be a challenge.
  • Pair’s trade relies a lot on historical trends, which do not depict future trends accurately.

4. Price Action Trading

This Forex Trading strategy involves analyzing the historical prices of securities to develop a trading strategy. Price action trading can be used in short, medium, and long periods. The most used price action indicator is the price bar, which shows detailed information like high and low-price levels during a specific period. However, most traders use more than one strategy to recognize trading patterns, stop-losses, and entry and exit levels. Technical analysis tools also help price action traders make decisions.

PROS:

  • No two traders will interpret specific price action the same way.

CONS:

  • Past price history cannot predict future prices accurately.

5. Carry Trade Strategy

A carry trade strategy involves borrowing a low-interest currency to buy a currency with a high rate; the goal is to profit with the interest rate difference. For example, one can buy currency pairs like the Japanese Yen (low interest) and the Australian dollar (high interest) because the interest rate spreads are very high. Initially, carry trade was used as a one-way trade that moved upwards without reversals but carry traders soon discovered that everything went downhill once the trade collapsed.

With the carry trade strategy:

First, you need to identify which currencies offer high rates and which ones have low rates.

Then match two currencies with a high-interest differential

Check whether the pair has been in an upward tendency favoring the higher-interest rate currency

PROS:

  • The strategy works in a low volatility environment.
  • Suitable for a long-term strategy

CONS:

  • Currency rates can change anytime
  • Tricky because they are highly leveraged
  • Used by many traders, therefore overcrowded

6. Momentum Trading

This strategy involves buying and selling assets according to the strength of recent price trends. The basis for this strategy is that an asset price moving strongly in each direction will continue to move in the same direction until the trend loses strength. When assets reach a higher price, they attract many investors and traders who push the market price even higher. This continues until large pools of sellers enter the market and force the asset price down. Momentum traders identify how strong trends are in each direction. They open positions to take advantage of the expected price change and close positions when the prices go down.

There are two kinds of momentum:

  • Relative momentum – different securities within the same class are compared against each other, and then traders and investors buy strong performing ones and sell the weak ones.
  • Absolute momentum – an asset's price is compared against its previous performance.

PROS:

  • Traders can capitalize on volatile market trends
  • Traders can gain high profit over a short period
  • This strategy can take advantage of changes in stock prices caused by emotional investors.

CONS:

  • A momentum investor is always at a risk of timing a buy incorrectly.
  • This strategy works best in a bull market; therefore, it is market sensitive.
  • This strategy is time-intensive; investors need to keep monitoring the market daily.
  • Prices can shift in a different direction at any time.

7. Pivot Points

This strategy determines resistance and support levels using the average of the previous trading sessions, which predict the following prices. They take the average of the high, low, and closing prices. A pivot point is a price level used to indicate market movements. Bullish sentiment occurs when one trades above the pivot point, while bearish sentiment occurs below the pivot point.

PROS:

  • Traders can use the levels to plan out their trading in advance because prices remain the same throughout the day.
  • Works well with other strategies

CONS:

  • Some traders do not find pivot points useful.
  • There is no guarantee that the price will stop or reverse at the levels created on the chart.

This brings us to the end of the article. Which strategy do you use? Please write us a comment!

 

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