Forex Trading Strategies Explained

Having a set, clear strategy is vital to becoming a successful forex trader. However, it’s not easy to find a great plan that gives consistent results, let alone be confident enough to stick by it. Actually, one of the more important things to which many people don’t really give that much attention is confidence. It’s essential that you are confident with every decision you make in order to avoid making grave mistakes or miss great opportunities


What is a Forex Trading Strategy?

A forex trading strategy is a method used by forex traders to help them decide on whether to sell or buy a currency pair at a given moment.

These strategies can be built on several things. Some of them might be based on chart analysis, while others might be based on events and news. There are also some strategies that rely on technical analysis. However, what they all have in common is that they are all made up of trading signals that determine whether to buy or sell.

The internet can be very handy in this regard as you’ll find plenty of strategies in it. However, it’ll be up to you to develop them and tweak them to your preferences.

Forex trading strategies for generating trading signals can be either automatic or manual. Automated systems follow an algorithm that’s developed by the trader to detect trading signals and act accordingly without the trader intervening. This can be good if the trader is impulsive as it eliminates the risk of making rushed decisions. Manual systems, on the other hand, are self-explanatory, they involve the trader manually looking for trading signals and making buy or sell decisions accordingly. These are great if the trader has good intuition.


Trading Styles

There are plenty of different trading styles, each one made for a specific time frame. Some are designed for short time frames while others are designed for longer time frames. We’ve compiled a list of the most popular and trusted trading styles that have been, and still are, used. It’s important to keep in mind that there is no ultimate style and it’s up to the trader’s experience and personal preference to determine which one to use in which situation, so we encourage you to try them out and see which one works best with you.

There are plenty of different trading styles, each one made for a specific time frame. Some are designed for short time frames while others are designed for longer time frames. We’ve compiled a list of the most popular and trusted trading styles that have been, and still are, used. It’s important to keep in mind that there is no ultimate style and it’s up to the trader’s experience and personal preference to determine which one to use in which situation, so we encourage you to try them out and see which one works best with you.

Scalping

Scalping involves trades that last for no more than a few minutes. Scalpers aim to quickly out-bid the spread and skim a couple of points of profit before closing. Scalping relies heavily on tick charts. When it comes to scalping traders, nothing is more important than the spread.

Day trading

As the name implies, these are trades that are done within a day. These are low-risk trades that are great for beginners and inexperienced traders. 1-hour and 4-hour time frames are the most commonly used by professional traders when it comes to day trading.

Swing Trading

Swing trading is when positions are held for several days, where the traders are looking to make a profit from short-term price fluctuations. Swing traders usually rely on larger time frame compared to day trading, including the 15-minute, 30-minute, 1-day, and 1-week charts

Position trading

Unlike scalping, this is a long-term trend-following style that aims to maximize the gain off of significant price shifts. A long-term trader usually looks at the end of day charts. Positional trading, in general, requires a lot of discipline and patience and reward handsomely. Positional trading also requires vast knowledge and experience of the market fundamentals.


Trend Trading

This is a trading strategy that is based on analyzing a currency pair’s momentum in a given direction in order to make profits.

Forex trend trading uptread

If a currency pair is trending upward, trend traders would only enter into a long position.

Forex trend trading downtrend

If a currency pair is trending lower, then they’d enter into a short position and a short position only.

One thing to keep in mind about trend trading strategies is that they all assume that a given currency pair will keep going in the same direction. These strategies usually contain a stop-loss or take-profit provision in case there are some signs of a reversal.

These strategies can be used by long-term, intermediate or short-term traders. No matter of the chosen time frame, a trader will always remain in their position unless they’ve noticed a reversal in the trend. These reversals can happen at different times depending on the chosen time frame.


Forex Trading Strategies Using Technical Indicators

Indicators are not the same as strategies; they act as a way to help traders scout out market conditions. Strategies, on the other hand, are more like a set of rules for using indicators in order to predict the future activity of the market accurately.

Trading tools are numerous, and they can be grouped into many different categories. Most traders will devise strategies using several indicators, though it’s essential to use different types of indicators rather than using indicators of the same type. Using two or more momentum-based indicators will result in multicollinearity, which is what happens when the same information is being counted multiple times.

Traders should use at least two different types of indicators to avoid multicollinearity. Typically, one indicator serves as a primary one while the other is used for confirmation, in order to trigger more accurate signals. One of the most used combinations is the Moving Average/ MACD combo, which can yield great results. To better understand Moving Averages and their different uses, check our post here.

If you want to learn more about Forex Indicators, check this thorough guide that we prepared.


Forex Price Action Trading

All price fluctuation is forex is based on the ratio of buyers to sellers (buyers are also called bulls, while sellers are called bears). When a given currency pair moves up, it can be attributed to the fact that there are more buyers than sellers, and vice versa. This ratio is constantly changing.

Who Controls the Price?

Knowing who’s currently controlling the price in a given market is what price action trading is all about. However, it’s equally as important to know whether or not the one controlling the price is able to stay in control.

  • If buyers are in control of the market and are likely to hold it, then you’re safe to buy.
  • If sellers are in control of the market and are likely to hold it, then you’re safe to sell.

How Do You Analyze Who Controls the Price?

There are two main price action techniques when it comes to analyzing who controls the price:

  • Advanced candlestick analysis: This analysis requires in-depth knowledge of the candlestick chart and how it works. With enough trial and error, you’ll be able to quickly figure out who’s in control of the price just by glancing at the chart.
  • Support and resistance areas: These are buy-and-sell areas that you can put on your chart in order to identify the right time to buy or sell.

Learn more about Candlestick Charts here.

Want to learn more about Support and Resistance levels? Check our forex support and resistance guide.


Now that you know these strategies, it’s time to put them into use in order to develop your own strategies and maximize your profits.

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