Those who are planning to trade in the forex market must have read about the relevance of devising a solid trading strategy as the first step towards profitable trading. But the actual results of trading have a lot to do with your knowledge, skills and, moreover, the ability to execute the chosen trading strategy with perfection. Hence, the first and foremost thing you need while deciding about your trading strategy is knowledge. However, the information on the internet often confuses you when you try to find relevant information about different strategies. In that case, this write-up can be the right starting point for you as we review the best forex strategies in a comprehensive manner.
Things to Know About Forex Trading Strategies as a Beginner
Before we dive into various trading strategies and how they apply in a real-life trading scenario, we need to understand what a trading strategy is all about from a beginner’s perspective. Simply put, a trading strategy is like a blueprint essential for building a strong foundation for your trading career. Basically, it explains what you plan to do in your trading account. It also describes how you will analyse the market and how you will spot the best trade setups for executing trades with enough profit potential. These strategies would also involve using various trading tools like a profit calculator, which allows you to assess the potential profits for your trades.
Forex trading is about anticipating favourable price changes in currency pairs and entering a trade to profit from that expected exchange rate fluctuation. But what kind of price changes or market trends you plan to rely on for making profits will be defined in the strategy that you follow for trading. Whether it is about following a particular trend or placing trades ahead of a potential trend reversal, all such aspects will be determined by the strategy employed for trading.
A forex strategy actually justified each and every move that a trader makes while trading. Having a solid strategy helps you to stay logical and rational in all situations as you learn to remain disciplined without being overpowered by the sudden outburst of emotions. Traders who thoroughly follow their original trading plan or strategy are more likely to attain success and consistency in the long run. So, you need to consider your own trading goals and style while choosing or devising the forex strategy that suits you best as a trader.
The Best 8 Trading Strategies Followed by Forex Traders
- Trading Using Price Action – Just as the name implies, price action strategies are closely related to the study of prices, including historical price movements and how they work in current market scenarios. Price action is actually the core concept that comes into play in many popular forex strategies like trend trading, range trading and more. Price action serves as a tool for developing detailed strategies that rely on technical analysis for the most part.
A vast majority of forex traders depend on price action, and it is considered one of the best techniques for trading multiple time frames, whether long-term, medium-term or short-term. The technical side of price action is all about using candlestick price charts and analysing the support and resistance levels for determining the entry as well as exit points for trades. Those who follow price action strategies will also use efficient and powerful tools to make sound trading decisions.
- Trend Trading – The trend trading strategy is one of the simplest forex trading strategies out there, making it a popular choice among beginners and experienced traders. This strategy is all about going with the trend without any resistance, which is also a safe way to trade in the volatile currency market. This strategy has 2 parts: identifying the trend and entering a trade position in the direction of the ongoing trend.
Again this would involve the application of price action techniques, and traders may also be using simple indicators like RSI, Oscillators and more to make their analysis more precise. The number of trading opportunities you get with trend trading strategies is quite high in comparison to other strategies. But applying this strategy also requires constant monitoring of market situations, which is a time-consuming process.
- Range Trading – Trend trading strategies have this limitation: they are not applicable when the market does not display a clear trend and only has sideway movements. In such situations, the traditional range trading strategy would be the best course of action, making it a popular and practical strategy in the currency market. This strategy is especially suitable when the market is less volatile, and the chances of an upcoming trend are slim.
Range trading strategies also involve oscillators, RSI, Stochastics, and other such technical indicators, which allow you to identify the range the chosen currency pair’s price is moving in the absence of a clear trend. The problem with range trading is that you run the risk of being caught up in a breakout which happens quite often in the forex market.
- Scalping – Scalping is one of the most preferred trading styles in the forex market, as the volatile market conditions give a lot of trading opportunities that are favourable for scalpers. Scalping is basically about entering and exiting multiple trades within a short span of time, typically within 1 to 15 minutes. In this strategy, scalpers target tiny yet quick pip movements multiple times a day to get a decent profit. They can trade different pairs and determine the exact pips they have earned in their base currency with the help of a pip calculator. Scalpers rely on the smallest time frames for analysis and use minute charts for spotting ideal trade setups.
Scalping can also be very profitable for beginners if they get good at executing it well. One major mistake that many make while getting into scalping is that they don’t spend enough time practising. Because speed and timing are essential for executing this strategy without fail, and these two things do not develop without practice. So, I will suggest beginners spend enough time to practise and utilise the free demo account before trying this strategy on a real account.
- Day Trading – This is another popular strategy that fits well in the volatile currency market. Day trading is also a short-term trading strategy, but here you won’t be closing trades within minutes but will have to exit your positions before the day ends. This is another way to profit from the small price movements in currency pairs. Day trading is not as fast as scalping, as you will be looking at hourly charts instead of minute charts, but still, the method applied remains pretty much the same for both these strategies.
- Swing Trading – Swing trading is another strategy that forex traders can follow to trade the price swings in currency pairs. This is a medium-term strategy as traders hold positions for a duration of a few days to a few weeks. They won’t exit the trades until the price hits their targeted levels, making the strategy perfect for those with enough patience to wait until their goals are reached. The size of trade positions opened for swing trading will be more in comparison to scalping and day trading, but the number of trades will be lesser.
- Position Trading – The position trading strategy is more popular among professional or experienced traders as it requires in-depth knowledge about the market fundamentals that drive long-term trends in currency pairs. Because position traders hold onto a position for an extended period, ranging from several weeks to several years. They want to gain as much as possible from a long-term trend, and hence they won’t be exiting the trade anytime soon, unlike other strategies. They mostly rely on fundamental analysis, as technical analysis does not do much when it comes to keeping track of trends that last for a longer duration.
- Carry Trading – Carry trading is a strategy that is not really about trading as it is more about holding onto a currency pair for a longer duration to profit from the interest rate differences between the currencies in that particular pair. Because each overnight trade position that we hold results in swap charges which are either paid or earned by you. And if you enter a trade which allows you to earn from swap rates, then you carry forward that position for an extended period of time in order to make gains from the swap that is paid to you by the broker.
So, these were the most popular and best forex strategies that you need to know about as a beginner. Now choosing the most suitable strategy for yourself would become easier as you know how each of these strategies works and which would fit well with your trading personality and personal trading goals. Take your time to decide and trade well.