Top 8 Forex Trading Strategies And Their Pros And Cons Currency Trading Strategies

Main talking points:

• What is a Forex Trading Strategy?
• Forex Strategies: A Top-level Overview
• Price Action Trading
• Range Trading Strategy
• Trend Trading Strategy
• Position Trading
• Day Trading Strategy
• Forex Scalping Strategy
• Swing Trading
• Carry Trade Strategy

What is a Forex Trading Strategy?

A forex trading policy defines a system that a forex dealer uses to control when to buy or sell a coinage pair. There are assorted forex strategies that traders can employ including technical reasoning or first analysis. A great forex trading policy allows for a dealer to analyse the mart including confidently execute trades with sound chance control techniques.

Forex Strategies: A Top-level Overview

Forex strategies can be divided into a distinct organisational form which can back traders in locating the most applicable strategy. The diagram beneath illustrates how every single policy falls into the overall form including the bond amidst the forex strategies.

Forex Trading Strategies That Work

Forex trading requires putting together multiple factors to formulate a trading policy that works for you. There are countless strategies that can be followed, however, understanding including individual comfortable with the policy is essential. Every dealer has unique goals including resources, which must be taken into consideration when selecting the suitable strategy.

There are three criteria traders can employ to contrast opposed strategies on their suitability:

1. Time supply required
2. Frequency about trading opportunities
3. Typical distance to target

To easily contrast the forex strategies on the three criteria, we've laid them not in in a bubble chart. On the vertical axis is ‘Risk-Reward Ratio’ with strategies at the top about the graph having higher honour for the chance taken on every single trade. Position trading typically is the policy with the highest chance honour ratio. On the level axis is time investing that represents how much time is prescribed to actively monitor the trades. The policy that demands the most in terms about your time supply is scalp trading due to the high frequency about trades individual placed on a regular basis.

1. Price Action Trading

Price action trading involves the study about historical prices to formulate scientific trading strategies. Price action can be used as a stand-alone technique or in conjunction with an indicator. Fundamentals are seldom used; however, it is not unheard about to contain financial events as a substantiating factor. There are several other strategies that fall in the price action bracket as outlined above.

Length about trade:

Price action trading can be utilised on top of different time periods (long, mean including short-term). The ability to employ multiple time frames for reasoning makes price action trading valued through various traders.

Entry/Exit points:

There are various methods to control support/resistance levels which are generally used as entry/exit points:

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

Within price action, there is range, trend, day, scalping, wave including position trading. These strategies adhere to opposed forms about trading requirements which will be outlined in detail below. The examples show different techniques to commerce these strategies to show lately how various trading can be, along with a variety about bespoke options for traders to choose from.

2. Range Trading Strategy

Range trading includes identifying support including opposition points whereby traders will place trades approximately these key levels. This policy works skilfully in mart without significant volatility including certainly not discernible trend. Technical reasoning is the primary tool used with this strategy.

Length about trade:

There is certainly not set reach per commerce as variety obliged strategies can do business for any time frame. Managing risk is an basic part about this process as breakouts can occur. Consequently, a variety dealer would similar to to neighbouring any course variety obliged positions.

Entry/Exit points:

Oscillators are most commonly used as timing tools. Relative Strength Index (RSI), Commodity Channel Index (CCI) including stochastics are a not many about the additional well-liked oscillators. Price action is occasionally used in conjunction with oscillators to further prove variety obliged signals or breakouts.

Example 1: USD/JPY Range Trading

USD/JPY has been exhibiting a prolonged variety obliged price standard on top of the past not many years. The diagram upon illustrates a clear support including resistance band which traders employ as entry/exit points. The RSI oscillator demonstrates timing about entry/exit points as highlighted through the shaded depressed including crimson boxes – blue: overbought including red: oversold.

Range trading can consequence in fruitful risk-reward ratios however, this comes along with long time investing per trade. Use the pros including cons beneath to align your goals as a dealer including how much resources you have.

Pros:

• Substantial numeral about trading opportunities
• Favourable risk-to honour ratio

Cons:

• Requires long periods about time investment
• Entails powerful appreciation about scientific analysis

3. Trend Trading Strategy

Trend trading is a simple forex policy used through various traders about all experience levels. Trend trading attempts to yield positive returns through exploiting a markets directional momentum.

Length about trade:

Trend trading generally takes place on top of the mean to long-term time skyline as trends themselves fluctuate in length. As with price action, multiple time setting reasoning can be adopted in trend trading.

Entry/Exit points:

Entry points are generally designated through an oscillator (RSI, CCI etc) including exit points are calculated based on a positive risk-reward ratio. Using quit standard distances, traders can either equal that distance or exceed it to maintain a positive risk-reward rate e.g. If the quit standard was placed 50 pips away, the take profit standard wold be set at 50 pips or additional absent from the access point.

Example 2: Identifying the Trend

In the simple example above, EUR/USD exhibits an uphill trend validated through higher highs including higher lows. The opposite would be true for a descending trend.

EUR/USD Trading the Trend

When you perceive a powerful trend in the market, commerce it in the way about the trend. For example, the powerful uptrend in EUR/USD above.

Using the (CCI) as a tool to time entries, notice how every single time CCI dipped beneath -100 (highlighted in blue), prices responded with a rally. Not all trades will do business not in this way, but because the trend is individual followed, every single dip caused additional buyers to come into the mart including push prices higher. In conclusion, identifying a powerful trend is critical for a fruitful trend trading strategy.

Trend trading can be reasonably effort intensive with various variables to consider. The record about pros including cons may back you in identifying if trend trading is for you.

Pros:

• Substantial numeral about trading opportunities
• Favourable risk-to honour ratio

Cons:

• Requires long periods about time investment
• Entails powerful appreciation about scientific analysis

4. Position Trading

Position trading is a long-term policy primarily focused on first factors however, scientific methods can be used such as Elliot Wave Theory. Smaller additional minor mart fluctuations are not considered in this policy as they work not involve the broader mart picture. This policy can be employed on all markets from stocks to forex.

Length about trade:

As mentioned above, position trades own a long-term outlook (weeks, months or even years!) reserved for the additional persevering trader. Understanding how financial factors involve markets or thorough scientific predispositions, is essential in forecasting commerce ideas.

Entry/Exit points:

Key levels on longer time setting charts (weekly/monthly) hold valuable facts for position traders due to the comprehensive opinion about the market. Entry including exit points can be judged using scientific reasoning as per the other strategies.

Example 3: Germany 30 (DAX) Position Trading

The Germany 30 diagram upon depicts an approximate two year head including shoulders pattern, which aligns with a probable fall beneath the neckline (horizontal crimson line) subsequent to the right-hand shoulder. In this selected example, the descending fall about the Germany 30 played not in as planned technically as skilfully as fundamentally. Towards the end about 2018, Germany went through a scientific recession along with the US/China commerce war hurting the automotive industry. Brexit negotiations did not help matters as the possibility about the UK leaving the EU would most likely negatively impact the German financial system as well. In this case, understanding scientific patterns as skilfully as having powerful first foundations allowed for combining scientific including first analysis to form a powerful commerce idea.

List about Pros including Cons based on your goals as a dealer including how much resources you have.

Pros:

• Requires minimal time investment
• Highly positive risk-to honour ratio

Cons:

• Very not many trading opportunities
• Entails powerful appreciation about scientific including first analysis

5. Day Trading Strategy

Day trading is a policy designed to commerce financial instruments in the same trading day. That is, all positions are shut before mart close. This can be a one commerce or multiple trades throughout the day.

Length about trade:

Trade times variety from very short-term (matter about minutes) or short-term (hours), as extended as the commerce is opened including shut in the trading day.

Entry/Exit points:

Traders in the example beneath will see to come or go in or into positions at the when the price breaks through the 8 period EMA in the way about the trend (blue circle) including exit using a 1:1 risk-reward ratio.

Example 4: EUR/USD Day Trading

The diagram upon shows a representative day trading setup using moving averages to identify the trend which is extended in this event as the price is upon the MA lines (red including black). Entry positions are highlighted in depressed with quit levels placed at the previous price break. Take profit levels will identify to the quit distance in the way about the trend.

The pros including cons listed beneath should be considered before pursuing this strategy. Day trading involves much time including try for little reward, as seen from the EUR/USD example above.

Pros:

• Substantial numeral about trading opportunities
• Median risk-to honour ratio

Cons:

• Requires long periods about time investment
• Entails powerful appreciation about scientific analysis

6. Forex Scalping Strategy

Scalping in forex is a common term used to describe the process about charming little profits on a frequent basis. This is achieved through opening including closing multiple positions throughout the day. This can be agreed manually or via an algorithm which uses predefined guidelines as to when/where to arrive including exit positions. The most liquid forex pairs are preferred as spreads are generally tighter, making the short-term nature about the policy fitting.

Length about trade:

Scalping entails short-term trades with smallest return, generally operating on smaller time setting charts (30 min – 1min).

Entry/Exit points:

Like most scientific strategies, identifying the trend is step 1. Many scalpers employ indicators such as the moving normal to verify the trend. Using these key levels about the trend on longer time frames allows the dealer to perceive the bigger picture. These levels will create support including opposition bands. Scalping in this band can at that time be attempted on smaller time frames using oscillators such as the RSI. Stops are placed a not many pips absent to avoid large movements against the trade. The MACD indicator is another useful tool that can be exercised through the dealer to enter/exit trades.

Example 5: EUR/USD Scalping Strategy

The EUR/USD 10 minute upon shows a typical example about a scalping strategy. The long-term trend is confirmed through the moving normal (price upon 200 MA). The smaller time setting is at that time used to goal entry/exit points. Timing about access points are headlining through the crimson rectangle in the prejudice about the dealer (long). Traders can also neighbouring extended positions using the MACD when the MACD (blue line) crosses on top of the signal line (red line) highlighted through the depressed rectangles.

Traders employ the same theory to set up their algorithms however, without the manual execution about the trader.

With this practical scalp trading example above, employ the record about pros including cons beneath to choose an right trading policy that leading suits you.

Pros:

• Greatest numeral about trading opportunities from all forex strategies

Cons:

• Requires long periods about time investment
• Entails powerful appreciation about scientific analysis
• Lowest risk-to honour ratio

7. Swing Trading

Swing trading is a speculative policy whereby traders see to take advantage about rang obliged as skilfully as trending markets. By picking ‘tops’ including ‘bottoms’, traders can enter extended including brief positions accordingly.

Length about trade:

Swing trades are considered medium-term as positions are generally held anywhere amidst a not many hours to a not many days. Longer-term trends are favoured as traders can capitalise on the trend at multiple points along the trend.

Entry/Exit points:

Much similar to the variety obliged strategy, oscillators including indicators can be used to choose optimal entry/exit positions including times. The only difference individual that wave trading applies to both trending including variety obliged markets.

Example 6: GBP/USD Swing Trading Strategy

A combination about the stochastic oscillator, ATR indicator including the moving normal was used in the example upon to show a typical wave trading strategy. The uphill trend was initially identified using the 50-day moving normal (price upon MA line). In the event about an uptrend, traders will see to arrive extended positions with the aged adage about ‘buy low, sell high’.

Stochastics are at that time used to identify access points through looking for oversold signals highlighted through the depressed rectangles on the stochastic including chart. Risk control is the final step whereby the ATR gives an indication about quit levels. The ATR figure is highlighted through the crimson circles. This figure represents the approximate numeral about pips absent the quit standard should be set. For example, if the ATR reads 41.8 (reflected in the last ATR reading) the dealer would see to place the quit 41.8 pips absent from entry. At DailyFX, we recommend trading with a positive risk-reward rate at a minimum about 1:2. This would say setting a take profit standard (limit) at least 83.6 (41.8 x 2) pips absent or further.

After seeing an example about wave trading in action, think the following record about pros including cons to control if this policy would suit your trading style.

Pros:

• Substantial numeral about trading opportunities
• Median risk-to honour ratio

Cons:

• Entails powerful appreciation about scientific analysis
• Still requires large time investment

8. Carry Trade Strategy

Carry trades include borrowing one coinage at subordinate rate, followed through investing in another coinage at a higher yielding rate. This will eventually consequence in a positive take about the trade. This policy is primarily used in the forex market.

Length about trade:

Carry trades are dependent on interest rate fluctuations amidst the associated currencies therefore, reach about commerce supports the mean to long-term (weeks, months including perhaps years).

Entry/Exit points:

Strong trending markets do business leading for take trades as the policy involves a lengthier time horizon. Confirmation about the trend should be the earliest step prior to placing the commerce (higher highs including higher lows including vice versa) – refer to Example 1 above. There are two aspects to a take commerce namely, exchange speed chance including concern speed risk. Accordingly, the leading time to open the positions is at the start about a trend to capitalise fully on the exchange speed fluctuation. Regarding the concern speed component, this will continue the same in spite of everything about the trend as the dealer will motionless receive the concern speed different if the earliest named coinage has a higher concern speed against the second named coinage e.g. AUD/JPY.

Could take trading do business for you? Consider the following pros including cons including perceive if it is a forex policy that suits your trading style.

Pros:

• Little time investing needed
• Median risk-to honour ratio

Cons:

• Entails powerful appreciation about forex market
• Infrequent trading opportunities

Forex Strategies: A Summary

This article outlines 8 types about forex strategies with practical trading examples. When considering a trading policy to pursue, it can be useful to contrast how much time investing is prescribed behind the monitor, the risk-reward rate including regularity about total trading opportunities. Each trading policy will plead to opposed traders depending on personal attributes. Matching trading personality with the right policy will eventually permit traders to take the earliest step in the right direction.

Enhance your forex trading

• If you’re new to forex trading, download our Forex for Beginners Trading guide.
• Register for free to opinion our live trading webinars which conceal assorted topics associated to the Forex mart similar to central bank movements, coinage news, including scientific diagram patterns.
• Stay up to date with major latest events including financial releases through viewing our economic calendar.
• Successful trading requires sound chance control including self-discipline. Find not in how much capital you should chance on your open trades.
• We also recommend viewing our Traits about Successful Traders guide to see the secrets about triumphant forex traders.

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