Essential Forex trading strategies in 2021
Forex trading is the exchange of one currency to another usually from the forex market. The forex market is a global decentralized market that determines exchange rates and controls the buying and selling of currencies. The participants in the forex market are multinational banks, central banks, financial institutions, hedge funds, professionals and retail clients. In order to try and succeed in the market, forex trading strategies are deployed by forex traders.
Table of Contents
- What is a forex trading strategy?
- Basics of forex trading Strategies
- Popular forex trading strategies
- How to create your own strategy
What is a Forex Trading Strategy?
A forex trading strategy is a comprehensive trading procedure deployed by a forex trader to determine how he will approach the markets at any given time. It helps the trader to determine which currency pairs to trade, time to trade, to buy or sell, stop loss and take profit values as well as other metrics to use or watch out for in the trade. When these data are generated from the strategy, the trader then makes informed trade decision. A trader may have different forex trading strategies to use depending on the market conditions, currency pairs, market sentiment or news.
Basics of forex trading strategies
Forex trading strategies can be built using the principles of technical analysis, fundamental analysis or a combination of both. Technical analysis is used to analyze statistical trends and historical trading data with the belief that the patterns will repeat again. Most trading platforms come with tools for technical analysis such as charting package, drawing tools, technical indicators, etc. Fundamental analysis focuses on social, economic and political events that affect currency prices.
Manual strategies usually demands that a trader sits in front of the computer seeking to identify trading opportunities from the charts. But automated strategies involve the scripting of software forex robots which automatically identifies signals and executes the trades. Several software robots are available on the internet for rent or outright purchase.
Forex by TradingView
Popular forex trading strategies
Several trading strategies have already been developed and are being used by numerous traders. A trader can study and use an existing strategy or modify it to suit his style. Note that there is no perfect strategy and some strategies work better for some people at specific market conditions.
Below are some of the well-known forex trading strategies:
1. Position trading
This is a trading strategy where a forex trader holds open positions for weeks, months or years. The trader is not interested in short-term price fluctuations; rather he is hoping to take advantage of long term market trends. A major advantage of this strategy is that the trader places only a few trades in months or years and there are no frequent analyses. It can be done on a part time basis.
But, position trading has major flaws. Swap fees will accumulate and may even cancel out any floating profits accumulated by the trader. Also, to maintain an open position for months, the ‘stop loss’ and ‘take profit’ values must be very wide meaning that the trader must have a huge trading capital. Trader discipline is required otherwise the trader might be tempted to close the trade before schedule in order to lock-in profits or cut his losses.
2. Swing Trading
Swing trading strategy is similar to position trading except that the swing trader wishes to capture short and medium term fluctuations in the market and so, maintains open positions for days or a few weeks. The difference with swing trading is that the trade time is shorter than that of position trading.
This strategy requires a thorough understanding of technical analysis methods and much discipline on the part of the trader. Swing trading is one of the forex trading strategies that is suitable for both part time and full time traders. Unfortunately, the swing trader is subject to swap fees which might greatly reduce potential returns. Swing traders face the risk of market reversals which may wipe out the trader’s capital.
3. Price action strategies
These are a number of forex trading strategies derived from the action of buyers and sellers in the forex market. Price action strategies focus on price analysis of the forex pairs and it is used by both short-term and mid-term traders. Traders study the historical price of the forex pair and then predict its next movement. Candlestick charts are mainly used in this analysis but it is sometimes combined with some technical indicators.
Price action strategies are not difficult to learn; this is why it is widely used by beginners. But, in most cases, price action strategies are not sufficient to be used alone; it needs confirmations with technical indicators.
4. Trend following strategy
Trend following is a strategy that seeks to identify price patterns and place trades in the trend direction as it occurs. A trend is the general direction of an asset’s price. Trends can be upwards, downwards or sideways. Trend traders do not predict price levels of a forex pair; they only identify a trend and place their trades. If it is an uptrend, a ‘buy’ position is opened and if it is a downtrend, a ‘sell’ position is opened.
This strategy has no complexities and a newbie can easily understand and use it. Trend followers are likely to capture big moves and quickly cut losses when the market reverses. However, the strategy required appreciable knowledge of technical analysis. The trader should always watch out for false breakouts. Risk management is a top priority for trend followers.
5. Range trading strategy
This is one of the forex trading strategies that is based on chart analysis. Range trading looks for support and resistance levels at extremes forming a range and ignoring the trends. The trader believes that price will still come back to the identified support or resistance levels and then positions his trades accordingly.
This strategy works well in markets where there are no clear trends and it can be used on all time frames. To execute perfectly, the trader must have a good knowledge of technical analysis and must be a disciplined trader.
6. Day trading
Day trading is the strategy of opening and closing positions within a day. The traders speculate on the price of the financial assets in order to capture the intraday movements. Most day traders open positions at the beginning of the day and close it before the market closes for that day. Almost every day trader bases their trading decisions from studying the charts and analyzing with indicators.
By virtue of the trading strategy, day traders avoid swap charges and market gapping. They can choose to place one long trade or a few trades within the day. But, the day trading requires knowledge of technical analysis, a strict trading plan and good money management skills. It is also unsuitable for emotional traders and it requires patience.
How to create your own strategy
If you do not find any of the existing forex trading strategies appealing, you can create your own. The major component is the trading signals that can be interpreted as buy or sell decisions. If you wish to automate your strategies, then you may need some programming knowledge depending on the trading platform that you wish to deploy the trading robot. For example, the MT4 expert advisors (EAs); which are software trading robots, can be developed on the MetaQuotes Language Editor 4.
Use the following steps to create your own forex trading strategies:
- Define your trading objectives.
- Select the forex pairs of your interest.
- Consider your account balance, leverage and risk appetite and then select your position sizes.
- Choose the complete analysis methods, time frame, technical indicators and/or trading systems that will generate your trading signals.
- Create rules that will determine your entry points when going long or selling short.
- Define clear exit strategies for buying or selling orders.
- Backtest your trading strategy and amend as necessary.
If you are a beginner, always evaluate your trades when you close all open positions. You may need to change your strategy based on the market movement, profitability, market news, etc. It is generally difficult to create a profitable trading strategy.
Forex trading strategies are of great importance to every trader that wishes to excel in his trading business. It tells a trader when and how to trade the markets. A strategy can be manual or automated with the use of software trading robots. The most popular trading strategies are based on trade duration, method of analysis and the overall style used. A trader can modify and use any of the existing strategies or create his own from scratch.
R1investing is a leading financial service provider that is based in Cyprus. It provides a wide range of forex pairs for trading on the powerful MT4 trading platform. Below are some of the reasons why you should trade with R1Investing :
- Regulated by the Cyprus Securities and Exchange Commission (CySEC)
- Trading on windows desktop computer, web trader and on mobile; iOS and android devices.
- Low spreads with no commissions on forex trades.
- High leverage; up to 1:500 for professional clients.
- Forex trading education is provided especially for newbies.
What is the best strategy for forex trading?
There is no recognized best strategy for trading forex and there is no foolproof strategy. The successful application of a good strategy depends on the trader’s skills, psychology, discipline and market conditions. The past performance of a strategy does not guarantee its future performance.
Which timeframe is best for forex trading?The timeframe used by a trader depends on his trading knowledge, trading strategy, assets traded and style. So, there is no best timeframe for forex trading. For example, scalpers trade smaller timeframes like 5 minutes to 30 minutes, while several position traders look at weekly or monthly timeframes.
How long does a forex trade last?
Generally, there are no defined times for forex trading. It all depends on the trader and the financial services provider involved. For most financial service providers, they will not close your open positions as long as you still have enough funds to maintain the positions. So, forex trades can last from a few minutes to years.
Can you live off forex?
Yes, it is possible to make a living through forex trading. But, it is very difficult and risky. Most forex Advisors assert that a greater percentage of their clients end up losing their trading capitals. However, to live off forex, you must be an exceptionally skilful trader with robust forex trading strategies and reasonable capital.
Can you learn forex by yourself?
Of course, there are lots of free and paid video lessons, articles, eBooks and forex trading education academies on the internet. You can also develop your own trading strategies, practice with demo accounts and become a live forex trader, all by yourself. Thanks to modern technology, you can move from a novice to an expert by teaching yourself.
The information above is for education purposes only and cannot be considered as investment advice and past performance is not a reliable indicator of future results