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Top 7 Best Forex Trading Strategies in 2021

Feb 09, 2021

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A wise man once said one who fails to plan plans to fail. This saying also holds in forex trading—one who fails to plan trade plans to trade in losses. In forex trading lingo, a ‘trade plan’ is termed, forex trading strategy.

A well-baked forex trading strategy is as important as the trading opportunities themselves. A Forex trader who would want to be in the business of forex trading for long should never trade by emotional impulses. He should know that is a surefire recipe for a tsunami of losses. Therefore, it would be best to learn how to use forex strategies and price action as an indicator to watch the market. Forex strategies are at least is preferable to trading based on his emotions.

In this discourse on forex, we want to provide a comprehensive review of the best forex trading strategies forex traders actually use. Each of the strategies has proven to works in practice.

As you move from paragraph to paragraph of individual trading strategies, make sure you understand each trading strategy. Understanding a trading strategy forex approach may be all you need to develop a solid trading style.

You may want to observe the advantages and disadvantages and take a critically long look within. Ask yourself the following trading questions.

Can I cope with the requirements and accept the risks inherent in the price moves of the forex trading strategy?’

  • Am I in for the longer term?
  • Will these recommendations meet my trading goals and objectives?
  • Do they suit my trading styles?

And more especially, if you used to chart your course in trading by your gut feelings and takes an unusually high risk, we hope that falls by the wayside as we take on this delightful tour.

 

What is a Forex Trading Strategy?

A Forex trading strategy can be defined as an organized system of rules that traders can use to determine whether to buy or sell a currency pair at a given time. A Forex trading strategy provides you with criteria you need to meet before you can enter a trade.

In essence, forex trading strategies are systems that work to take out the emotional element from forex trading. The emotional elements could make you pay for the wrong spur-of-the-moment decisions with your money, sanity, or both in forex trading.

By developing a Forex trading strategy, you will learn to keep a cool head in a highly volatile and low volatile market. However, drafting out a Forex trading strategy is about half the work. The other half lies in putting in discipline to observe your rules according to the forex strategy assiduously. Your chance of making profits depends on it.

To develop the right trading strategy, you will need to devote your time and gray cells to hone your trading instincts and commit to your trading style. This will, in turn, help you not just to see trends, market conditions, and patterns but also to see beyond them.

Forex trading strategies can be generated from technical and fundamental analysis. It can also be created manually or automatically by software backed by a coded algorithm.

The manual system needs a Forex trader to work. This could be an expert well-versed in the trade or a veteran who understands how to trade forex. He would usually have to study top technical indicators like the candlestick chart, price action, and many others. He would then deliver his decisions after the assessment.

In the automated version, software-enabled by a coded algorithm is used to find forex trading signals. It processes the forex signals then execute buy or sell. To make an entry on trade at such-and-such points and sets the limit order as risk management.

For a beginner, you can start simple in forex. You can start with a particular currency pair showing recurrent trends like rebounding at particular support or resistance levels. Forex trading strategies that work are more than guesswork. You need to learn all the market variables and come up with a strategy that works well. Make sure you test run the forex strategy in a demo environment before executing live trades.

 

Components of an efficient forex trading strategy

 

1. Selecting a currency pair

A forex trader should focus on a few select markets (if possible, focus on one currency pair). Else a Forex trader may fall for the temptation of being a Jack of all trade yet master of none.

 

2. Position sizing

You must select the proper size that can meet your trading objectives

 

3. Entry Strategy

Traders always develop rules on when to initiate an entry into a trade.

 

4. Exit Strategy

Traders always develop rules on when to exit a trader to mitigate losses.

Trading strategies that work should be consistent and clear. More than that, they should also be definitive, objective, and verifiable.

 

Why Should You Use a Forex Trading Strategy?

A fine question, my friend. Imagine a trading day where a currency pair, say EUR/USD, is moving support and resistance levels on the chart. It may move bearishly, hit a support level, and rebound bullishly, covering some pips.

Let’s assume that this maintains constancy for some time. How do you decide on whether or not to buy or sell a currency pair? Where do you initiate your entry? And how do you know you will get profits from that? How do you make it work?

Without forex trading strategies, there is no means to check the market moves per time. The traders may have to resort to their feelings. Results are more often than not disappointing.

Though not infallible, forex trading strategies provide a surer means to accumulate gains; however, since it is a rule system, only a thin chance that your trading will end in losses.

 

Best Forex Trading Strategies That Work

IMG 2: What are the best forex trading strategies

In this section, we offer you a handy dandy list of the best trading strategies available. These are forex trading strategies that have proven to work consistently.

We advise you to do your homework before using these recommendations. Research and ask thought-provoking questions on the forex trading strategies. Only use them when you are convinced that they fit into your trading style. If you took your time to understand them, they would boost your pips profits to pro-levels in no time.

Now brace for the facts.

 

1. Price Action Trading

Price action trading points to studying the prices in the recent past and real-time and using them to set up the right trading strategies. It’s a strategy that lets forex traders consider recent and actual movements of the forex market. And from that assessment, make entry and exit decisions.

Price action is a strategy that is heavily dependent on technical analysis. Hence, any trader who wants to employ the price action forex trading strategy services must know his onions regarding technical, analytical tools.

 

Timeframe: it is the best fit for both short term to medium term trades.

Generation of price action trading strategy

As we mentioned earlier, it is drawn from recent past and real-time data. Analytical tools like trend lines, price bands, moving averages (simple and exponential), support and resistance levels, candlestick charts are pivotal in decision making.

The traders may use price movements, breakouts, trend lines, and price bars( mainly candlestick bars) from the tools. Depending on the circumstances involved, he would determine stocks that may range bullishly or bearishly and what support and resistance levels are price reversal likely to occur.

To help you do that, you will need to learn how to use other methods like the Candlewick, indicators, and oscillators.

Advantages

  • A good number of trading opportunities
  • It has a good risk-to-reward ratio.

Disadvantages

  • Time-consuming
  • Requires mastery of analytical tools.

 

2. Range Trading Strategy

This strategy is gaining popularity. It is a Forex trading strategy where a trader identifies a range that an investor buys and sells to make a profit.

A trading range is a price range that the market has consistently included for a significant period. For example, let’s assume a trade, say EUR/USD is trading between 1.0076 support and 1.0100 resistance level. You might want to trade a range between 1.0080 and 1.0098.

However, before you do that, make sure that the prices recover from that support and resistance levels at least twice each. Else price might, in an uptrend, develop a higher low and a higher high. Or in a downtrend, develop a lower high and a lower low.

 

Time Frame: it is suited for all trading timeframe– long term, medium term, short term.

That you want to range trade doesn’t exactly mean that the market will play ball. Always set a stop-loss that will help minimize loss. This is important because it will attract buyers or sellers that causes the market volatility to increase. Then, the odds may now be against you.

To make the most of this Forex strategy, you have to factor in RSI, CCI, or Stochastics. They are crucial timing tools. They will go a long way in helping you determine the market momentum, overbought and oversold securities.

 

Steps To Successful Range Trading
  • Identify the Range

The best ranges are from points where a currency recovered or retreated from support or resistance levels, respectively. The range should not be too wide, but close.

 

  • Make an entry

After you have successfully identified a prospective range, buy near the support levels or buy near the resistance level. We recommend using oscillators like the Relative Strength Index and Commodity Channel Index to get a better sense of when to enter or exit a trade.

 

  • Manage Risk

No matter the accuracy of your strategy, you must set your limit orders. If you are buying, you should set your stop loss above the previous high and vice versa if you are selling.

 

Advantages

  • It has a good risk-reward ratio.
  • There are a lot of trading opportunities.

Disadvantages

  • Requires mastery of technical analysis
  • It is time-consuming

 

3. Trend Trading Strategy

A trend means the propensity of prices to drift in a particular direction over a given period. A trend can move in any direction–upwards, downwards, sideways.

 

Time frame: It fits long term and medium-term traders. It is all about timely positioning to accrue profits. Entry points are usually indicated by oscillators such as the Relative Strength Index, Commodity Channel Index.

Following the latest developments on foreign policies, fundamental news, inflation, interest rate, etc., are equally important. Exit points are based on the risk-reward ratio. In an upward trend, to meet the higher highs and higher lows, you may need to set your stop loss 50 pips away and take profit 50 pips higher than the entry point.

 

Steps to Successful Trend Trading.
  • Identify a trend

From the chart, the greatest telltale of a trend is a succession of uptrends or downtrends. Uptrends area series of higher highs and higher lows. Conversely, a downtrend is a series of lower highs and lower lows. Depending on the causative micro or macroeconomic factors, these conditions may stay around for many hours.

  • Follow economic events:

A trend-trading trader needs to keep an eye peeled for economic happenings and news. For example, he must be up to date with the latest news on inflation rates, GDP, interest rate policies, national trade, investment balance. Those variables can suspend or wholly abate such trends.

  • Get in on the Trend

After identifying a trend, it is essential to get in on the trade early enough. Make the right decision about when to start a trade will tell on the number of pips you get to make and your net profitability.

  • Set your limit orders:

Not one trading style or tactic is waterproof. There are always false trends that go in opposite directions after it goes initially in an expected direction. Hence, the need to protect your investment against reversal by setting a stop loss.

 

The stop loss should be carefully considered to ensure that the traders are not locked out of gains, should the reversal prove false.

 

Advantages

  • It has a good risk-reward ratio.
  • There are a lot of trading opportunities to apply this strategy.

Disadvantages

  • Time-consuming
  • Require mastery of technical analysis

 

4. Position Trading

This is another forex trading strategy that is gaining quite some popularity. It is more of a way of looking at the bigger picture. On top of that, it is the longest term trading strategy. It can run from several months to years, unlike day trading, where your trades only need to run over a few hours.

Specialists that trade positions are called the buy and hold forex traders. They are patient fellows and have an in-depth knowledge of the fundamentals. They base their trade ideas on macroeconomic factors and news like the Non-farm payroll, investment news, Gross domestic product, retail sales, etc.

These factors can tip the direction of the overall trend in a favorable direction or not. Small price fluctuations don’t worry about this type of traders. It is ideal for you to devote the time to study and test run strategies daily—just that initial in-depth research of macroeconomic indices and the way they hold on the market.

The length of the term reflects on the potential gains and losses–very huge profit or losses. This, by extension, means that the stop losses will also be large, huge.

 

Time Frame: Long term– medium term trading

 

Types of Position Trading

For a trader to spot a successful trend, he must do his homework on fundamental analysis and technical analysis. Below are examples of position trading a trader may like to engage in.

I Simple moving averages

Simple averages are a useful analytical tool that offers value when adding recent past price performance to currency pair movement. Applying a long term frame with SMA can help identify oversold assets. This represents a good time to enter a trade. You can use the 50-, 100-, 200- Moving Average models.

These MA can form a chart pattern that can serve as indicators to buy or sell in the long term.

The two most notable examples are

i. Golden Cross: it is a chart pattern that indicates that a major buyout is probable. It happens when a short term moving average(50-MA) ascends above the long term moving average (200-MA).

ii. Death Cross: It is a chart pattern that can be used to indicates that a major selloff is more probable. It happens when the short term moving average(50-day MA) descends below a long moving average(200-). This indicator was used to correctly predict bear markets in 1929, 1938, 1974, 2008

II The Moving Average Convergence & Divergence (MACD)

it leverages a MA called the exponential moving average (EMA). It is the difference between a 26-day EMA and 12-day EMA. Simply put, it is used to denotes an excellent trading effort when MACD crosses the signal line

III Support and Resistance trading

Support and resistance levels, to a good extent, can predict the directionality of the market. It is tool traders find invaluable. Support and resistance also help to know whether to open or close a trading position. Others include breakout trading, pullout trading.

Advantages

  • Time-saving
  • Favorable risk-reward ratio

Disadvantages

  • Fewer trading opportunities to apply these tactics
  • Requires mastery of technical analysis.

 

5. Day Trading Strategy

This strategy forex is also trendy. It is the strategy where a trader on one of the trading platforms will buy and sell financial security within the short position of 24-hour/ one day.

It can prove to be very lucrative if you are following a well-thought-out plan. Day traders on the forex market usually analyze, monitor, and then execute trades. As usual, for a day trader to make the right calls, he must be up-to-date with economic happenings via real-time news, intraday candlestick chart, level 2 quotes/ECN.

You can’t afford to be distracted on your trading day. In the end, it will tell in your intra-day profit or losses.

 

Time Frame: Short -term trading

You have to do your homework by analyzing the economic happenings in stocks you wish to trade. After this, you may set aside funds to invest. The bigger the deposit, the bigger the payor loss.

But we will advise you to use 0.5—1% of the money in your trading. This serves to mitigate losses— 0.5% — 1% of your trading account— should the trade ends in losses. For you to land a good result, you will need to devote time.

As a newbie, never start with a bang. Start small inside, invest in few stocks on the market, and then learn the ropes from there. Try not to be in haste to enter trade opportunities. Always wait until you see that the pattern has set in properly. Minimize losses by using limited order

Factors that affect a day trader

Volatility: it is the daily price range. The greater the market volatility, the greater the profit or loss. You can take advantage of either high volatile or low volatile trade depending on your risk appetite.

Liquidity: It is a measure of how fast you can buy and sell an asset on the market at stable prices. Knowing this will help you enter and exit trades at good prices.

Trade volume: While trading forex, this denotes an interest in a particular. And also an indicator that a stock is about to swing–in any direction

it goes without saying that there are two types of day trading: trend trading by day trading and counter-trend day trading.

Advantages of day trading

  • A good number of trading opportunities to apply the tactics
  • The moderate risk to reward ratio

Disadvantages of day trading

  • Time-consuming
  • Requires mastery of technical analysis

 

6. Forex Scalping Strategy

This strategy involves a trader buying some currency pairs and holding them for a small time frame. Following that, the trader grabs as many pips as possible and exits the trade. You can make many small profits in a day that eventually add up.

The scalper gains his profits from the little changes that happen on a market day. It helps a trader maximize his accrued benefits while avoiding significant losses. There are broadly two types of forex trading strategies.

Manual scalping

In this case, the trader analyses the market conditions in real-time and in the recent past and decides whether to enter a trade.

Automated Scalping

This type use dedicated software enabled by a coded algorithm to decide whether to buy or sell. The scalping is a consistent means of gaining pips here and there, albeit small. The reason being that small prices in a business day are legion and far more common than large moves.

Before you can decide on scalping, you must understand the nuances of technical analysis, and more importantly, be consistent with it.

Steps to Successful Forex Scalping

  • It works just the same way as other forex strategies. A beginner is advised first to test run his scalping signal in a demo environment.
  • Choose currency pairs with high volatility, but make a mental note that this can work for you as well as against you. You could also choose a low volatility pair, but I hope you will wait until an inconsistent small price change comes on stage.
  • Consider SL and take profits. We recommend a time frame between 1 to 15 minutes. The time frames are dependent on the number of trades you hope to execute. The greater the risk, the greater the reward
  • For more information on ‘Forex Scalping Strategy,’ visit our ‘forex scalping strategy section.’

Advantages

  • It has the most number of trading opportunities in a business day.

Disadvantages

  • Time-consuming
  • Requires mastery of technical analysis.
  • Has the least risk to reward ratio

 

7. Swing Trading

swing trading can be used to profit from price swings. It requires a great deal of patience because you might have to wait for days, weeks, or months before you can identify a trading opportunity and execute the trading plan.

Swing trading combines the ideas of day and position trading to make a profit. It is best fitted for traders who can afford only a few hours of market analysis per day.

Time frame: Medium

Tools

Traders use fundamental and technical analysis to predict a swing and enter the trade when the odds are in their favor. Wide SL is important in tempering volatility. During the holding time, you may see lots of price fluctuations. You need to stay calm in those trying times.

Types of swing trading strategy

1. Reversal trading: It is the trading that depends on a change in market moves. It could swing in any direction, be bullish or bearish.

2. Retracement: It is like reversal but shorter. It is also called pullbacks. It is a minor counter-trend within a larger trend

3. Break out: The forex trader positions early enough in an uptrend after an uptrend break through a key resistance point.

4. Break down: Conversely, the forex trader position early enough in a downtrend after it breaks a key support point.

Advantages of the swing strategy

  • A good number of trading opportunities
  • The moderate risk to reward ratio

Disadvantages of the swing strategy

  • Requires mastery of technical analysis
  • Time-consuming

 

8. Carry Trade Strategy

In this trading strategy, a Forex trader borrows from currency pairs with a low return and uses it to fund another currency pair with a high return. A most notable example is AUD/JPY and NZD/JPY.

Carry trade brings with its own risk, because of the high leverages and is overcrowded. Before executing a profitable carry trade, you must first identify a high yield currency such as AUD and a low yield currency like JPY. AUD/JPY pairs are most commonly used in carrying trade strategy.

You can then match the high yielding currency with a low yielding currency. Ensure you are abreast with the information on changes in interest rates through the countries’ Central Bank Websites or other authority websites.

The carry trade does well in low volatility conditions. And as far as the interest rate doesn’t fall, the carry traders are gaining profit.

Advantages

  • Time-saving
  • The moderate risk to reward ratio

Disadvantages

  • Few trading opportunities
  • Require an in-depth understanding of the forex environment

 

Advanced Forex Trading Strategies

The pros mainly employ these techniques.

 

Types of Advanced Forex Trading Strategy

1. Currency Swap

It is a currency also termed cross country swap. It involves exchanging the interest, sometimes principal, of one currency with another. Because of lax legal policies, companies overseas can use it to get round limitation. These are limitations that government imposes on the buying or selling of currencies.

To carry out a currency swap, the two parties involved must agree to exchange the principal amount at the start of the transaction. These principal amounts create an exchange rate.

For example, if an exchange involves swapping 5 million Euros versus 6.25 million United States Dollars. The exchange, Euros against the United States Dollars, is now at 1.25.

After a fixed amount of time, the interest rate matures. And the principal is swapped again. Companies overseas often use this trick to obtain favorable loan rates in foreign countries. More favorable loans than they would have gotten if they directly borrowed from the host country’s local banks. It is called hedging risk with currency swaps.

2. Uncovered Interest Parity[UIP]

This concept in forex trading implies that the relative change in foreign exchange rates is directly proportional to the difference in the subject currency pair’s interest rate. Without the UIP, any trader can make a profit without any risk.

It also has a mathematical statement that says that the Forward rate equals the spot rate and one plus interest rate in one country. This is then divided by one, plus the interest rate in another country.

3 Natural Hedge

This is a risk management strategy. It involves investing in financial security that shows contrasting economic performance to manage risk, for a company can decide to generate revenues in another currency. This serves as a natural hedge against currency risks.

4 Currency Arbitrage

In this strategy, a forex trader makes profits from different spreads offered by the brokerage for currency pairs when he trades. Simply put, the trader gains profit from different brokerages as there are always cases of different price rates.

One of the most notable types of currency arbitrage is triangular arbitrage. Other examples of advanced forex trading strategies include

  • Currency Convertibility
  • Back-to-back loan
  • Ichimoku Cloud
  • Order Block

 

Summary

In conclusion, we hope you have learned that the forex market doesn’t play by your feelings. You must carefully consider all the strategies and price action you can get around.

Then consider your trading objectives and goals. Try your hands on as many strategies as you can get around. Keep honing your support & resistance and risk management. As a precaution, you may not need to take the high risk just yet.

Continue practicing until you can see the forex trading strategies that work well for you. And even when you discover a strategy that put you on a winning streak, know that there is no such thing as the holy grail.

Your best strategy is not foolproof, but it is rewarding to master one and apply it diligently.

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