Best Forex Trading Strategies That Work
Forex trading involves the trading of currency pairs. It helps retail and institutional investors exchange one currency for another to make profit from the exchange rate differential, and hedge currency risks. There are several best forex trading strategies that you may follow depending on your objective, risk-return appetite, and expertise.
These strategies can be defined as ways by which a trader can decide whether to buy or sell a currency pair. Fundamental and technical analysis lies at the core of all trading strategies.
The best forex strategy enables you to make the right trading decisions, optimize risks, and minimize losses. A strategy is important for profitable trading. However, all trading strategies come with a caveat – no guaranteed success or profits at all times.
In this article, we have identified some time-tested and proven top forex trading strategies that are relatively simpler and have higher success rates if executed properly. You may go through the successive paragraphs for more details on each.
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These are effective ways to help the trader to decide whether to buy or sell a currency pair.
Position trading, range trading, trend trading, swing trading and price action trading are amongst the best forex trading strategies widely used.
Under this strategy, you must close all your open positions within the same trading session or before market close.
It uses Macroeconomic conditions impacting global currency markets along with your risk-return profile, resources, and goals to determine your holding period.
Position – Best Forex trading strategy
It is one of the top forex trading strategies for consistent profit, especially among long-term traders. Short-term or minor market volatilities are insignificant in position trading as they are unlikely to disturb the broader market scenario.
In other words, the fundamental analysis holds more relevance than technical analysis in this trading strategy. As a “buy and hold” strategy, technical charts of longer time-frames can be used to determine market entry and exit points.
Macroeconomic conditions impacting global currency markets and your risk-return profile, resources, and goals determine your holding period. You may hold a position for several weeks, months, or even years.
Plus, it is a passive forex trading strategy requiring less market monitoring. Its risk-to-reward ratio is usually healthy. On the minus side, trading and arbitrage opportunities arise infrequently.
Intraday Forex trading strategy
Intraday trading is a short-term forex trading strategy for day traders wherein you must close all your open positions within the same trading session or before the market close. You can execute any number of trades in a day.
The trading duration never lasts for more than a few hours. It is a high-risk trading strategy with a high-profit generation potential. However, the magnitude of losses may be equally high.
Technical analysis tools are particularly useful in intraday trades to gauge market momentum, price patterns and determine entry-exit points. MACD, Relative Strength Index, Bollinger Bands, and Fibonacci pivots are commonly used market oscillators.
Range trading
It is amongst the best forex trading strategies that involve identifying support and resistance levels. It is useful to study exchange rate movements in forex markets with low volatility and no single perceptible trend.
Technical analysis acquires more prominence in this strategy. The popularly used technical indicators for range trading are Bollinger Bands, moving averages, Fibonacci retracements, Fibonacci pivots, and candlestick patterns.
The price break-out patterns or prices moving into the ‘overbought’ or ‘oversold’ regions help you identify and time your market entry and exit. Frequent trading opportunities and fairly decent risk-reward ratios are the positives of this trading strategy.
However, on the flip side, you need significant mastery over technical analysis to use this Forex trading strategy. At times it may be time-consuming as you may be required to hold a trading position for longer to garner profits.
Trend trading
Trend plan is amongst the successful forex trading strategies wherein you can make profits by analyzing the directional momentum of a currency pair.
This trading style works well for those forex traders who can remain invested for a medium or long duration. You must observe the exchange rate movement for a considerable period to identify a noticeable trend.
Suppose you want to trade USD/INR using the trend trading strategy. You may buy USD/INR when exchange rates form a strong uptrend, with each successive rally higher than the previous.
In different words, intermittent troughs aren’t strong enough to cause a trend reversal. Conversely, you may sell USD/INR when the market shows a strong downtrend.
In short, the thumb rule in trend trading is when you should trade in the direction of the trend. So, go long when the market is bullish and go short when the market is bearish.
It is the reverse of the golden trading rule of buying when markets are down and selling when markets are up. Hence, it is a riskier trading strategy with moderate-high risk-reward ratios.
The Bladerunner forex trading strategy is a type of trend trading that uses only EMA (Exponential Moving Averages) to study market trends and patterns.
Under this strategy, you would sell a currency pair when the exchange rate retests the EMA as a resistance level, falls back, and continues its downward momentum.
Conversely, you will buy a currency pair when the FX rate retests the EMA as a support level, rebounds, and continues its upward movement. You can get a detailed knowledge of these strategies from Forex trading strategies books.
Swing trading
One of the best forex trading strategies for medium durations, with traders holding positions anywhere between a few hours to a few days. It appreciates technical indicators for analyzing market momentum, trends, patterns, and entry-exit timing.
A distinguishing characteristic of this trading strategy is that it emphasizes market peaks/tops and troughs/bottoms to buy or sell an FX pair. It has a moderate profit generation potential and presents many trading opportunities.
Carry trading
This type of strategy is mainly used in medium or long-term forex trading. It involves borrowing funds in a lower interest rate currency and converting the proceeds into a higher interest rate currency.
While this forex trading plan has high return potential, the risks are significant too. Thus, it is ideal for traders with heavy pockets or high-risk absorption potential. It is because now you have to tackle two risks – exchange rate risk and interest rate risk.
Price action trading
Price action is the simplest plan in the list of best forex trading strategies for beginners. It doesn’t require deep knowledge of technical and fundamental analysis. You must focus on price movements – break-outs, trends, patterns, support, and resistance. In the context of forex trading, you need to focus on currency rate movements.
It can be used in isolation but is often used with other trading plans. While practicing this strategy, candlestick charts, Fibonacci pivots, Fibonacci retracements, and bid-ask spreads are useful.
Final words
The above best forex trading strategies are not exclusive to trading. They can also be applied in stock, cryptocurrency, and derivative markets. You must require a sound knowledge of technical analysis to maximize your gains from most of these trading strategies.
Except for position trading, all others are active forex trading plans. They have a high upside as well as downside potential. In other words, the magnitude of losses can be equally high as that of profits.
Hence, if you are a beginner, you may start trading small amounts and exercise due diligence before undertaking any trade move. With practice and discipline, you will become apt at executing different effective forex trading strategies to your best advantage.