Forex trading involves the trading of currency pairs. It helps investors – both retail and institutional, to exchange one currency for another, profit from the exchange rate differential, and hedge currency risks. There are many forex trading strategies that you may follow depending on your objective, risk-return appetite, and expertise.
Forex trading strategies can be defined as ways by which a trader can decide whether to buy or sell a currency pair. Fundamental and technical analysis lie at the core of all trading strategies. An ideal trading strategy enables you to make the right trading decisions, optimize your risks, and minimize your losses. However, all trading strategies come with a caveat – no guaranteed success or profits at all points in time.
In this article, we have identified some time-tested and proven 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 of them.
This is a popular trading strategy, 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 it is a “buy and hold” strategy, technical charts of longer time-frames can be used to determine market entry and exit points. Macro-economic conditions impacting global currency markets along with your risk-return profile, resources, and goals, determine your holding period. You may hold a position for several weeks, months, or years even.
On the plus side, it is a passive forex trading strategy and hence requires less market monitoring. Its risk-to-reward ratio is usually healthy. On the minus side, trading and arbitrage opportunities arise infrequently.
Intraday trading is a short-term trading strategy wherein you need to close all your open positions within the same trading session or before 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. Some of the commonly used market oscillators are MACD, Relative Strength Index, Bollinger Bands, and Fibonacci pivots.
Range trading is also a short-term trading strategy that involves the identification of support and resistance levels. It is useful in forex markets with low volatility and no single perceptible trend to study exchange rate movements.
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 make using this trading strategy. At times it may be time-consuming as you may be required to hold a trading position for a longer duration to garner profits.
This is a forex trading strategy 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 have to 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 are forming a strong uptrend with each successive rally higher than the previous. Putting it differently, intermittent troughs aren’t strong enough to cause a trend reversal. Conversely, you may sell USD/INR, when the market is showing a strong downtrend.
In short, the thumb rule in trend trading is that 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. This 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.
Swing trading is a medium duration trading strategy with traders holding positions anywhere between few hours to few days. This strategy also strongly appreciates technical indicators for analyzing market momentum, trends, patterns, and entry-exit timing. A distinguishing characteristic of this trading strategy is that it lays more emphasis on 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.
This trading 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 of the same into a higher interest rate currency. While this forex trading strategy has high return potential, the risks are significant too. It is because now you have to tackle two risks – exchange rate risk and interest rate risk. Thus, it is ideal for traders with heavy pockets or high-risk absorption potential.
Price action trading
This is the simplest of all trading strategies. It doesn’t require deep knowledge of technical and fundamental analysis. You just need to focus on price movements – breakouts, 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 most of the time used in conjunction with other trading strategies. Candlestick charts, Fibonacci pivots, Fibonacci retracements, and bid-ask spreads are useful while practicing this strategy.
All the trading strategies listed above are not exclusive to forex trading. They can be applied in stock, cryptocurrency, and derivative markets as well. You 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 strategies. 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 forex trading strategies to your best advantage.