Best Forex Trading Strategies

Day trading

Day trading involves buying and selling currency pairs within the same trading day. Day traders will typically implement their trades in the morning, with price bars set to just one or two hours. Typically, they will open perhaps two or three trades a day.

One of the most popular forex trading strategies, many beginner forex traders will implement day trading strategies, as the short-term nature of the trade means that you don’t need to worry about holding it for a long time – you’ll close your trade within a few hours, knowing how much of a profit or loss you have made instantly.

This also means you won’t need to worry about prices shifting overnight – unlike the stock market, the forex market is open 24/7, so you eliminate this risk by exclusively day trading.

Day trading does still require market analysis to find appropriate currency pairs, so you will need to be comfortable reading charts to identify the right trades.

One risk that can come with day trading is that breaking news could lead to unexpected price moves during the trading session. This could have unexpected consequences for your trade, and could mean that perhaps holding your position would be preferable.

The possibility of events like this could mean you’ll need to make decisions over whether to hold your trades for longer.

Why I like this trading strategy

As day trading is typically a short-term trading strategy, I like this strategy as an option for beginner forex traders who don’t want to leave their positions open for long periods.

A day trading strategy also reduces the risk of price movements affecting your trades as, while it could happen, you’re less likely to face breaking news and sudden market moves in this shorter trading window.

Only making two or three trades a day can be less stressful, as well as being cheaper as you may end up paying less in commission to a broker.

Scalping

A scalping strategy involves making multiple, smaller trades throughout the day to try and generate returns from smaller price movements.

Scalping is a form of day trading, except it revolves around greater trading volume rather than two or three larger trades. Scalp traders will target smaller price movements, perhaps even less than five pips for each trade, and lasting over short periods of a few seconds to a couple of minutes.

They’ll place multiple trades in a single day, perhaps even hundreds, targeting multiple small returns that add up to be comparable to what you can generate from other strategies.

Generally, scalpers will target specific markets and usually focus on highly liquid pairs, such as GBP/USD and EUR/USD.

You’ll need to be alert and good with maths when trading currencies by scalping, as the window to generate a return will be small so you’ll need to act quickly.

Why I like this trading strategy

A scalping strategy could certainly be effective if you’re confident analysing charts and making quick decisions. It does require you to be present in your trades and to keep an eye on price movements but, if you can do that, I like that you can find returns in what look like smaller trading opportunities.

I also like the reduced risk of each individual trade – seeing as you’re targeting smaller returns, that also means any losses you incur will also be smaller. While these smaller losses can add up just as your profits can, this means lower risk of incurring large losses at once.

Swing trading

Swing trading is a longer-term strategy that can see you hold your trade for multiple days, and perhaps even weeks.

Forex traders who use a swing trading strategy watch out for buy and sell signals in the market. You’re looking for the highs and lows in a trend, using indicators such as moving average convergence/divergence (MACD) or relative strength index (RSI) to inform your decision.

While a swing trading strategy requires less time looking at the market than with day trading or scalping, it does mean that you’re at greater risk of prices moving in this period – you’d be exposed to sudden changes in value overnight or as a result of government announcements, for example.

Swing traders do still keep an eye on markets throughout their trades, looking at bars perhaps hourly or daily.

Why I like this trading strategy

I like this strategy because it’s simpler to understand than others, and requires less time looking at markets, with half-hourly, hourly, or even daily checks being sufficient to check that you’re on track.

You will need to be comfortable leaving your positions open, so you will need a fairly robust appetite for risk if you want to explore this option.

Position trading

Position trading is a long-term form of forex trading, involving keeping trades open for many weeks or months, and in some rare cases, even years.

Position traders ignore the day-to-day price action of currency pairs, and instead focus on market fundamentals to predict how prices will move in the long term.

You will need to be calm, patient, and disciplined when position trading – even if your trade were to move 100 pips in the wrong direction in the short term, you would need the presence of mind to stay the course and trust in the analysis you have done.

Why I like this trading strategy

I like position trading as it is perhaps as close as you can get to traditional investing when trading forex – you place your positions, hold until the price moves as you want it to, and then exit when this happens.

The potential returns are also greater from each individual trade, rather than relying on smaller profits from multiple trades. This does mean that losses could also be larger if prices move against you.

You won’t need to monitor your trades for hours every day to position trade, although you will need a firm grasp on market fundamentals to select the appropriate trades.

Hedging

Hedging functions differently to other forex strategies, looking to mitigate risk in your trades by covering your losses.

There are various ways to hedge but three of the most common when trading forex are:

• Buying the opposite pair to your trade, in the event that it moves the other way.
• Trading correlated pairs that may move and cover your losses if another trade goes against you.
• Forex options, giving you the right (not the obligation) to buy a currency pair at a certain price by a certain date in return for a premium. This would give you a way to buy back a pair at a favourable price if the market moves against you.

Hedging only helps to reduce risk, so you will need to employ one or more of the other best forex trading strategies alongside mitigating the potential of markets moving against you.

Hedging is not a forex-specific strategy, with many investors and traders using it to try and limit losses with stocks, shares, commodities, and other assets.

Why I like this trading strategy

Any method that can help reduce risk is worth considering, so I like the potential that hedging has to do this when forex trading.

While it will reduce how much profit you can generate, knowing that your position is hedged can give you confidence in your trade as you will have some extra coverage in case markets move against you.

This can be helpful if you are a newer trader or you are anxious about the prospect of placing losing trades.

Price action trading

Price action trading relies entirely on technical analysis, using data related exclusively to price movements, rather than economic news or other fundamentals.

In a price action strategy, you might use the data from resources such as candlestick charts, MACD, RSI, and Bollinger bands to identify opportunities and then trade accordingly.

As price action trading is concerned more with how you choose pairs than how you actually trade, many forex traders will combine it with another strategy, such as day trading or scalping.

Why I like this trading strategy

Knowing how you’ll choose pairs is just as important as knowing how and when to trade, so I like price action trading as it gives you a clear answer to this question.

I also like that you’ll be able to see the results of your strategy in real time, rather than using fundamentals to make your decisions and waiting for external factors to have an impact.

While you will need to be confident undertaking technical analysis to successfully follow a price action strategy, it can be highly effective when done correctly.

Breakout trading

Breakout trading is a type of price action trading, revolving around the idea of support and resistance levels. A support level is the lowest price a currency pair will typically trade at, while a resistance level is the typical maximum price it will reach.

These levels are not fixed, however, and the price of a currency pair can breakout at either side of them, especially in a volatile market environment. In turn, traders might sell if they think the pair has broken out above its resistance level, or look to buy if they believe it is undervalued below its support level.

To breakout trade, you’ll need to successfully identify the moment when the price of the currency pair breaks out of its range either way, and then act accordingly to generate returns.

This can be one of the more advanced forex trading strategies, as a breakout strategy is often the start of a new trend (see below for more about “trend trading”). You’ll need to understand exactly what this means for the currency pair and how to react to successfully use it.

Why I like this trading strategy

In a breakout trading strategy, your entire focus is on these support and resistance levels. This is what I like about this strategy – you are essentially only watching these two key metrics.

That said, just because a currency pair is trading above or below these levels doesn’t necessarily indicate where it can go next, as wider market sentiment and trader behaviour can also have an impact.

Furthermore, if it does end up moving the wrong way for you, you may find yourself in a difficult position.

This typically makes breakout trading potentially only suitable for experienced traders.

Trend trading

Trend trading is the next logical step of breakout trading, using the breakout from a support or resistance level to predict (and ideally profit from) new trends for a currency pair. This is usually a longer-term strategy.

Once prices start moving in one direction or another, trend traders look to buy when prices start to pull back up, or sell when prices are trending down. They will then wait for the trend to reach their objective price, whichever direction that may be in.

There is always a risk that trends won’t turn out exactly as you expect. To guard against this, many trend traders will use “trailing stop-loss orders” in their forex brokerage accounts, which allows them to set an automatic price threshold at which they will leave the position.

This can protect against sudden reversals if a trend stops behaving as you expect.

Why I like this trading strategy

I can certainly see the value of a trend trading strategy – it uses the logic of a breakout strategy but with a longer-term outlook.

The ability to place stop-loss orders on your trades is a significant benefit of trend trading too, as it means you can insulate your position from a sudden reversal if the trend doesn’t play out as you expect.

Again, as with breakout trading, you will need to be able to a) successfully identify the support and resistance levels, and b) use this information effectively to incorporate it into a winning strategy. As a result, it is often most suitable for more experienced traders.

Best Forex Trading Strategies FAQs

Please note

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.