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.

Carry trade strategy

A long-term strategy typically used only by institutional investors, a carry trade strategy seeks to generate profits from the varying interest rates on different currencies.

To carry trade, you would borrow a currency pair with a lower interest rate and use it to fund the purchase of a pair with a higher rate. You might invest this currency in another asset with a higher fixed rate of interest to achieve this.

Unlike other forex trading strategies, carry trading doesn’t require the currency you buy to increase in value for you to generate a return. Instead, your returns are made from the more favourable rates of interest you’re paid while holding it.

Using leverage on your trade would then magnify your returns, increasing the profit you could make from the difference between the interest rates alone.

However, this is only the case if the interest rate remains the same between the two currencies. If the currency with the higher interest rate loses value relative to the one with a lower rate that you borrowed, converting back will cost you more. This could diminish – and potentially even entirely reverse – the profits you stood to make.

Why I like this trading strategy

Carry trading can certainly offer something to your wider forex strategy, working in an entirely different way to other strategies.

Currencies often have greatly varying interest rates for borrowing, meaning there is an opportunity to generate a return here. The ability to use leverage on the trade can substantially increase these returns, too.

However, the currency risk of fluctuating values could potentially be harmful to your position. Additionally, you typically need to borrow fairly notable amounts to make this strategy worthwhile.

You’ll need to be sure that you fully understand this strategy before using it.

News trading

News trading involves following current events in the news to identify trading opportunities in a particular currency pair or set of pairs.

News traders keep an eye on the market and identify support and resistance levels based on financial announcements.

For example, this might be a country’s unemployment rate data, changes in a central bank’s base rate, or large fiscal announcements such as the UK government’s spring Budget.

A news trading strategy is often thought of as higher risk. Without checking economic calendars and knowing when such events are coming up, or understanding how those announcements could affect forex markets, you’d be unlikely to successfully generate the returns you want.

Additionally, it can be difficult to accurately predict exactly how announcements will affect prices. While you can make educated predictions, market sentiment can be hard to forecast.

Why I like this trading strategy

What I particularly like about news trading is that it is theoretically simpler than looking at technical indicators or trying to predict currency price movements based on other market moves.

Instead, you have concrete facts affecting an economy that could influence how prices in forex markets will shift.

However, you’ll need both a good knowledge of financial happenings across markets, and a greater risk tolerance (and potentially deeper pockets) if you want to explore a news-based strategy, as events can have unpredictable or unforeseen consequences for currency prices.

5-3-1 forex trading strategy

The 5-3-1 trading strategy is a highly straightforward and intuitive way to trade. It simply involves learning:

• Five currency pairs to trade
• Three strategies
• One time to trade each day.

For newer traders, the 5-3-1 strategy can be helpful as it breaks down everything you need to learn into easier blocks. Rather than being bewildered by the number of currency pairs available, learning the ins and outs of just five can be far more manageable.

Similarly, as there are so many different trading strategies, becoming an expert in just three can be more effective than learning bits and pieces about all of them.

Finally, knowing when you’re going to trade each day removes the difficulty of deciding when will be best to do so.

Why I like this trading strategy

I like this strategy for two reasons: firstly, it can help to remove some of the difficulty that comes with making decisions about forex trading. You can exclusively focus on the pairs you’ll trade, using your chosen strategies, at the time that works best for you.

Secondly, this method actively involves combining trading strategies. As a result, it can be a good way to create a comprehensive, effective forex trading strategy, using the best elements of each one that suits you.

If you are a beginner trader, the 5-3-1 strategy may be a good place to start.

Choosing the best forex trading strategy for you

The key to a successful forex trading strategy is to develop one that works for you and your trading style. For example, one particular strategy might suit you better because it requires less time spent watching industry news, or because you have purchased software that lets you undertake in-depth technical analysis and you want to use this data to inform your trades.

Nothing stops you from building a personalised strategy by combining different forex trading strategies, too. You could use the price action or breakout momentum indicators in a day trading strategy, while simultaneously basing your choice of currency pairs and trading ideas on market trends or significant economic announcements you’ve read about in the news.

If you’re a less experienced forex trader, you may want to consider using a demo trading account before you put any of your money in the financial markets. By using a virtual account, you can test trades and find out which are the most successful strategies for you.

You can open a demo account with a trading platform, such as eToro, to learn how to trade forex successfully without putting your money at risk.

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.