The Top Forex Trading Strategies
Experts claim that only 10% of forex traders make money while the remaining 90% lose their capital within the first week!
The reason why 90% of the investors fail in forex trading is because they do not follow sound forex trading strategies. They often indulge in social trading or copy trading without realising that each trader and their forex trading strategy is unique.
While you can generate short term profits by copy trading, every trader must create their own unique forex trading strategy if they want to generate long-term wealth.
But the term forex trading strategy sounds scary and complicated, right?
Sounds like something reserved for the ‘trade experts’ and not for a ‘common man’?
Well, the truth is that forex trading strategies are complicated but not impossible to understand. You do not have to be an expert technical chartist or fundamentalist to understand forex trading strategies.
In this article, we will decipher the top forex trading strategies. We will also cover:
» What is Forex trading?
» What is a Forex trading strategy?
» What are the top Forex trading strategies that work?
What is Forex trading?
Forex trading refers to the simultaneous buying and selling of currency pairs such as USD/INR, EUR/INR and others to generate profits or hedge businesses against unfavourable exchange rate movements.
What is a Forex trading strategy?
A forex trading strategy helps you decide when to buy or sell a currency pair. It involves studying the fundamental (market environment, economic data) and technical (trends, breakouts) factors. Price Action Trading, Position Trading and Day Trading are some of the top forex trading strategies.
What are the top Forex trading strategies?
There is no singular answer as to which is the best and the most profitable forex trading strategy. Forex trading strategies are unique to each trader and what might work for Ram might not work for Shyam. While selecting the best forex trading strategy for yourself, you should consider the following factors:
- Your time horizon: Are you a short-term, medium-term or long-term trader?
- Your risk appetite: What are your profit and loss targets? Does a 25 pip fall cause you anxiety?
- Your Trading style: Are you a trade-every-minute trader or a buy-and-hold trader?
Top Forex strategies that work
Price action trading:
Price action trading is one of the best forex trading strategies as it involves studying the historical exchange rates and deciding the support and resistance levels. Post this, buy or sell trades are placed near support and resistance levels and upward or downward rally leads to profit.
Price action trading strategy works in all market conditions be it range-bound or volatile. This strategy can be used across all time frames i.e. short-term, medium-term and long-term. The versatility of price action trading makes it the most preferred forex trading strategy of seasoned traders.
In range trading forex strategy, support and resistance levels are identified and trades are placed around these key levels. This strategy is dependent on technical analysis.
A support level is a bottom level around which the prices will stop falling further and reverse their movement i.e. go up.
The resistance level is the top-level around which the prices will stop rising further and reverse its movement i.e. go down.
Position trading is a great long-term forex trading strategy as it involves taking long-term positions to maximise profits from major shifts in the currency rates. This strategy is not for short-term profit hunters as it requires immense patience and discipline to maintain the same position for weeks or months.
A large capital base is required for position trading as the position needs to be maintained for months. Generally, low leverage and lot size is recommended while position trading.
You need a good grasp of fundamental and technical analysis to implement a successful position trading strategy. Since this strategy is long-term in nature, your stress is limited as daily price movements are futile to you.
Trend trading is one of the most successful forex trading strategies. The primary objective is to identify a trend.
A trend refers to the likelihood of prices continuing to go up or down consistently.
An uptrend refers to the consistent upward movement of exchange rates, whereas a downtrend refers to the consistent downward movement of exchange rates.
In trend trading, the trader identifies whether there is an upward or downward trend and then chooses an entry point to maximise profits. Trend trading is largely affected by inflation, interest rates and government policies.
The three simple principles of trend trading are:
- Bullish trend: Buy when the markets go up
- Bearish trend: Sell when the markets go down
- Wait & watch: When the markets are neither going up or down, it means the market is consolidating. In such a situation, take no action.
Range trading is one of the most popular forex trading strategies. As the name suggests, range trading involves trading in ranges. The trader has to identify strong support and resistance levels and then trade between these two ranges.
Currencies which are stable and less volatile to sudden news are perfect for range trading.
Day trading is also known as intraday trading i.e. the positions are closed on the same day. The trades can last from a few minutes to a few hours but have to be closed on the same day. A day trading strategy does not care for the fundamentals of the economy. The idea is to predict whether the exchange rate will go up or down and place your trade accordingly.
Swing trading is a speculative forex trading strategy where traders pick ‘tops’ and ‘bottoms’ and enter into long (buy) or short (sell) positions.
Swing trading strategy is a medium-term strategy where trades are held from a few hours to a few days.
Swing trading requires strong technical analysis skills like discovering support and resistance levels, candlestick pattern and moving averages.
Carry trade strategy:
Carry trade is a popular forex trading strategy which follows the 'buy low sell high' principle.
The currency with low-interest rate is known as the funding currency, whereas the currency with a high-interest rate is known as asset currency.
In a carry trade, investors (buy) borrow the funding currency and take short positions (sell) in the asset currency.
A carry trade strategy is implemented when the central banks are thinking of raising their interest rates. But, in order for a carry trade strategy to work, there should be no movement in the currency exchange rates.
The most popular carry trade currency pairs are AUD/JPY & NZD/JPY as their interest rate spreads are very high.
Scalp trading is a get-rich-quickly type of forex trading strategy. Scalping involves buying and selling within minutes or seconds to take advantage of even the smallest price movement.
Scalping trades last anywhere between 30 seconds to 1 minute. To become a successful scalper, you need to be glued to your trading schemes throughout the trading session as each trading session presents multiple profit opportunities.
Forex Trading Strategies - Synopsis
While this article highlighted the top 9 forex trading strategies, selecting the best and most profitable forex trading strategy takes practice and patience. You will need to understand and draw your own strategy keeping in mind your time horizon, risk appetite and risk-reward ratio. You need to ensure that your trading style matches your trading strategy.
If you are a long-term trader then position trading will suit you better than day trading or scalping.
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