Different strategies are used in the forex market. These strategies help the traders to identify different consistent profits in the forex market. A good trading strategy is very important in the forex market for successful trades.
Forex trading requires putting together multiple factors to formulate a trading strategy that works for you. Countless strategies can be followed, however, understanding and being comfortable with the strategy is essential. Every trader has unique goals and resources, which must be taken into consideration when selecting a suitable strategy.
Usually, the factors that help traders identify and compare different strategies are:
- Time resource required
- Frequency of trading opportunities
- Typical distance to target
Different Types of Forex Trading Strategies
- Scalping: A trader following a scalping strategy aims to beat the bid/offer spread. He/she holds this position for a very short span of time, usually minutes. Just after a few pips, the trader exits the trade. This is one of the most advanced Forex trading strategies out there. This strategy typically uses low time-frame charts. The Forex-1 minute Trading Strategy can be considered an example of this trading style.
- Day trading: A trader following day trading has to exit the trade before the end of the day. By following this strategy the trader saves himself from being adversely affected by large moves overnight. Day trading strategies are common among Forex trading strategies for beginners. Trades may last only a few hours, and price bars on charts might typically be set to one or two hours.
- Swing trading: A swing trading position is held for several days, whereby traders are aiming to profit from short-term price patterns. A swing trader might typically look at bars every half an hour or hour.
- Positional trading: Positional trading strategy is a long-term trend following, seeking to maximize profit from major shifts in price. A long-term trader would typically look at the end-of-day charts. The best positional trading strategies require immense patience and discipline on the part of traders. It requires a good amount of knowledge regarding market fundamentals.
11 Best Forex Trading Strategies to Adopt in 2023
Below we have discussed the 11 best forex trading strategies to adopt in 2023:
- Elliott Wave
- Support and Resistance Trading Strategy
- Forex Volume Trading Strategy
- Forex Range Trading Strategy
- Bollinger Band Trading Strategy
- 50-Pips a Day Forex Strategy
- Daily Chart Forex Strategy
- Forex 1-Hour Trading Strategy
- Price Action Trading Forex Strategies
- Trend-Following Forex Strategies
- 4-Hour Forex Trading Strategy
Elliott Wave Theory is a technical analysis method that uses patterns to forecast market trends. The theory is based on the idea that markets move in predictable waves, which are composed of two phases: impulse and correction. The theory distinguishes between impulse waves that move with the trend and corrective waves that retrace the trend. The waves are nested within larger waves of the same type, creating a fractal structure. These waves are also used to determine when a trend is changing direction. If a stock is in an uptrend, and then the price moves down more than the last impulse up, that means the uptrend may be over. The biggest movement always occurs in the direction of the trend, so when corrective waves start looking more like impulse waves, that means the trend may have changed.
The Elliott Wave Theory claims that prices move in five patterns in forex trading.
- In an upward trend, a five-way rise will be followed by a three-way fall.
- In a downward trend, a five-way fall will be succeeded by a three-way rise. The five-way patterns are referred to as the ‘impulse waves’ while the three-way patterns are called the ‘corrective waves’.
- In the ‘impulsive wave’, the price rise is in phase one of the uptrend. This is the time wherein investors expect the trend to change. This brings a negative denominator on the prices.
- On wave two, prices don’t fall much. It is in wave three that the trend rises, bringing positive news into the market.
- On wave four, prices decline because of profit booking, leading to an optimistic outlook from investors, who get positively inclined market news.
This strategy is used to identify the direction of the market trend, the rise and fall of currency prices based on the psychological factors of brokers, and the trade participants. Traders should be careful while using this strategy and only implement as a supportive measurement, since it can hardly provide valuable information on entry and exit points.
Elliott Wave uses its popular “Blue Box Strategy” to identify high-probability trades. The strategy involves identifying a “blue box” on a chart, which is an area where the price is likely to reverse. Traders can then enter a trade when the price breaks out of the blue box. They are referred to as High Frequency trading areas, mainly because at Blue Boxes majority of the times, both buyers and sellers agree in direction of the next moves and hence why they present high probability and low risk opportunities to enter the market in the direction of the trend.
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Support and Resistance Trading Strategy
If the market reaches and bounces back from a particular price, that price is called level. Support is the bottom price level and resistance is the top price level.
In technical terms, Resistance Level is the place where:
- Demand decreases and Supply increases.
- Excess supply builds selling pressure.
- Sellers dominate more than buyers at the resistance level.
In technical terms, the Support level is the place where:
- Demand increases, supply decreases
- Excess Demand builds buying pressure
- Buyers dominate more than sellers at the support level.
It is very easy to trade support and resistance levels in the forex market. However, you need to be aware of breakout trading at support and resistance levels.
- If the market came to the Resistance, place a Sell trade.
- If the market comes to the Support level, place a Buy trade.
Spotting strong support and resistance levels can be tricky. If the price was trending upward and switched to a downtrend, this price level where the trend reversed is considered a strong resistance. The point where the downtrend stops and reverses into an uptrend is also considered a strong support level.
However, in the markets, identifying strong support and resistance levels can be tricky, which is why traders use support and resistance indicators.
Forex Volume Trading Strategy
The volume refers to the number of securities that are traded over a particular time.
Higher volume = higher degree of intensity or pressure.
Volume also relates to a market’s liquidity, that is, how easily currencies can be bought or sold. When there’s a higher volume of traders on the market, it’s more likely you’ll be able to open and close positions quickly and with a lower spread. The major FX pairs have the highest volumes, and so experience the highest liquidity.
The volume provides a key indication of which currency pairs are accumulating buy and sell orders. Volume can’t tell us which direction the market will move in on its own, but it can give us clues as to whether a trend is strong or weak.
Traders have to be careful that High volume doesn’t automatically translate to a higher price. An increase in volume just means that there are more people on the market and that currencies are more likely to experience volatility because of a higher number of transactions.
There are several ways to use volume to trade more effectively. Here are a few key forex strategies you can use:
- Trend trading
- Reversal trading
- Breakout trading
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Forex Range Trading Strategy
Range trading is a form of trading strategy where traders buy when the price is at the lower end of a well-defined range and sell it when the price is at the upper end of the same range. This strategy works when the price of the forex oscillates between two key levels of support and resistance, creating a horizontal price channel. Range traders aim to identify these levels and execute trades based on the assumption that the asset price will continue to move within the range.
Range trading can be a profitable strategy, but it can also be challenging. The price of the currency pair can remain within the range for long periods, and identifying the exact support and resistance levels can be difficult.
Some key points to consider while practicing this strategy:
- Identify the range: Traders should identify the key levels of support and resistance that define the range. They can use technical analysis tools such as trend lines, moving averages, or chart patterns for this.
- Monitor for potential breakouts: Traders should watch for any signs of a potential breakout from the range. A breakout occurs when the price of the asset moves beyond the support or resistance levels. If a breakout occurs, traders may need to adjust their trading strategy.
- Look for price patterns: Traders should look for specific price patterns that may indicate an impending breakout or reversal. For example, a series of higher lows and lower highs could indicate that the price is consolidating and may be ready to break out of the range.
- Use technical indicators: Traders can use technical indicators, such as the Relative Strength Index (RSI) or Moving Average Convergence Divergence (MACD), to confirm the range-bound market and to identify potential trading opportunities.
- Apply risk management techniques: Traders must implement appropriate risk management techniques to manage potential losses. This can include setting stop-loss orders, using appropriate position sizing, and being disciplined in executing the trading plan.
Bollinger Band Trading Strategy
The Bollinger band trading technique is a forex trading framework system used to distinguish the section and leave focus on the market pattern. It is used to identify the drifting lines in the market, it identifies whether the market is in a bullish pattern or bearish pattern. Generally, it is utilized to distinguish the overbought and the oversold in the market pattern.
The Bollinger band indicator utilizes three distinct groups to gauge the value changes, unpredictability, and drifting lines. It utilizes period and standard deviation boundaries. In the default setting the period for this indicator is 20 and 2 standard deviations, you can likewise change this blend from 20/2 to 40/6, and so forth This trading technique has an alternate sort of procedure that makes it novel from different ones.
To have a higher probability of success with the Bollinger Band strategy, traders should be careful about the following factors:
- Look to long the lower band in an uptrend (and vice versa)
- Reversal candlestick patterns that show signs of reversal
- The outer bands coincide with Support and Resistance
To locate the direction of the breakout, traders need to carefully observe the trend. If the trend is down then the breakout will be lower, and vice versa.
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50-Pips a Day Forex Strategy
One of the latest Forex trading strategies to be used is the 50-pips-a-day Forex strategy which leverages the early market move of certain highly liquid currency pairs. The profit target is set at 50 pips, and the stop-loss order is placed anywhere between 5 and 10 pips above or below the 7 am GMT candlestick, after its formation. This is implemented to manage risk. After these conditions are set, it is now up to the market to do the rest.
Day trading and scalping are both short-term Forex trading strategies. However, remember that shorter-term implies greater risk due to the nature of more trades taken, so it is essential to ensure effective risk management.
Daily Chart Forex Strategy
Daily Forex Chart strategy is one of the most favored forex strategies which many traders swear by. It is better and more reliable than strategies with a lower timeframe. The profit potential is also greater, however, there are no guarantees.
Traders in this strategy don’t need to be concerned about daily news and random price fluctuations. The Forex daily strategy is based on three main principles:
- Locating the trend: The first principle of the Forex daily strategy is to find the long drawn-out moves within the Forex market. One way to identify a Forex trend trading chart is by studying the price data over the last 3 months. Identifying the swing highs and lows will be the next step. By referencing this price data on the current charts, you will be able to identify the market direction.
- Staying focused: This strategy needs traders to practice patience and avoid getting into the market with even a small signal. Traders need to stay out and preserve their capital for a bigger opportunity which is the key to success in a daily time frame Forex strategy.
- Using larger stop losses: Forex traders are well knowledgeable about large intraday swings in the market for which there are larger stop losses However, this does not mean putting large amounts of capital at risk but it does help to deal with the random volatility that can develop during the day, which is why it makes it to the list of trading strategies.
Forex 1-Hour Trading Strategy
Here the traders trade in a 60-minute time frame. The most suitable currency pairs to trade using this Forex strategy are EUR/USD, USD/JPY, GBP/USD, and AUD/USD.
For this strategy, the buy Trade Rules are:
Enter a long position when the MACD histogram goes above the zero line. The stop loss could be placed at a recent swing low.
Also, the sell Trade Rules are:
Enter a short position when the MACD histogram goes below the zero line. The stop loss could be placed at a recent swing high.
Price Action Trading Forex Strategies
It is one of the best forex trading strategies. This is also known as technical analysis. This trading strategy has two main styles:
- Trend following
- Countertrend trading.
Both of these FX trading strategies try to profit by recognizing and exploiting price patterns.
When it comes to price patterns, the most important concepts include support and resistance. Support is the market’s tendency to rise from a previously established low. While resistance is the market’s tendency to fall from a previously established high. This occurs because market participants tend to judge subsequent prices against recent highs and lows.
Traders react quickly to recent highs and lows. When the market approaches lows, buyers will be attracted to what they regard as cheap. Similarly, when the market reaches high, sellers will be attracted to what they view as either too high or buyers will look to lock in a profit.
Therefore, recent highs and lows are the yardsticks by which current prices are evaluated. There is also a self-fulfilling aspect to support and resistance levels. This happens because market participants anticipate certain price actions at these points and act accordingly. As a result, their actions can contribute to the market behaving as they had expected.
However, it’s very important to understand these three things:
- Support and resistance levels do not present ironclad rules, they are simply a common consequence of the natural behavior of market participants.
- Trend-following systems aim to profit from the times when support and resistance levels break down.
- Counter-trending styles of trading are the opposite of trend following—they aim to sell when there’s a new high and buy when there’s a new low.
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Trend-Following Forex Strategies
Trend-following strategies encourage traders to buy the market once it has broken through resistance and sell a market once they have fallen through support. This type of system has the potential to be the most successful Forex trading strategy. Trend-following systems use indicators to inform traders when a new trend may have begun. The indication that a trend might be forming is called a breakout. A breakout is when the price moves beyond the highest high or the lowest low for a specified number of days.
Trend-following systems usually stretch for a long duration. And during this long period, profits can disappear as the market swings. When markets are volatile, trends will tend to be more disguised and price swings will be greater. Therefore, a trend-following system is the best trading strategy for Forex markets that are quiet and trending.
4-Hour Forex Trading Strategy
The 4-hour trend-following strategy can also be used as a swing trading strategy. This strategy uses a 4-hour base chart to screen for potential trading signal locations. The 1-hour chart is used as the signal chart, to determine where the actual positions will be taken.
For this Forex strategy, two sets of moving average lines are chosen for the best results. One will be the 34-period MA, while the other is the 55-period MA. To ascertain whether a trend is worth trading, the MA lines will need to relate to the price action.
In case of an uptrend, the conditions that need to be fulfilled include:
- Price action is above the MA lines
- The 34-MA line is above the 55-MA line
- The MA lines are sloping upwards
In case of a downtrend, the following conditions need to be fulfilled:
- Price action is below the MA lines
- The 34-MA line is below the 55-MA line
- The MA lines are sloping downwards
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Which Forex Trading strategy is best?
There is no clear answer to the above question. The best strategy for trading Forex is the one that suits the individual. A particular strategy might work for one individual and may not work out best for the other. Sometimes, traders might have to experiment with different strategies in order to figure out what’s best for them.
There are several types of Forex trading strategy styles from short timeframes to long timeframes. These styles have been widely used over the years and still remain a popular choice from the list of the best Forex trading strategies this year. The best Forex traders always remain aware of the different styles and strategies in their search for how to trade Forex successfully.
The different times in different forex strategies are:
- Short-term timeframes include 60-minute, 30-minute, 15-minute, 5-minute, and 1-minute charts.
- Longer-term timeframes include 4-hour, Daily, Weekly, and Monthly charts.
In addition to time, it is also vital to consider:
- Position sizing
- Risk management
- How to exit a trade