What Are the Top Forex Trading Strategies?

Why Having an Effective Trading Strategy is Important

Due to its popularity, forex trading has gained a reputation for turning quick profits, but in reality it’s just as complex and competitive as any other world marketplace. To maximise your chances of succeeding, it’s important to have a clear strategy in place.

There are a variety of ways to trade forex, so it’s crucial to choose an approach that suits your personal goals, experience level, risk tolerance, time horizon and dedication.

What all forex strategies have in common is analysing the market to determine the best entry and exit points, as well as position size and trade timing. Some strategies also involve technical indicators, which you can use to try and forecast future market moves. Most experienced forex traders will use a combination of trading methods, depending on their goals and objectives. Below, we’ve outlined six of the most popular strategies for trading forex.

Top Forex Trading Strategies

Position Trading

Position trading is a strategy in which traders hold their position over an extended time period; from several weeks to a couple of years. It’s popular among forex traders, as it means that they don’t have to deal with short-term price changes, but it does require traders to take a macro view of the market and sustain smaller market fluctuations that counter their position. Position trading is best for patient traders.

Pros and Cons of Position Trading

Position trading is a good strategy as it makes the precision of market entry and exit less critical. Intraday changes do not play an important role in the strategy, while great gains are still possible for patient traders. On the other hand, traders using this long-term strategy need to rely on the fundamentals, while systemic risk is also enhanced.

Range Trading

Range trading is based on the concept of support and resistance, which on charts can be identified as the highest and lowest point that price reaches before reversing in the opposite direction. Together, these support and resistance levels create a bracketed trading range.

In a trending market, price will continue to break previous resistance levels (forming higher highs in an uptrend, or lower lows in a downtrend), creating a stair-like support and resistance pattern. In a ranging market, however, price moves in a sideways pattern and remains bracketed between established support and resistance thresholds. 

When price reaches the resistance level, traders anticipate a reversal in the opposite direction and sell. Similarly, when price approaches the support level, it’s considered a buy signal. Finally, if price breaks through this established range, it may be a sign that a new trend is about to take shape. Range traders are less interested in anticipating breakouts and more interested in markets that oscillate between support and resistance levels without trending in one direction for an extended period.

Pros and Cons of Range Trading

Range trading carries less inherent risk, as traders are looking to capitalise on the current trend rather than predicting it. However, timing is extremely important in risk trading, as an asset will often remain overbought or oversold for an extended period before reversing to the opposite side.

News Trading

As a multinational marketplace, forex is influenced by global economic events. Understanding economic news events and their potential impact on currency pairs helps traders anticipate short-term market movements or breakouts.

Major scheduled news events include interest rate decisions, economic reports on national unemployment rates, inflation rates, gross domestic product (GDP), non-farm payroll and national trade balances, as well as consumer and business confidence surveys.

Pros and Cons of News Trading

Trading small breakouts that occur over a short time period has high profit potential. But it also carries greater risk. When price consolidates, volatility increases. If a trader enters a trade too soon, they risk being forced out of the trade (and experiencing a loss) if the breakout doesn’t occur immediately or isn’t sustained.

Forex Swing Trading

Forex swing trading involves mid-term trading. It is where traders hold a position for several days and make profits by recognising the swing highs and lows. These smaller surges and dips may go against the prevailing trend direction, and thus require a more limited market outlook, eg. examining 15-minute, hourly, daily, and weekly price charts as opposed to analysing overall market trends.

Because swing trading demands quick action and close market oversight, it’s typically favoured by day traders who are available to monitor changes in price momentum minute to minute. Unlike day trading, however, swing trading requires traders to hold their positions overnight.

Pros and Cons of Swing Trading

With swing trading, short-term volatility is not important and exact market entry and exit also do not play a crucial role, while big gains are still possible. The cons include additional rollover costs and opportunity costs which are affected by account liquidity.

Forex Scalping

Scalping is an intraday trading strategy in which traders buy and sell currency with the goal of shaving small profits from each trade. In forex, scalping strategies are typically based on an ongoing analysis of price movement and a knowledge of the spread.

Pros and Cons of Forex Scalping

Scalping is associated with several trading opportunities, an improved success rate and exposure to minute systemic risk. However, scalpers need to be very consistent and closely monitor the trade during the day with a high risk slippage. Forex is a highly volatile market, so traders must have impeccable timing, excellent concentration and steady nerves.

Forex Day Trading

Day trading forex involves opening and holding one trade a day, while currency pair intraday price changes determine profits or losses.

Pros and Cons of Day Trading

Day trading comes with limited systemic risk and no rollover costs. It minimised opportunity cost due to account liquidity. However, day trading is highly sensitive to volatility and positive risk is minimised due to the slow market.