Most Successful Forex Trading System

Reviewed by Nick Cawley on December 16, 2021

Main talking points:

What is a Forex Trading Strategy?
Forex Strategies: A Top-level Overview
Price Action Trading
Range Trading Strategy
Trend Trading Strategy
Position Trading
24-hour interval Trading Strategy
Forex Scalping Strategy
Swing Trading
Bear Trade Strategy

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What is a Forex Trading Strategy?

A forex trading strategy defines a system that a forex trader uses to determine when to buy or sell a currency pair. There are various forex strategies that traders tin can utilise including technical analysis or fundamental analysis. A good forex trading strategy allows for a trader to analyse the marketplace and confidently execute trades with sound gamble direction techniques.

Forex Strategies: A Top-level Overview

Forex strategies can be divided into a distinct organisational structure which can assist traders in locating the most applicative strategy. The diagram below illustrates how each strategy falls into the overall structure and the relationship between the forex strategies.

relationship between different forex strategies

Forex Trading Strategies That Piece of work

Forex trading requires putting together multiple factors to formulate a trading strategy that works for you. In that location are endless strategies that can be followed, however, understanding and existence comfortable with the strategy is essential. Every trader has unique goals and resources, which must exist taken into consideration when selecting the suitable strategy.

There are three criteria traders tin use to compare dissimilar strategies on their suitability:

Fourth dimension resource required
Frequency of trading opportunities
Typical distance to target

To easily compare the forex strategies on the three criteria, nosotros've laid them out in a chimera chart. On the vertical axis is 'Hazard-Advantage Ratio' with strategies at the top of the graph having higher advantage for the run a risk taken on each trade. Position trading typically is the strategy with the highest take a chance advantage ratio. On the horizontal axis is time investment that represents how much time is required to actively monitor the trades. The strategy that demands the most in terms of your time resource is scalp trading due to the high frequency of trades being placed on a regular basis.

ane. Price Activity Trading

Price activity trading involves the study of historical prices to formulate technical trading strategies. Price action can be used as a stand-alone technique or in conjunction with an indicator. Fundamentals are seldom used; withal, information technology is not unheard of to comprise economic events as a substantiating factor. At that place are several other strategies that fall within the price action bracket as outlined to a higher place.

Length of trade:

Price action trading can be utilised over varying time periods (long, medium and short-term). The ability to use multiple time frames for analysis makes price activeness trading valued by many traders.

Entry/Exit points:

At that place are many methods to determine back up/resistance levels which are generally used as entry/exit points:

Fibonacci retracement
Using candle wicks
Trend identification
Indicators
Oscillators

Within price action, there is range, trend, twenty-four hours, scalping, swing and position trading. These strategies adhere to dissimilar forms of trading requirements which will be outlined in detail below. The examples show varying techniques to merchandise these strategies to prove simply how various trading can be, forth with a variety of bespoke options for traders to choose from.

2. Range Trading Strategy

Range trading includes identifying support and resistance points whereby traders will place trades around these cardinal levels. This strategy works well in market without significant volatility and no discernible trend. Technical assay is the primary tool used with this strategy.

Length of merchandise:

There is no set length per trade as range bound strategies can work for whatever time frame. Managing risk is an integral part of this method as breakouts can occur. Consequently, a range trader would similar to shut whatsoever electric current range bound positions.

Entry/Exit points:

Oscillators are most commonly used as timing tools. Relative Strength Index (RSI ), Commodity Channel Index (CCI) and stochastics are a few of the more pop oscillators. Price activity is sometimes used in conjunction with oscillators to further validate range bound signals or breakouts.

Instance one: USD/JPY Range Trading

USD/JPY has been exhibiting a prolonged range spring price level over the by few years. The nautical chart above illustrates a articulate support and resistance band which traders use as entry/exit points. The RSI oscillator demonstrates timing of entry/get out points as highlighted by the shaded blue and scarlet boxes – blue: overbought and red: oversold.

Range trading can result in fruitful run a risk-advantage ratios nevertheless, this comes along with lengthy time investment per trade. Use the pros and cons beneath to marshal your goals as a trader and how much resources yous have.

Pros:

Substantial number of trading opportunities
Favourable risk-to reward ratio

Cons:

Requires lengthy periods of time investment
Entails potent appreciation of technical analysis

3. Trend Trading Strategy

Tendency trading is a simple forex strategy used by many traders of all experience levels. Trend trading attempts to yield positive returns by exploiting a markets directional momentum.

Length of merchandise:

Trend trading mostly takes place over the medium to long-term time horizon as trends themselves fluctuate in length. As with price activity, multiple time frame analysis can be adopted in trend trading.

Entry/Exit points:

Entry points are unremarkably designated by an oscillator (RSI, CCI etc) and exit points are calculated based on a positive adventure-advantage ratio. Using finish level distances, traders can either equal that distance or exceed information technology to maintain a positive risk-reward ratio e.k. If the finish level was placed 50 pips away, the take profit level wold be gear up at 50 pips or more abroad from the entry betoken.

Example ii: Identifying the Trend

In the uncomplicated instance higher up, EUR/USD exhibits an upwards trend validated by college highs and higher lows. The opposite would exist true for a downwards trend.

EUR/USD Trading the Trend

When you see a strong trend in the market, trade it in the direction of the tendency. For instance, the strong uptrend in EUR/USD in a higher place.

Using the (CCI) as a tool to time entries, notice how each fourth dimension CCI dipped below -100 (highlighted in blue), prices responded with a rally. Non all trades volition work out this fashion, but because the tendency is being followed, each dip caused more buyers to come into the market and push prices higher. In conclusion, identifying a strong trend is important for a fruitful tendency trading strategy.

Trend trading can be reasonably labour intensive with many variables to consider. The list of pros and cons may assist you in identifying if trend trading is for you.

Pros:

Substantial number of trading opportunities
Favourable risk-to advantage ratio

Cons:

Requires lengthy periods of time investment
Entails strong appreciation of technical analysis

four. Position Trading

Position trading is a long-term strategy primarily focused on fundamental factors however, technical methods tin can exist used such equally Elliot Wave Theory. Smaller more than small marketplace fluctuations are not considered in this strategy as they do non bear upon the broader marketplace picture. This strategy can exist employed on all markets from stocks to forex.

Length of trade:

As mentioned above, position trades have a long-term outlook (weeks, months or even years!) reserved for the more persevering trader. Understanding how economical factors bear upon markets or thorough technical predispositions, is essential in forecasting trade ideas.

Entry/Go out points:

Key levels on longer time frame charts (weekly/monthly) hold valuable information for position traders due to the comprehensive view of the market. Entry and get out points can be judged using technical assay as per the other strategies.

Case 3: Germany thirty (DAX) Position Trading

The Germany xxx nautical chart above depicts an approximate two year head and shoulders pattern, which aligns with a probable fall below the neckline (horizontal ruddy line) subsequent to the right-hand shoulder. In this selected case, the down fall of the Germany 30 played out equally planned technically likewise as fundamentally. Towards the stop of 2018, Frg went through a technical recession along with the United states of america/Mainland china trade war pain the automotive industry. Brexit negotiations did not help matters equally the possibility of the UK leaving the EU would most likely negatively bear upon the German language economy as well. In this case, understanding technical patterns likewise equally having stiff key foundations immune for combining technical and fundamental analysis to structure a strong trade idea.

List of Pros and Cons based on your goals as a trader and how much resources you take.

Pros:

Requires minimal fourth dimension investment
Highly positive chance-to advantage ratio

Cons:

Very few trading opportunities
Entails stiff appreciation of technical and fundamental analysis

5. Twenty-four hour period Trading Strategy

Day trading is a strategy designed to trade financial instruments within the same trading day. That is, all positions are closed earlier market place close. This can be a single trade or multiple trades throughout the day.

Length of trade:

Trade times range from very brusque-term (affair of minutes) or short-term (hours), as long equally the trade is opened and airtight within the trading 24-hour interval.

Entry/Exit points:

Traders in the example below will wait to enter positions at the when the price breaks through the 8 period EMA in the direction of the trend (blueish circle) and go out using a 1:ane chance-advantage ratio.

Instance iv: EUR/USD Day Trading

The chart above shows a representative twenty-four hours trading setup using moving averages to identify the trend which is long in this case as the cost is above the MA lines (red and blackness). Entry positions are highlighted in blueish with finish levels placed at the previous price interruption. Take profit levels will equate to the stop distance in the direction of the trend.

The pros and cons listed below should be considered before pursuing this strategy. Twenty-four hour period trading involves much time and effort for piffling advantage, every bit seen from the EUR/USD example above.

Pros:

Substantial number of trading opportunities
Median risk-to advantage ratio

Cons:

Requires lengthy periods of time investment
Entails strong appreciation of technical analysis

6. Forex Scalping Strategy

Scalping in forex is a common term used to describe the procedure of taking small profits on a frequent basis. This is achieved by opening and endmost multiple positions throughout the twenty-four hours. This can be done manually or via an algorithm which uses predefined guidelines as to when/where to enter and exit positions. The most liquid forex pairs are preferred as spreads are generally tighter, making the curt-term nature of the strategy plumbing fixtures.

Length of merchandise:

Scalping entails short-term trades with minimal return, usually operating on smaller time frame charts (30 min – 1min).

Entry/Exit points:

Like most technical strategies, identifying the trend is step i. Many scalpers use indicators such as the moving boilerplate to verify the tendency. Using these key levels of the trend on longer time frames allows the trader to see the bigger picture. These levels will create back up and resistance bands. Scalping within this band can then be attempted on smaller fourth dimension frames using oscillators such equally the RSI. Stops are placed a few pips away to avoid large movements against the trade. The MACD indicator is another useful tool that can be exercised by the trader to enter/leave trades.

Example 5: EUR/USD Scalping Strategy

The EUR/USD 10 minute above shows a typical example of a scalping strategy. The long-term trend is confirmed past the moving average (price above 200 MA). The smaller time frame is so used to target entry/exit points. Timing of entry points are featured by the red rectangle in the bias of the trader (long). Traders can also close long positions using the MACD when the MACD (blue line) crosses over the signal line (red line) highlighted by the blueish rectangles.

Traders utilize the same theory to ready their algorithms however, without the manual execution of the trader.

With this practical scalp trading example above, use the list of pros and cons beneath to select an appropriate trading strategy that best suits yous.

Pros:

Greatest number of trading opportunities from all forex strategies

Cons:

Requires lengthy periods of time investment
Entails stiff appreciation of technical analysis
Everyman risk-to advantage ratio

7. Swing Trading

Swing trading is a speculative strategy whereby traders look to take advantage of rang bound as well equally trending markets. By picking 'tops' and 'bottoms', traders tin can enter long and short positions accordingly.

Length of trade:

Swing trades are considered medium-term every bit positions are generally held anywhere between a few hours to a few days. Longer-term trends are favoured as traders can capitalise on the trend at multiple points along the tendency.

Entry/Exit points:

Much like the range bound strategy, oscillators and indicators can exist used to select optimal entry/exit positions and times. The simply difference being that swing trading applies to both trending and range jump markets.

Example vi: GBP/USD Swing Trading Strategy

A combination of the stochastic oscillator, ATR indicator and the moving average was used in the case in a higher place to illustrate a typical swing trading strategy. The upward trend was initially identified using the 50-day moving average (price to a higher place MA line). In the case of an uptrend, traders will look to enter long positions with the old adage of 'purchase low, sell high'.

Stochastics are then used to identify entry points by looking for oversold signals highlighted by the blue rectangles on the stochastic and chart. Chance direction is the final pace whereby the ATR gives an indication of stop levels. The ATR figure is highlighted by the carmine circles. This figure represents the guess number of pips away the stop level should be set. For instance, if the ATR reads 41.8 (reflected in the terminal ATR reading) the trader would expect to place the stop 41.8 pips away from entry. At DailyFX, we recommend trading with a positive risk-reward ratio at a minimum of 1:two. This would mean setting a take profit level (limit) at least 83.half-dozen (41.8 x two) pips away or further.

After seeing an example of swing trading in action, consider the following list of pros and cons to determine if this strategy would arrange your trading style.

Pros:

Substantial number of trading opportunities
Median risk-to reward ratio

Cons:

Entails stiff appreciation of technical analysis
Still requires extensive time investment

viii. Carry Trade Strategy

Behave trades include borrowing one currency at lower rate, followed by investing in some other currency at a higher yielding rate. This will ultimately result in a positive carry of the trade. This strategy is primarily used in the forex market.

Length of merchandise:

Carry trades are dependent on interest charge per unit fluctuations betwixt the associated currencies therefore, length of trade supports the medium to long-term (weeks, months and perhaps years).

Entry/Exit points:

Strong trending markets piece of work all-time for carry trades equally the strategy involves a lengthier time horizon. Confirmation of the trend should be the beginning step prior to placing the trade (higher highs and higher lows and vice versa) – refer to Example 1 above. There are two aspects to a carry trade namely, exchange rate gamble and involvement rate take chances. Accordingly, the best time to open the positions is at the kickoff of a tendency to capitalise fully on the exchange rate fluctuation. Regarding the interest rate component, this will remain the same regardless of the trend as the trader will even so receive the interest rate differential if the outset named currency has a higher interest rate against the 2d named currency east.g. AUD/JPY.

Could carry trading work for you lot? Consider the following pros and cons and see if information technology is a forex strategy that suits your trading manner.

Pros:

Little time investment needed
Median risk-to reward ratio

Cons:

Entails strong appreciation of forex market place
Infrequent trading opportunities

Forex Strategies: A Summary

This article outlines eight types of forex strategies with practical trading examples. When considering a trading strategy to pursue, it tin can be useful to compare how much fourth dimension investment is required behind the monitor, the chance-advantage ratio and regularity of total trading opportunities. Each trading strategy will appeal to unlike traders depending on personal attributes. Matching trading personality with the appropriate strategy will ultimately allow traders to take the first step in the right management.

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