by Introduction
The forex market, or foreign exchange market, is the largest and most liquid financial market in the world. Every day trillions of dollars exchange hands by retail traders, institutions and governments, respectively. However, forex trading is more than just looking at random currency pairs and randomly trading. It is discipline, education, and ultimately a strategy.
- In this article, I will share with you the top 5 strategies that successful traders use when cracking the forex market to make informed trading decisions consistently while maximising their chances of success.
1. Trend Following Strategy
Arguably the most popular forex trading strategy is trend following. This strategy consists of identifying where the overall market direction is headed and placing trades in the direction of the trend.
- Tools to use: moving averages (MA), MACD, RSI, and trendlines.
- Why it works: “The trend is your friend.” Trading in the direction of the trend reduces your risk and increases your probability of success.
- Pro tip: Use the higher timeframes (like 4H or daily) to confirm a strong trend.
2. Breakout Strategy
A breakout occurs when price moves through an important support or resistance level with greater than average volume. Traders use this momentum to trade with confidence upon entering the trade with the market moving strongly in their favour.
- Best Used: Ahead of major news events, during major market sessions (e.g., overlap of NYC and London), and after price has been consolidating for a considerable amount of time.
- Pros: Catch large moves with very little risk; provides a way to keep out of choppy and sideways price action.
- Risk Management on this type of trade: Always use stop-loss orders to limit risk after initial entries, as there may be false breakouts or “fakeouts”.
3. Scalping
Scalping is a very short-term trading, and requires literally dozens or hundreds of trades a day. It depends on quick execution, tight spreads, and fast reflexes regarding figuring out what the market is up to.
- Timeframe to Use: 1-minute to 5-minute charts.
- Best for: Traders with high-speed internet and fast reflexes appreciate managing large amounts of small doses of positions without having to have their minds on the full day of monitoring.
- Tools/Screening Methods: Bollinger Bands, Stochastic Oscillator, EMA (Exponential Moving Average).
4. Swing Trading
Swing trading seeks to capture the medium-term trend in the markets. This is typically over a span of several days to a few weeks. This style is less stressful than day trading and can be great for traders who prefer to not have to monitor the price action during the day.
- Pros: You have fewer trades and mix of less time to gather your analysis, and easier to limit emotions.
- Tools Typically Used: candlestick patterns, Fibonacci retracements, support and resistance zones.
- Best for: Traders who enjoy forex but also have a full-time job.
5. Risk Management Plan
A risk management plan is an essential part of any strategy. Even the best setups will fail. Risk management is critical to long-term success.
- The Golden Rule: Never risk more than 1-2% of your account on a single trading action.
- Use stop-losses: always ask yourself, “If my trade goes against me, what is my stop-loss going to be?” to protect your downside.
- Position size: Order size based on your account size and risk levels.
- Diversification: Don’t only trade one currency pair so as to spread the potential risk among different currency pairs.
Commitment
There is no ‘one size fits all’ with forex trading. What suits one individual may not work for another trader. The important thing is to understand these strategies, put them to the test and ultimately adapt them to your personality, risk tolerance, trading style and market conditions.
Whether you are just starting out in currency trading or have been trading for years, these top 5 currency trading strategies can give you a solid foundation for success. Regardless of whether you are in favour of a technical or fundamental approach, consistency, discipline and continual learning are the most important factors in making money in the foreign exchange market.
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