Forex Best Strategies: Every trader needs to have a trading strategy

Any experienced trader will tell you that trading Forex (or any financial markets) without having a well defined trading plan and strategy is pure suicide ( or rather you donate your money to your broker )

There are many ways to trade so you will have to find your trading style and method that suits you the best. Time and experience are the keys to finding out what your own most successful strategy is.  Forex market offers multiple avenues to trading success and in order to take advantage of these opportunities, you must first learn explore and understand what are the best strategies used by experienced traders.
Forex Winning Strategies, a Coach's Guide to Building A Successful Trading Plan by Vic Noble.

Here are some ideas – note that there are in no particular order- you should try and test as many as you can in a Demo account before making the decision to invest you money.

 

Scalping is equivalent with very short term trading, used by both professional and retail traders, is based mostly on making decision using  1 to 5 minutes charts.

Scalping strategies are base on taking many trades for very, very short periods of time  and trying to catch the small movements in price. The main  idea is to accumulate many small profits that eventually will compound into a large gain.

Few guidelines to consider:

  • Exercise a great deal of control and discipline in your trades
  • Be quick, take you profit (or loss) fast and don’t wait for big moves
  • Trade currency pairs with the smallest spread
  • Trade at the times when your selected currency pair is most active but avoid the times when news releases are schedules

Scalping trades are often triggered by signals given by scalping indicators and software that is programmed to run on 1 to 5 minutes timeframe charts.

  • SHORT TERM FOREX TRADING STRATEGIES

Short term trading strategies involve taking a trade that may last a few minutes and up to a few days and it is usually done using the short term chart of 5 mins, 15 mins and 1 hour. This are also known as day trading strategies.  The majority of retail traders prefer to trade short term rather then long term for various reasons.

There are many systems that rely on technical  indicators, analyzing support and resistance levels or price action patterns that applied to short term time frames that can be  successful if combined with  proper risk management.

Few guidelines to consider:

  •  Look at the bigger picture to try to identify the trend (examine the daily or 4 hours charts) when entering the short term trades. Trade in the same direction with the highest trend
  •  Control your risk by keeping you losses small and maximize profits
  • LONG TERM / POSITION TRADING STRATEGIES

A Working Man's Forex Position Trading System by Alan Benefield (CDs + Manual)Long term or position trading strategies require a position to be held for days or weeks or sometimes even months. Traders often build their position into the market over a period of days or weeks as the price moves. The main component of this strategy is a confidence in the prevailing fundamental conditions driving the price, and the anticipation that the market will eventually move in the desired direction. Long term trading is considered by some as a ‘stress-free’ type of trading

If a currency pair is hold for more than a day most brokers will charge a rollover fee. In other words, depending on the currencies involved and the direction of the trade, you may be paying a little bit of interest or earning a little bit of interest. For some currencies (for example AUD) the rollover fee can be quite substantial and it may add to your cost of trading or it may bring you some income.

Having the confidence to not only hold your position, but add to it is the key to this style of trading.

  • TREND FOLLOWING TRADING STRATEGIES

The trend is your friend – we’ve all heard this before and if you are patient enough this strategy is for you.

The trend following strategies are very popular and rely on taking advantage of the long or medium term moves.

The price and time are fundamental in making the decision to enter or exit a trade. The challenge is the find out when a trend starts and ends and not be taken by false signals.

The trend following strategies may involve breakout systems, moving average systems, volatility systems and many others, all of which can be considered trend following in nature.
FXM Trend Trader by Frank Paul

  • TREND REVERSAL STRATEGIES

 The trend reversal strategies may be applied for both short term trading and long term trading based on same systems but with different targets. Usually the indication of the trend reversal is derived from support and resistance levels, chart patterns and technical indicators in an extreme oversold  or overbought reading. Reversals are generally used by technical based traders during times of little fundamental activity. At these times the markets tend to ‘range’ or move sideways with no clear direction. Traders look for key price levels that they can use to trade directly from in expectation of a ‘bounce’ when price hits it. These bounces provide small, quick opportunities to take a profit from low volume market activity.

Common levels used by traders with this type of strategy include, old highs and lows from previous trading sessions, Pivot point levels, Fibonacci levels and areas at which all three of these levels overlap. These overlaps are known as confluences, and these provide excellent areas at which to look for the price to bounce from during the session.

  • RANGE TRADING STRATEGIES

Some currencies tend to be range-bound most of the time and if identified trading those currency pairs can provide consistent profits.  The underlying assumption of range trading is that no matter which way the currency pair travels, it will most likely return back to its point of origin. The traders are trying to profit from buying support and selling resistance or in other words buying bottoms and selling tops.

In fact, range traders expect that prices will trade through the same levels many times, and their goal is to collect on those zig-zag changes in direction as many times as possible.

Few guidelines to consider:

  •  Select the currency pair carefully; the currency crosses ( for example EUR/GBP, EUR/CHF, CHF/JPY, GBP/JPY, AUD/CAD etc.) are best candidates for range trading
  • Use technical indicators that are specific for ranges and be well versed in support and resistance levels
  • Trade only during hours when there is a low volatility for the currency pair chosen and avoid the news releases
  • BREAKOUTS TRADING STRATEGIES

Breakouts consist of identifying a key price level and then buying or selling as the price breaks that predetermined level. The expectation is that if the price has enough force to break the level then it will continue to move in that direction.

Generally breakouts are used when the market is already at or near the extreme high / lows of the recent past. The expectation is that the price will continue moving with the trend and actually break the extreme high and continue. With this in mind, to effectively take the trade we simply need to place an order just above the high or just below the low so that the trade automatically gets entered when the price moves.

  • PRICE ACTION STRATEGIES

Price action strategy is based (as the name suggests) on visual readings of a chart and looking at the movement of the price – direction, momentum, level relative to the support/resistance lines, shape of the chart. It is a subjective measure as every trader can have his/her own interpretation of the same visual cues. Price action trading is ignoring the fundamental factors and it is sometimes included under the umbrella of technical analysis – even if is not really making use of the technical indicators and the chart should be kept as simple as possible. The extreme of trading price action strategy without any indicators is often called “naked trading”.
Advanced Forex Price Action Techniques by Andrew Jeken
The price action trader will use setups to determine entries and exits for positions. Each setup has its optimal entry point. Some traders also use price action signals to exit, simply entering at one setup and then exiting the whole position on the appearance of a negative setup. Alternatively, the trader might simply exit instead at a profit target of a specific cash amount or at a predetermined level of loss. A more experienced trader will have their own well-defined entry and exit criteria, built from experience.

  • TECHNICAL ANALYSIS STRATEGIES

Technical analysis actually means forecasting the future price movements by looking at the present price action on the charts. They dismiss, in general most fundamental data believing instead that any material news will be reflected in the price action of the currency pair and will therefore provide objective clues to future direction. 

 Technical analysts use market indicators of many sorts, some of which are mathematical transformations of price, often including up and down volume, advance/decline data and other inputs. These indicators are used to help assess whether an asset is trending, and if it is, the probability of its direction and of continuation. Technicians also look for relationships between price/volume indices and market indicators. Examples include the moving average, relative strength index, and MACD.

  • FUNDAMENTAL ANALYSIS STRATEGIES

Fundamental analysis in Forex is a type of market analysis which involves studying of the economic situation of countries to trade currencies more effectively. News, economic reports and commentary from monetary officials are the primary tools of fundamentalists. 

The general rule of thumb is that fundamentals tend to have a stronger impact on longer-term trades, while technicals will be more important to consider for shorter-term trades. Over the long term, currency prices will respond to major economic events such as GDP growth, interest rates and the current account balances.

What are the most powerful figures that move Forex market?

♦  Interest rate
Traditionally, if a country raises its interest rates, its currency will strengthen because investors will shift their assets to that country to gain higher returns

♦ Employment situation
Decreases in the payroll employment are considered as signs of a weak economic activity that could eventually lead to lower interest rates, which has negative impact on the currency.

♦ Trade balance, budget and treasury budget
A country that has a significant Trade Balance deficit will generally have a weak currency as there will be continuous commercial selling of its currency.

 Gross Domestic Product (GDP)

GDP is reported quarterly and is followed very closely as it is a primary indicator of the strength of economic activity.
A high GDP figure is usually followed by expectations of higher interest rates, which is mostly positive for the currency