Forex Trading Strategies: 5 Successful Ways
Do you also find it difficult to find a suitable and successful strategy for Forex trading on the stock exchange?
When searching, terms such as day trading, swing trading, forex news trading, position trading, scalping, and a large number of other trading strategies often come up. But which strategy is best suited for you and can be successfully implemented?
The following article will give you an overview of 5 selected Forex trading strategies that are successfully used by a large number of traders in the Forex market.
Specifically, the 5 selected strategies, that can be best applied in the Forex market, are the following:
- Position Trading
- Swing Trading
- Day trading
- Combining different units of time
1. Position trading in the Forex market
In so-called position trading, a trading decision is made primarily on the basis of fundamental analysis (e.g. NFP, GDP, retail turnover). Technical analysis helps with the strategy to optimize the entry into the market. The usual time setting on the chart of the currency pair is usually on a daily or weekly basis. This already shows that the trading approach being pursued is designed for the longer term. Typically, trades last from several weeks to several months.
As an example, the euro / US dollar can be considered. As soon as it is determined in the course of the fundamental analysis carried out that the market is likely to rise in the longer term in the future, one should not enter the market directly. With the help of technical analysis, relevant levels of support can be determined, among other things. As soon as the price returns to the support level, the entry into the market occurs. In the best case, the entry point is the beginning of a new trend in the market.
But what are the advantages and disadvantages of the strategy?
- Long-term approach, so no large amount of time is required for chart analysis
- Due to the long-term approach, there is also no need for a constant reaction to short-term price fluctuations
- Advantageous balance between profit and risk
- What is required is a solid basic understanding of economics
- Since the stop loss is set broadly, a higher capital investment is required
- Not a high number of trades, so it is usually not possible to realize a profit every year
A strategy similar to position trading is the trend-following strategy. The difference, however, is that only the technical approach is used, a fundamental analysis is not used.
2. Swing trading as one of the forex trading strategies
Unlike position trading, swing trading is a medium-term approach. The usual period is several days, occasionally several weeks. The chart should be optimally set to 1 hour or 4 hours for analysis.
Within an existing large trend, relatively smaller price movements (also called swings) take place. The swing trader takes advantage of these price movements profitably.
In order for the strategy to be successfully applied, technical analysis is required. In advance, strong resistance and support levels should be identified, between which the price moves. In addition, the moving average should be included in swing trading.
- Medium-term approach, so the time commitment is manageable
- The annual realization of profits is possible due to the increased number of trades
- No profitable exploitation of large and long-term trends in the market
- Constant risk of short-term price movements with a negative impact on the trade (especially at night)
Due to the complexity of the strategy, a detailed guide to the successful application of swing trading is recommended. In addition, knowledge of resistance and support in the market, chart formations and the moving average should be available or learned in advance.
3. Day trading in the Forex market
Day trading is a strategy with a short time horizon. The trades usually last only a few minutes to a few hours. As a result, a time setting of 5 minutes or alternatively 15 minutes should be selected for chart analysis.
Within a day, numerous price fluctuations take place in the market, in day trading these short-term and small fluctuations are used for profitable trades. Compared to swing trading, day trading is very similar, only the time horizon is much smaller.
As a result, as with swing trading, only technical analysis is used, the fundamentals and the long-term trend are disregarded.
As an example, the USD / CAD currency pair can be considered. If the price is 1.3640, there is strong resistance, if the price does not break through it upwards, the chances are very high that the price will fall afterward.
What are the advantages and disadvantages of day trading?
- Trades are closed within one day (no risk of overnight price fluctuations)
- A monthly realization of profits is possible due to the large number of trades
- A lot of time is required, due to the constant analysis, as well as the opening and closing of trades
- Due to the high expenditure of time, there are high costs (opportunity costs), as a full-time salary could usually be received in the same time
- Unexpected and massive price movements can quickly lead to failure and high losses (Black Swan Events)
4. Scalping in the Forex market
Scalping usually uses an even smaller time horizon than day trading. Typically, a trade only takes a few minutes or even seconds. Due to the short time periods, only small profits can be made in Forex scalping, and the majority of the profit is needed for transaction costs.
In contrast to the conventional price chart, as it is used in the other strategies presented, scalping usually uses the order book. The order book can be used to derive short-term trading decisions about buying and selling.
Since a large number of trades are opened and closed over a day, a high level of discipline in trading and a clear strategy are required. Further advantages and disadvantages can be found in the following overview:
- A variety of trading opportunities on a daily basis
- Provides the opportunity to generate a constant income
- High financial costs (e.g. software and transaction costs)
- A high amount of time is necessary
- Can quickly trigger stress
5. Combining different time units and forex strategies
The strategy of combining different units of time is based on my own experience gained so far. The approach behind this is to plan the entry into the trade in a price chart with a small unit of time. If the trade moves quickly in the desired direction, the exit from the trade is not planned on the same chart. In this case, a price chart with a larger time unit is used to plan the exit, in which the target profit can be increased and the stop loss can be tightened.
As an example, we can use the GBP / JPY currency pair. Due to the technical chart analysis in the 1-hour chart, a breakout is traded, which also takes place as desired.
Looking at the 4-hour chart, however, it is noticeable after the successful breakout that it seems worthwhile to follow the stop loss with the help of the 20-MA instead of already taking the resulting profits. If the price breaks through the 20-MA downwards in the meantime, the market should be exited. In the best case, however, the profits can be increased considerably.
The described strategy can be used in the Forex market in a wide variety of variations, but the basic idea is always the same:
- Find your way into the market using a lower time frame price chart
- As soon as the price develops as desired, the exit in the price chart will be planned with a higher time unit
Again, this strategy has both advantages and disadvantages:
- The profit can be greatly maximized (factor 1 to 10, sometimes even higher)
- The entry into the trade takes place on the chart with a low time unit, which can reduce the risk
- Few trades lead to an extreme profit
- Multiple time charts need to be analyzed and understood at the same time
Which strategies are best suited for you to trade in the Forex market?
A large number of traders have been using strategies that do not suit them for years. In many cases, this leads to unnecessary losses, frustration quickly occurring and valuable time being wasted. To avoid this, you should answer the following 3 questions for yourself.
1. Should trading be used to increase assets or generate income?
The strategy used to generate a regular income differs significantly from that used to build wealth. In the case of income, a certain profit must be made within a month, while in the case of wealth, growth per year is decisive.
In order to earn a regular income through trading, it is necessary to find a high number of trading opportunities within a short period of time. As a result, only a short time horizon is possible and a higher time commitment is necessary. Scalping, day trading and swing trading (short-term swings) are ideal for this.
If the goal is to increase assets, a longer-term time horizon can be used. As a result, the time required is significantly lower compared to generating income.
Conventional swing trading as well as position trading are ideally suited for these purposes.
2. How much time can and do you want to invest in trading?
As already made clear in the upper part of the article, the different strategies have different time requirements. It is important to personally consider how much time you can and want to invest in trading. Considering full-time employment, swing trading or position trading should preferably be chosen.
3. Is the strategy suitable for me at all?
The strategies described can be divided into two categories based on their relationship between the success rate of the trades and the amount of profits per trade:
- High success rate of trades, but only a small profit per trade in case of success
- Low success rate of trades, but a high profit per trade in case of success
The majority can be classified in the first category. But which one is actually better? In terms of profitability, both approaches can be successful. The decision as to which strategy is the better one should therefore be answered by everyone for themselves.
If you feel comfortable trading with a high success rate, but relatively smaller profits, swing trading, among other things, is suitable.
However, if you tend to prefer a lower success rate, but higher profits per trade in case of success, position trading, for example, is a suitable strategy.
Which provider should be chosen for trading in the Forex market?
When choosing the right provider, you should always make sure that it is a reputable provider. In addition to seriousness, the provider should offer the MetaTrader 4 or 5. The table below contains 3 recommended brokers that are regulated, offer top support, and allow trading at very low Forex fees.