We believe that education is the best foundation for successful trading. That’s why we’ve put together a comprehensive guide to forex trading strategies. Maintaining your discipline as a forex trader is important, but it’s easy to make impulsive and panicked decisions when you’re close to a big win or a big loss. Having a strategy takes the emotion out of it and gives you a strong framework to work within. We’ll be taking a look at some of the most common forex trading styles and strategies, including:
For more information about forex basics, head over to our forex trading for beginners guide. We also have a glossary of important FX terms and a collection of short informative videos to get you up to speed.
Technical analysis is based on the idea that you can forecast possible future market movements by studying the price charts primarily. Unlike fundamental analysis, which attempts to pinpoint the individual value of an asset (through the evaluation of broad economic information), technical analysis looks for patterns in pricing to identify trends and assess the most profitable entry and exit positions.
Charts are a vital tool for traders using technical analysis. Japanese candlestick charts are the most popular as they display a lot of different information clearly, including the opening, closing, highest and lowest prices during a session.
Making financial decisions based on gut feelings is unlikely to be consistently profitable. That’s why many successful traders experiment with different systems and strategies to help them make decisions. These are based on the conditions of the market (whether it’s in a trend, staying within a fixed range or breaking out) and the trader’s own preferences, trading profile and character.
Fixed rules governing entry and exit points based on technical analysis can help traders remove emotion from the equation and possibly make more consistent gains. Technical indicators generate triggers to suggest when it is time to act. It’s important to remember that trading is inherently risky, and that profits are not guaranteed.
Always make sure you’re comfortable with your strategy by testing it in a simulated and safe environment. Opening a demo account lets you practise your strategies under real market conditions without you having to risk your own money. You can also test out strategies by applying them to historic price charts and seeing what your results would have been – again, without any real-world consequences.
Day traders capitalise on the volatility of an asset, placing several short-term trades in the expectation of making a relatively small gain per transaction. This can be a high-intensity and high-stress trading style so you need to be able to fully concentrate on the market and be in a position to react quickly to positive or negative developments.What is Day Trading?
As the name suggests, day traders open and close trades over the course of the day, usually holding positions for only a few hours. Day trading removes the risk that occurs when you leave a position open overnight.
Scalping trading is a more extreme form of day trending. Because you need to stay on top of all market changes, it suits traders who are willing to monitor data all day long. You need to be comfortable making quick decisions and have a high appetite for risk – a couple of large losses could wipe out your profits for the day.What is scalping?
Scalp traders target intraday price movements and aim to make very small, very frequent profits. They typically only hold positions for a few seconds or minutes and exploit small opportunities while they trade with the prevailing trend.
Position traders take a longer-term view of the market than day or scalping traders so this style suits traders who don’t want to have to constantly monitor the markets. You do, however, have to be resilient enough to ride out potential dips in the market (assuming they’re short-term).What is Position Trading?
With position trading, you invest in an asset in expectation of profiting from an uptrend. Position traders typically use fundamental analysis to identify the asset they want to invest in, and supplement that research with technical analysis tools to spot the most effective entry and exit points.
Swing trading follows the same basic premise as position trading, but looks to the intermediate term (unlike day trading which looks to the short term). Swing Trading is most effectively used in more volatile markets (compared to Position Trading), when there isn’t a clear uptrend to capitalise on. It’s generally thought to sit between Day Trading and Position Trading.What is Swing Trading?
With swing trading you’re looking at assets that will likely have short-term price moves you can exploit. Leaving your position overnight attracts more risk because of the potential for unexpected events to affect the market while your attention is elsewhere.
This dramatic-sounding strategy uses a 20-period exponential moving average (EMA) or the middle Bollinger band. It’s a particularly popular strategy with traders working on short time frames.What is the Bladerunner trading strategy?
The EMA line or the middle Bollinger Band effectively ‘cuts’ the price in two; trading signals are generated when prices move comfortably above or below the line and retest it several times. This confirms that the longer-term trend is unlikely to move to the opposite side of the line, although it might do so in the short term before consolidating.
The daily Fibonacci pivot trade combines daily pivot points and Fibonacci retracements into one strategy. It’s designed to give traders an indication of where they are likely to find strong areas of support and resistance.What is the Daily Fibonacci Pivot trading strategy?
When trading long in an uptrend, wait for the Fibonacci retracement line and a pivot support line to come together. The Fibonacci is the main driver of your decision making, backed up by confirmation from the pivot points.
This popular strategy is based on the principle that prices, by and large, revert to their mean average. Traders use Bollinger Bands as a technical indicator to assess when to buy and sell. This strategy works best in relatively steady markets that tend to move around in a consistent range.What is the Bolly Band Bounce trading strategy?
The basic premise is that an asset will conform to and not break support and resistance levels. Bollinger Bands mark these points with two lines that ‘sandwich’ the asset. When the price reaches resistance, it will bounce off the band and head back towards the middle; when it reaches support levels it will do the opposite. At its most basic, traders could sell when the price touches the upper band, and buy when it falls to the lowest. Be aware though that securities can often ‘walk the line’ instead of bouncing cleanly off it.
This is a slightly more advanced way to use Fibonacci levels in trading. Fans of this trading strategy often say it is the only one they use to trade the markets. You can use it in conjunction with other indicators to get a stronger reading.What is the Overlapping Fibonacci trading strategy?
The main idea is to map Fibonacci sequences over the same trend at different points and look out for confluences. It is best used in a strong trend in either direction. For example, in a bullish trend, one Fibonacci sequence is drawn from the overall trough to the peak of the trend. A second sequence is drawn from the trough of the second wave to the same peak. If the lines match up, it suggests a strong area of support (or in the case of a downtrend) resistance.
This strategy aims to take advantage of the volatility that often occurs when the London market opens. It’s a popular strategy for trading gold in particular.What is the London Hammer trading strategy?
A ‘hammer’ is a pattern that forms on a candlestick chart. It happens when an asset’s trading value drops from its opening price, and then shoots back up to either above or near its starting price, forming a hammer shape (a short body with a long shaft). The assumption is that London gives the earliest indication for how the market will react that day. To use this strategy effectively, you must have a clear idea of the resistance and support lines. For example, a good indication to sell is usually when the candlestick wick goes beyond the resistance level.
Fractals are used as an indicator that confirms the existence or emergence of a trend. In more chaotic markets, they can be helpful in identifying a clear price direction. Fractals, in the most basic sense, are patterns that can confirm a reversal.What is the Forex Fractal trading strategy?
The fractal pattern that signals a bullish turn is a trough in the middle, flanked by higher points either side. The fractal that signals a bearish turn in the market is a peak, flanked by lower points on either side. The ‘Alligator indicator’ is often used alongside fractals. This is a tool created using moving averages to form three lines that helps confirm that a reversal has taken place.
The dual stochastic trade uses stochastic oscillators to signal when a trend is likely to reverse. This gives traders an early indication that they should be prepared to alter their position on an asset.What is the Forex Dual Stochastic Trade?
This strategy compares fast and slow stochastic oscillators to gauge the momentum of a trend. When the price reaches the extreme levels marked by the stochastic levels (over 80 and under 20), it indicates that a reversal might be ahead as the asset has reached overbought and oversold levels. Traders typically wait for a price to be trending strongly and stay alert for the stochastic indicators to be at opposite ends of the spectrum. This strategy is best used with other technical indicators to suggest the most potentially profitable entry point.
The Pop ‘n’ Stop Trade is designed to help you take advantage of sudden breakouts from a tight range. The danger otherwise is that you completely miss the opportunity, get swept up too late in the excitement and chase the price unsuccessfully.What is the Pop ‘n’ Stop trading strategy?
Pop ‘n’ Stop trading describes when a price breaks to the upside out of its previous range, only to stop momentarily before continuing to rise. At this point it’s important to watch for signals that may indicate which direction the price is going to go. It combines price action theories with other indicators, mostly rejection bar candle patterns. Traders often place limit orders one or two pips ahead of the rejection bars to help manage risk.
The Drop ‘n’ Stop Trade is the opposite of the Pop ‘n’ Stop and is used to trade in bearish breakouts. Both these strategies are most commonly used when trading sessions open and volume is high.What is the Drop ‘n’ Stop trading strategy?
Like the Pop ‘n’ Stop, a Drop ‘n’ Stop happens when an asset falls out of its recent range and then appears to waver a little before moving in a clear direction. This movement can represent opportunity for traders if they enter and exit at the correct time.
Test your choice of strategy on our demo account
Before you start trading with your own capital, it’s important to test out a range of different strategies and tools until you’re confident that you’ve found the method that might work for you. As we’ve seen, that may depend on how much time you want to spend monitoring your trades, your general risk appetite and how comfortable you feel making quick decisions.
With FXTM’s demo account you can access the currency market completely risk-free, and practise under genuine market conditions. Everything’s real except for the (simulated) money!Open your demo account now to get started*
*Trading involves risk. You may lose your capital.
It’s not just forex trading that you can practise with an FXTM demo account. FXTM also offers you the opportunity to trade CFDs (contracts for differences) on commodities, major indices and shares. Trading CFDs gives you access to more financial markets, usually at a lower entry cost.
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The MACD is a popular tool that assesses the strength and direction of an underlying trend and helps flag a potential change in price ahead.How to use the MACD indicator
The MACD takes the difference between two exponential moving averages (using closing prices) – the 12-day EMA and the 26-day are the most commonly used. Then the “signal line” (a 9-day SMA of the MACD itself) is placed over the MACD. It’s called the ‘signal line’ because when the MACD line crosses it, it’s a signal to either buy or sell.
Crossovers – when the MACD line goes above the signal line, it suggests an upward trend meaning it may be time to buy. When it crosses below, it suggests a downward trend and it may be time to sell. Similarly, when MACD crosses above the base line, an upward direction is assumed and hence a signal to buy. On the other hand, when the MACD falls below the base line, a downward direction is assumed and hence a sell signal is generated.
Divergence – this is when the price line goes in a different direction from the MACD. It suggests that a trend might be about to reverse and therefore can help traders pinpoint opportunities.
Dramatic rise – when there’s a stark difference between the slow and fast EMAs (meaning a steep incline in the MACD line) it’s a signal that the asset is overbought.
Like the MACD, the Parabolic SAR is another trend-following indicator, meaning it helps you buy when a trend is up and sell when it’s down. It is displayed as a series of dots either below or above the price bars (depending on the direction of the trend) and is calculated using the most recent highest and lowest prices and an acceleration factor.How to use Parabolic SAR
Essentially the Parabolic SAR makes it easier to see uptrends (when dots are below the price) and downtrends (when dots are above the price). This indicator is useful for making the current price direction clear and suggesting potential exit and entry points. Signals are generated when the dots swap from above to below the price. It’s best for gauging momentum in the short term only and therefore likely to be most helpful for day traders.
The stochastic oscillator consists of two lines (called %K and %D) and measures an asset’s closing price against the high and low ranges of its price over an adjustable period of time. The typical period of time is usually 14 periods, but you can alter this to reduce or increase the indicator’s sensitivity to the market.How to use the Stochastic Oscillator
It was originally designed to help track the momentum and speed of price, but it is more often used now to alert traders to overbought or oversold conditions. When the lines are above 80, an asset is thought to be overbought (and the trend likely to reverse so traders should sell) and when they are below 20, an asset is thought to be oversold (so traders should buy).
Like the stochastic oscillator, the relative strength index is another range-bound indicator that can help traders pinpoint overbought and oversold conditions. It analyses the price of an asset over time by comparing average gain to average loss over a set lookback period. Patterns can be spotted using the RSI that won’t appear on the actual price chart.How to use the Relative Strength Index
If an asset’s price goes above 70, it is considered overbought. If the RSI goes under 30, it is considered oversold. The 50 mark is also generally used to confirm a trend (over for a bullish trajectory and under for bearish).
Bollinger Bands, at their simplest, measure a market’s volatility. This indicator is made up of two lines (which track standard deviations) that enclose the price bars, and a simple moving average line in the middle. The outer lines expand and contract according to how volatile close prices are.How to use Bollinger Bands
There are several patterns that some traders find helpful for forecasting market movements. In a steady market, the upper and lower bands tend to act as support and resistance levels, encouraging prices back towards the middle in a phenomenon known as the ‘Bollinger Bounce’. When prices ‘walk the band’ (rising or falling to the upper or lower band and continuing to stay there), it can be taken as a sign that the trend has strong momentum and is likely to continue in the short term.
The Ichimoku Kinko Hyo is designed to be an all-in-one indicator and is supposed to give traders all the information they need in one glance. Because it is made up of five lines, it can be hard for novice traders to read at first. It measures momentum as well as forecasting zones of support and resistance.How to use Ichimoku Kinko Hyo
The five lines (tenkan-sen, kijun-sen, senkou span A, senkou span B and chikou span) are calculated using the highest high prices and the lowest low prices of different lookback periods. The lines show different key levels of support and resistance, as well as signals for reversals and tactical places to plot your stop loss points. Despite its design as an all-in-one indicator, most experts recommend using other forms of technical analysis with it.