You cannot find a trader that consistently makes money trading Forex pairs and doesn’t have a trading strategy. The biggest mistake novice traders make is to trade without any plan, with the only goal to double their investment overnight and buy a Lamborghini at the end of the month.
Trading strategies do not have to be complex. In fact, learning the technical side of profitable trading is not that difficult. Once novice traders become proficient with using trading strategies, they are challenged with human emotions. Developing the discipline to follow your trading rules is the hardest part of trading profitably.
The tried and true way of making a lot of money in trading is to show consistency. When you are a consistently profitable trader, it’s easier to find investors or reinvest your profits and grow your trading balance. Top forex traders that earn the most are the ones that have significant investment funds under management.
The best Forex strategies give traders an edge, which is vital in making money consistently. Anyone can make money placing a single order, however, very few traders manage to make money consistently from trading CFDs. In this guide, we’ll discuss some of the best strategies to trade Forex that are easy to grasp and use in your trading. Remember, simple doesn’t mean easy. In trading the true challenge comes when fighting greed, fear, hope, boredom and doubt.
Important factors to take into account before using trading strategies
- Treat trading as a business
- Do not invest money that you cannot afford to lose
- Profitable trading requires hard work
- Trading requires upfront investment
- Having the best strategies for Forex trading doesn’t guarantee success
- Trading takes time to master
- Trading is the best way to compound, reinvest your profits and grow rich gradually
- Investing attracts various scammers. Avoid taking advice from people that promise doubling your capital overnight
Top Forex trading strategies
There are various trading strategies available in Forex trading. We’ve picked some of the best trading strategies that fit different personalities and different market conditions. The best way to approach these strategies is to test each one of them using a demo account, backtest them, or use micro trading funds to test them live. As a result, you’ll be able to find the ones that make the most sense to you and fit you best.
Trend trading strategy
Trend trading strategy is all about identifying trends and joining them. The idea is that the fact that the price has been in a trend, makes it more probable that the price will continue moving in the same direction.
Trend trading is not as complex as trading pullbacks and reversals. And therefore, trend trading strategies are equally useful for novice and more seasoned traders. It’s not recommended for beginner traders to trade against trends.
Professional traders are generally using two ways to trade trends: simple trendlines and moving average indicators. Note that the moving average indicators are great for trading trends, however, if market conditions change and start ranging, you will get a lot of false entry signals.
Traders get entry signals when price reaches and fails to break trend lines. While entries are obvious, exits are often based on price action. For example, if a trend is too strong, it will be a bad idea to exit and lose the potential higher rewards. The same trend lines can be useful for identifying reversals. When the trendline gets broken, it is a sign for exit.
Trend trading strategies can be accompanied by volume indicators. A strong trend is usually led by increased activity in the markets, which can be seen by observing volume. Decrease in volume might be an indication of lost interest in the instrument and can result in reversal.
Range trading strategy
The idea behind range trading is that when price is moving between certain support and resistance levels, traders can go long when price drops near support and close positions when price gets closer to resistance.
Similarly, traders can short when price reaches resistance and take profits close to support. What’s great about range trading is that it gives amazing risk to reward ratios to traders and is highly affective. The more touching points the trendlines have, the stronger support and resistance lines are, and the probability of the trade ending the predicted way is high.
Range trading is one of the highly popular trading strategies. What’s more, it’s very simple to trade. Traders use simple support and resistance trendlines or oscillator indicators to trade ranging markets. Oscillator integrate volume and often show overbought and oversold conditions. When markets are overbought, the probability of price turning downwards increases. When indicators show oversold conditions, it indicates that price has good probability of going upwards.
Using simple trendlines to trade range is simple, yet super effective. The reason these simple techniques work is that they are widely used, make total sense, and traders generally avoid placing orders against strong levels. However, breakouts may still happen. When price breakout from range, the market conditions change.
Price action trading
Price action trading is known as naked trading. Traders that trade price action, avoid using technical indicators and rely on how prices act on the charts. For many traders, price action trading makes perfect sense.
Price action traders can use candlesticks and price patterns as well as trendlines to find entries and exists. However, their main focus is on how prices act. For instance, if prices move gradually and trending step by step, you need to utilize different strategies than when price action is filled with high volatility.
Naked trading helps especially novice traders get a better feel of the markets. Prices seem to gather around significant levels, make false or real breakouts, move in waves, reduce volatility and increase spreads around less active trading hours and so on. A bunch of indicators and patterns are not particularly useful in helping understand these processes.
Position traders are the ones that plan their trades well and trade their plans. Trading is about getting losing and winning trades. Profitable trading means that the winning trades cover for the losses and increase trading account balance.
If you are someone who hates losing and is completely up for waiting and waiting for the best trading opportunities, position trading is for you. The fact that position traders make more successful trades doesn’t mean they are better at profitability, as other strategies are focused on placing lots of orders. For instance, high frequency traders might place hundreds of trades per day.
Position trading might be more challenging for novice traders as it requires understanding fundamentals and how they affect currency prices. Position traders are analyzing trade deficits, interest rate decisions, building permits, inflation, employment, manufacturing, main indices and so on. Usually position trading is long term, however, it might also be concluded within a trading day.
Day trading strategy
Day traders open and close trades within a day in order to catch market moves during the most active trading sessions, such as London and New York. What’s best about day trading is that the trading activity is not charged by swaps (swaps are interests charged for keeping positions active overnight).
Day trading strategies include high frequency trading, scalping, news trading and any other form of trading that concludes within a trading day. High frequency traders are typically using trading algorithms to automatically place multiple trades in the markets. News traders are focused on economic announcement. However, news trading can be dangerous as reactions are highly unpredictable. Often, giant position holders place orders against their active positions to protect their investments from negative market announcements short term. The hedging and buy the rumor, sell the news tactics make news trading highly unpredictable. In fact, many technical traders avoid placing orders around major announcements.
Scalping and swing trading strategies
Both scalpers and swing traders are aiming to benefit from price swings, however, there’s a huge difference between the two. Scalpers are using shorter timeframes such as 5, 15 or 30 minute charts, whereas swing traders use hourly, daily, weekly and monthly charts.
Scalpers place much more trades than swing trades. The idea behind each is that price do not move as straight lines. Prices change as waves. Both strategies try to catch those waves. Swing traders are more calculative and base their decisions mainly on some indicators and mostly on fundamental factors. Scalpers base their decisions on local trends and mostly indicators.
Some traders mix scalping with other strategies to increase probability. For example, if you analyze the markets and conclude that the general trend is down, following scalping decisions might only be limited to opening short positions.
Trading breakouts is also highly popular. However, it’s important to note that there are many false breakouts in Forex. A false breakout refers to an event when prices breaks outside strong trendlines, takes out stop loss orders and momentarily returns back on the opposite side of the trendline.
False breakouts are the number one enemies of breakout strategy traders. The breakout strategy has an incredible risk to reward ratio as once these breakouts take place, they might reverse trends or start new trends from the ground up. Stop loss is usually placed below or above trendline, depending on the breakout direction.
The idea behind trading breakouts is simple. Traders place market and limit orders. And that’s how prices are created. Market orders are the order types that tell brokers to execute trades at current rates and in the current moment. Limit orders are only triggered when price reaches predetermined levels. Limit orders hold prices, market orders move prices. Support and resistance levels or areas are created because of the limit orders. Once the trendlines are breached, it means that the limit orders are taken over by market orders and prices have no or very little resistance toward making jumps toward the group of new limit orders.
Keep in mind that when breakout happens and the price starts testing the significant level that was just broken from the opposite side and fails, you get an even stronger level. For example, when resistance is broken and turned into a new support, or support becomes a new resistance, the probability of price respecting that level in the near future increases.
How to make yourself better at following trading strategies
Having the best strategies to trade Forex is only a one highly critical part of successful trading. The other part is the ability to execute trades according to these strategies.
The top Forex trading strategies usually give traders entry signals, stop loss targets and sometimes (but not always) take profit targets. Risk management, having proper expectations and preparedness are the things that traders need to figure out themselves. Let’s discuss each in detail.
When starting out the trading journey, having proper expectations is essential for success. If your goal is to become a millionaire by investing a thousand dollars, you will probably take huge risks and blow up your account. The same is true for using trading strategies. Not all trading strategies work in different market conditions. The best Forex strategies experience drawdown periods. If you are expecting your strategy to work all the time in any circumstances and notice that it fails to deliver, you’ll get it rid of and start looking for other strategies. In fact, the key to success is finding the strategies that best work for you. And manage drawdown periods.
When trading strategies underperform, there can be two major reasons: market conditions have changed temporarily or market conditions have changed permanently. The best way to find out if the strategy is still profitable is to reduce trading sizes or turn to demo trading all together. The main reason why traders blow up their account is that they do the opposite. Instead of reducing trading size or trying to improve the strategies, they increase trading sizes in, hoping to return the money that was lost during the drawdown periods. Adding to position sizes when trades are not profitable is a terrible idea and the fastest way to losing trading capital.
Getting prepared to start trading journey
Profitable trading requires preparation. Even if you have the best strategy for forex that fits you, you’re not going far if you’re ill prepared. You don’t need 6 computer screens and private analysis to become a consistently profitable trader, however, it’s important to have a trading desk where you can focus. A single decent computer screen is enough to conduct an analysis.
Trading is not gambling. If you treat trading as a way to gamble, you will lose money. Trading without a plan or working strategy is gambling.
Trading is not a job, either. You should not expect to receive a steady paycheck at the end of the month. If you plan to pay bills from the profits made from trading, you should have an emergency fund for such occasions. As trading is like running a business. Yes, there are profitable months, but there are also periods of drawdown. You do not want to find yourself in a position where you have to make money in the market. Forex market doesn’t care about your financial situation. When you are trading out of need and desperation, you will most likely open traders that are not worth the risk and lose money.
When using the top Forex trading strategies, proper risk management is essential. You can’t find strategies and setups that predict future market action with 100% accuracy. Consistency in trading is based on probabilities. When traders fail to manage risks, they take oversized positions and put everything on single trades. When a trading position is oversized, you might win or lose a lot of money. If you lose and blow up your account, you are forced to stop trading. If you win and make a lot of money, you will most likely try again in the future. The more you place oversized orders, the more likely you are to blow up the entire trading account.
Professional traders only risk 1-5% of their trading capital per trade. This approach not only helps to help strategies work in the long run, they also help limit losses during drawdown periods.
In trading, some trades are winners and some go against your predictions. The key to success is to make more money when winning to cover the losses.
Top Forex trading strategies give traders a trading edge. Meaning, in order to see the results, it’s important to make numerous trades.
Managing human emotions
Having the best forex strategy is useless when a trader lacks discipline. Fear, doubt, hope, and greed are the four horsemen of trading. Expressing human emotions is counterproductive in trading. When a trader is influenced by greed, he or she might open oversized positions and break money management rules. Greed also leads to revenge trading and over trading. Instead of planning trades and trading plans, revenge traders are impulsive and open positions that are not worth the risk.
When a trader is doubtful, he or she will throw away the trading strategy the moment of drawdown period. Fear prevents traders from opening new positions even when the trading setup is perfect. If you are hoping that the price will reach the certain point, it means you are ill prepared. These emotions have nothing to do with reality. The markets do not care how you feel. Decisions should be based on facts and analysis and not on feelings.
Another thing to consider is to avoid trading when feeling sick or tired. Sometimes it’s best to avoid placing orders when not feeling well or in the mood. Profitable trading requires a great deal of focus and precision in execution.
Moreover, if you are a swing or a position trader, you will not see as many trading opportunities as scalpers and shorter timeframe traders. Trades made by position traders have a high success rate, as they spend a great deal of time on planning their trades and looking for trading opportunities. However, when a trading opportunity is not presented for a couple of days, boredom and feeling unproductive might make traders open positions. Trading due to boredom is a terrible idea and will lead to losing money.
Create a trading journal
Creating a trading journal is also highly recommended when using the top forex trading strategies. Trading journals help traders to learn from their own mistakes and improve trading strategies. As we’ve already mentioned a multiple times, the best strategy for forex is the one that fits your personality. Forex market is dynamic. To get the best forex strategy, you should constantly try to make improvements.
Trading journal should include trade specifications such as entry price, exit, stop loss, take profit, market conditions and your emotional state. When you are using top forex trading strategies, you’ll be able to look back and check which strategy works best in uptrend, downtrends and ranges. What’s more, some strategies work best for certain currency pairs. Most professional traders use trading journals to their advantage.
The main takeaways
To sum everything up, top Forex trading strategies give traders an edge and make decision-making easier. However, true challenge comes from human emotions such as greed, fear, hope, boredom and doubt. Some of the best trading strategies that even beginner traders can use are: Trend trading strategy, Range trading strategy, Price action trading, Position trading, Day trading strategy, Scalping strategy, swing trading and Breakout strategy. Each strategy needs certain market conditions to be used affectively. In addition, there are various indicators developed for trading each market conditions. Trend trading strategy can be used in combination with moving average indicators, while Range trading strategy can be used in combination with oscillators. The best strategies to trade forex give traders an edge and in order to let that edge bear fruit, it’s important to have proper risk management. Keep in mind that having the best forex strategy doesn’t guarantee profits. In addition to the strategy, you need to manage your risks and emotions. Use trading journals to eliminate mistakes. And treat trading as a business journey.
FAQs on the best Forex trading strategies
What is the best FX trading strategy?
The best strategy to trade Forex is the one that best fits your personality. There are various types of traders and there are a million ways to make money in the market. What works for one trader, might not work for the other. That is why it’s highly critical to test different strategies before going live. Some of the best and easiest strategies to follow are:
- Trend trading strategy
- Range trading strategy
- Price action trading
- Position trading
- Day trading strategy
- Scalping strategy
- Swing trading
- Breakout strategy
Does the best forex trading strategies really work?
The best trading strategies work when they are traded properly. For instance, in order to use trend trading strategies, the market needs to be in a trend. If you are using this strategy when the market is in a range, you will get a lot of false signals. What’s more, traders need to have discipline to overcome human emotions. Having a profitable strategy is only a one essential component for successful trading. Trade management and self-management are equally critical.
What are the best FX trading strategies for beginners?
Trend trading strategies and Range trading strategies are one of the best strategies for beginners as they do not require learning complex patterns and use of complex indicators. The strategies can be traded using simple trend lines and indicators. Keep in mind that trends are traded using moving average indicators and ranges are traded using oscillator indicators.
Is FX trading strategy the most important in trading?
Having a trading strategy that gives you an edge is essential in trading. However, it’s not the only thing that can help you profit in the markets long term. You also need to master risk management and manage your emotions. What’s more, trading strategies need to be a part of your personality in order to work. One strategy might be highly profitable for one trader and completely useless for another.
Can I develop my own trading strategy?
Yes. You can modify existing strategies to better fit your personality, or develop new strategies from the ground up. Remember that the most important thing to take into account when creating a strategy is the trading edge. Your strategy should guarantee account growth after a number of trades. You can also create specific trading strategies for certain markets. It’s a known fact that every currency pair and trading instrument moves differently on the charts. It’s best to learn about as much as you can about your trading instruments before trading them.