Identifying top forex strategies is considered to be one of the most significant aspects of forex trading. A forex strategy is a trading technique that forex traders use to determine whether to buy or sell currency pairs in the forex market. However, there is no such thing as the “best” forex strategy, and not all forex trading strategies are the same, or even effective in all situations. Understanding the market and honing your trading strategies are essential, not just to succeed in a trade but also to succeed in the long run.
The importance of having an effective trading strategy
Participating in forex trading gives you the opportunity to take part in a global marketplace that has tremendous potential. In fact, forex has become so popular with day traders that it has gained a reputation for turning quick profits. In truth, it’s just as complicated and competitive as any other market in the world. Trading strategies are essential for keeping a trader focused and disciplined in a highly competitive market like forex.
A good forex trading strategy is typically based on market analysis with sound risk management techniques.
Despite the fact that there are a variety of ways to trade forex, it is imperative that you choose an effective trading strategy that is appropriate for your level of experience, goals, and context. In this article, we’ll outline the benefits, drawbacks, and basics of popular forex strategies to help you find the right one for you.
How to Choose the Best Forex Trading Strategy?
Before engaging with a particular strategy, it is wise to identify the type of trader you are. There are three main aspects that should be considered while choosing an effective forex trading strategy.
- Time Frame: Choosing a suitable time frame that suits your trading style is very crucial. In forex, trading on a 15-min chart is completely different from trading on a weekly chart. If you prefer the scalping trading style and benefit from smaller market moves, then you should focus on the lower time frames. You should go for the daily and 4-hour chart if you don’t mind keeping your trades a little longer. So, before choosing your trading strategy, make sure to answer this question; how long do I want to stay in a trade?
- Lot Size: deciding the proper trade size is a major decision that you should consider before setting your trading strategy. Successful strategies in forex trading require strict risk management discipline so you don’t risk more than you can afford. In this regard, you can set a risk limit at each trade. Some traders usually set a small percentage to risk-on trades. This means that if you set a 1% limit, you won’t risk more than this percentage on every single trade. Another good piece of advice is to consider lowering the number of trades if you decide to use bigger trade sizes or vice versa.
- Trading Frequency: How frequently do I want to open trades? That’s an important question you should ask yourself before choosing the best strategy. If you decide to open a higher number of positions, then you should focus on a scalping trading strategy. On the other hand, if you are one of the traders that rather focus more on the fundamental background and deeper price analysis, then your trading strategy should be based on longer time frames and bigger positions.
There is no universally applicable trading style when it comes to forex trading. Some forex traders rely heavily on market news and fundamentals for their trading decisions, while others use technical analysis indicators only. The reason for this is that all of us are different personalities with different perspectives and approaches in various areas of life, and trading in financial markets is not an exception to this rule.
So, what are the top Forex Strategies in 2022?
1. Forex Scalping Strategy
This strategy suits traders who prefer short-term, or those who like to seize instant price movements. Forex’s scalping strategy focuses on accumulating small but frequent profits and trying to limit any possible losses. Despite the fact that these short-term trades would involve few pips price movements, when combined with high leverages, they can lead to significant losses if not executed carefully. So scalping is a short-term trading strategy that involves taking multiple small profits in a considerably short time.
Forex scalping strategy is typically recommended for those who can devote their time to higher-volume trading periods and remain focused on these rapid trades. These are some of the periods when trading volume is at its highest:
- Between 8 a.m. and 12 p.m. GMT, both the New York and London exchanges are open
- 7.00 pm to 2.00 am GMT, when Sydney and Tokyo exchanges are open
- 3.00 am to 4.00 am GMT, when the Tokyo and London exchanges are open
Scalpers mostly prefer the most liquid forex currency pairs since they have the tightest spreads, allowing them to enter and exit positions more quickly. These are just a few examples:
- AUD/USD – 0.7pts minimum spread
- EUR/USD – 0.7pts minimum spread
- USD/JPY – 0.7pts minimum spread
Since scalpers typically enter and exit trades within a few seconds, they must be able to react quickly to price changes. Technical analysis and charts with shorter time frames are the main components of this strategy. Stochastic oscillators, relative strength indexes, and moving averages can also be helpful when analyzing price charts.
2. Day Trading Strategy
Forex day trading strategy is another short-term strategy that includes holding trades during a particular trading session. Day traders do not take overnight positions and close all trades each day which typically reduces exposure to market movements when the trader is inattentive to the market. Although it is applicable in all markets, the day trading strategy is mostly used in Forex trading.
To minimize the risk, no position should stay open overnight. Day traders usually remain active over the day monitoring and managing opened trades. The preferred time frame for this strategy is 30-min an 1-hour time frame. Day traders also tend to set a daily risk limit, besides setting one for each trade. This step is crucial to protect your account and capital.
However, this strategy requires more time to monitor the prices and the trades, as well as a good understanding of how the daily events could affect the pair you’re trading. Major economic news can easily affect your position. But if you prefer trading for shorter periods but are not comfortable with fast-paced strategies with multiple trades, day trading is an alternative strategy that can suit you better.
Top technical indicators for day trading:
Forex day traders require a deep understanding of chart types and technical indicators. Since day trading occurs over a short period of time, it is necessary for traders to have the ability to read charts efficiently and accurately in a shorter amount of time. Indicators that can be used on forex day trading charts include:
- Fibonacci retracements
- Simple moving average (SMA)
- Bollinger Bands
- Stochastic Oscillator
- Relative strength index (RSI)
Forex day trading success depends entirely on knowledge, research, training, and experience. Traders cannot think like gamblers if they want to succeed. Forex day trading involves serious risks. Here are some tips on how to make a living by Forex Day Trading the right way.
3. Swing Trading Strategy
This one is for traders who prefer a mid-term trading style where positions can be held only for several days. It is based on the idea of making a profit out of changes in price, by identifying the swing highs and swing lows in a trend. For this strategy to be successful, price movements need to be carefully analyzed in order to identify when to enter and exit the trade. Although this strategy saves time by not having to closely watch markets during the day, it does leave you at risk of any disruption that may occur overnight, and sometimes price-gapping.
Top Technical indicators for swing trading:
- Relative strength index (RSI)
- Simple moving average (SMA)
- Moving average convergence divergence (MACD)
Forex swing trading strategy is ideal for people with full-time jobs or students with plenty of free time to keep up with global economic trends. Fundamental or technical analysis can be used by swing traders to predict whether a particular currency pair will rise or fall in price. If you want to succeed at swing trading, you must remain calm and believe in your analyses.
4. Position Trading Strategy
Position trading is a long-term trading strategy. Unlike scalping and day trading strategies, the Position trading strategy is primarily focused on fundamental factors. This strategy does not consider minor market fluctuations as they won’t affect the broader market trend. Position traders monitor central bank monetary policies, political events, and other fundamental factors to identify price trends. This trading strategy is more suitable for patient traders as trades may take weeks, months, or even years.
A successful position trader may open just a few profitable trades over the entire year as profit levels may be hundreds of pips away. This strategy is based on the belief that prices will eventually reach the expected levels over this long-term time horizon. Position trades can be held for a prolonged period of time. However, for it to be successful, three elements have to be in place:
- A well-planned entry
- A predetermined exit
- Risk management
Your position trading strategy can fall apart if you neglect to take into account any of these elements.
Top technical indicators for position trading:
- 50-, 100-, and 200-day Simple Moving Averages
- Moving Average Convergence Divergence (MACD)
- Bollinger Bands
Basic requirements for this forex trading strategy include large stop losses to avoid being hit by possible price fluctuations, sufficient investment capital, the ability to stay calm if the price goes against your trade, and finally a good understanding of the price fundamentals.
Advanced Forex Trading Strategies
The above forex trading strategies focus on variables such as time spent researching markets, monitoring positions, and duration of active positions. Your time will be split between researching markets and monitoring your active positions based on the number of positions you open and the time you give to trading. However, the following list includes trading strategies designed to simplify and streamline your trading process. So, here’s what you need to know!
1. Copy Trading — Follow the strategies of experts
Copy trading is a popular forex trading strategy popularly employed by inexperienced forex traders to make trading decisions without conducting their own research.
Copy trade enables inexperienced forex traders to make trading decisions without researching on their own by using a popular trading strategy. It is the process of emulating an expert’s trading activity. Trading copying trades has become increasingly popular as it offers traders with minimal experience the chance to profit. However, it is critical to select the best copy trade platform in order to achieve your investment goals and manage your risks effectively.
The Elements of Copy Trading:
- Money Manager – The Provider: the trader whose trading activity is being copied. Usually referred to as the signal provider.
- Follower – The Copier: the trader who is following and copying the trades of another investor. Often referred to as the subscriber.
How to Successfully Copy Trade:
Copying an existing trade can be done in several ways. A trader could, for example, copy all transactions, such as the trade entry, and the profit and loss orders. It is also possible to automate copy trading so that trades are executed automatically. Manual versions, on the other hand, allow traders to make their own trades. Using the manual version and employing one’s own discretion, one’s results should differ from the historical returns of a copy trader.
Copying successful traders can lead to high profits. Copy traders, however, are most likely to suffer from market risks. Traders can lose money if they copy unsuccessful strategies. Furthermore, volatile markets result in unstable conditions that expose traders to liquidity risk. Trading involves risks, so traders should understand these before investing. Don’t take risks you can’t afford to lose.
2. Forex Hedging — Hedge Currency Risks
Hedging is a trading strategy used to mitigate the risk of losing money on one investment by purchasing another one that performs in the opposite direction. Forex hedging allows a trader to minimize investment risks from potential market downturns. By hedging your trade, you protect yourself from losses caused by market fluctuations.
Hedging is used almost everywhere in practice. The use of hedging techniques is used by individual investors, portfolio managers, day traders, and various corporations to minimize their risk of exposure to a number of risks. Understanding hedging strategies will help you understand how investors and companies protect themselves, no matter what type of investor you are.
Hedging refers to protecting yourself from losing a lot of money by finding a way to do so. A hedge is best understood as a type of insurance. The purpose of car insurance is to protect you against the possibility of future losses.
Reasons to Hedge Forex Trades:
Making your trading plan more successful can be achieved by carefully choosing your hedges. Trading in the stock market should only be carried out by experienced traders who understand market swings and timing. Attempting to hedge without adequate trading experience could lead to quickly losing your account balance.
The following are some things you should know about Forex hedging:
- It’s not a magic trick that guarantees you profit no matter what happens in the market
- It helps protect your funds from future damage caused by adverse price fluctuations
The best course of action sometimes is simply to close out or shrink an open position. Hedge, or even partial hedge, may, however, be the best course of action in some situations. Based on your risk tolerance, decide what is most appropriate.