Forex Trading Strategies That Work
To trade Forex, you need to cultivate two vital attributes—discipline and focus. Combine these with the right Forex trading strategies, and you’ll be on the road to mastering the market and achieving consistent profitability.
In this article, we’ll give you the Forex trading strategies you need to become a “sniper,” plus pointers on when and how to trade a currency pair. Every strategy works differently, depending on the circumstances. Once you test and scale, however, these can be leveraged to help build your trading profile.
Understanding the Forex Market
Trillions of dollars circulate in the foreign exchange (Forex) market every day. Different participants buy, sell, and exchange currencies to make a profit, including banks, trading firms, or individuals.
What makes the Forex market so accessible is that it’s not governed by a single market exchange. Instead, it’s operated by a global network of computers and brokers, meaning you can trade Forex from anywhere in the world. The brokers are the “market makers,” setting the bid and asking prices for every currency pair.
Any trader—even the ones without experience—can start trading via an online broker. The market opens Monday morning at 8:00 a.m. Sydney time and closes on Friday afternoon in New York. This gives you roughly 5.5 days to trade currencies.
That said, to ensure good returns, you need an effective trading plan. Read on for some Forex trading strategies that can help you generate profits consistently.
When the Forex market is stable, you’ll notice the graph moving within a range of low (support) and high (resistance) points. Sometimes, the market breaks out of range, causing the price point to oscillate below the support or above the resistance standard. This starts a trend, whereby the market creates either lower lows or higher highs.
Considering these trends, how do traders implement Forex trading strategies that realize a profit? Essentially, they look at the direction of the trend and decide when to enter the trade. This approach requires close monitoring of the charts. The key here is to get in as early as possible, then sell when the trend starts to reverse.
The above chart tracks the price movement of the Euro/USD pair over 30 minutes. Note the various downward and upward trends. To understand how to accurately plot the entry and exit points, you’ll need to learn these indicators:
- Moving Averages (MA) calculates the average price of a currency pair over a defined period. As such, a price above the moving average is considered an uptrend, while a price below the average is a downtrend.
- Average Directional Index (ADX) gauges the strength of a trend. While a rising ADX value indicates a strong trend, a falling index shows a weakening or range-bound market.
- Relative Strength Index (RSI) measures the speed and change of price movements.
Breakout Trading Strategies
Breakout trading involves identifying the support (lowest point) and resistance (highest point) levels on a price chart. Traders wait for the price to “break out” beyond these levels. Therefore, once the price breaches this barrier, volatility increases in the market and you can expect large price swings.
Generally, breakouts follow a “consolidation” phase—a period where the asset’s price doesn’t fluctuate much. Traders use the Moving Average Convergence Divergence (MACD) indicator to determine the entry and exit points.
Moving Average Convergence Divergence (MACD)
This is a versatile technical indicator that shows the relationship between two moving averages. Convergence occurs when the price of a currency pair moves in the same direction as the indicator. It’s a confirmation that the prevailing trend is likely to continue. By contrast, divergence signals a trend reversal.
This metric consists of two lines—the MACD line and the signal line. Traders look for instances where the MACD line and the signal line are about to cross over, suggesting a new trend.
MACD is a valuable tool for several Forex trading strategies. That said, it’s a “lagging” indicator, meaning it uses historical data. For this reason, it’s advisable to use the MACD along with other technical analyses to confirm breakouts.
Carry Trading Strategies
Carry trading is about making a profit from the difference in interest accrued by two different currencies. Here, traders borrow at a low interest rate from one currency (also known as the “funding currency”) and invest the funds in another currency that gives a higher return. In this scenario, you’ll earn the difference in interest rates between the currencies for as long as the trade is open.
Be aware that carry trading is not without its risks. Exchange rates fluctuate, and any adverse movement can offset your interest.
Range Trading Strategies
Range trading is a fairly straightforward strategy, based on the principle that the market moves between support and resistance levels. Therefore, range traders take advantage of tiny fluctuations—buying at the support level and selling at the resistance level.
Let’s say you’re trading the GBP/USD pair, which is at 1.2000. A range trader may sell this currency pair as the price moves up every 50 pips, and buy as it moves down every 25 pips.
Although risk is minimal, this strategy tends to generate only minimal profit as price movements in a range-bound market are quite low. Think of it like taking single runs instead of hitting a home run in a trending market. The best time to implement range trading is when the market’s direction isn’t clear.
Risk and Money Management
No trading market is 100% predictable. Forex trading strategies therefore rely heavily on risk management. A successful Forex trader knows how to accept and manage these risks, and takes steps to limit potential losses. For instance:
- Use stop-loss orders to protect your investment
- Diversify your trading portfolio
- Start with a small position size
- Use low leverage to prevent significant drawdowns
- Implement a risk-to-reward ratio of 1:2 or 1:3, where the potential reward outweighs the potential risk
Our funded traders have mastered risk-management techniques, enabling them to realize consistent profits.
Form the Right Trading Mindset
The secret to managing risk is training your brain to focus on a single trading strategy. This way, you’ll remain disciplined and objective in your trades. Yes, it can take months for an individual to develop this habit. However, in the long term, you’re preparing yourself for higher yields. Emotions such as fear and greed can lead to irrational trading decisions. That’s why it’s so important to learn discipline and have confidence in your strategy.
Perfect Your Forex Trading Strategies With The Funded Trader
Progressing from a novice trader to an experienced one calls for a careful and well-planned strategy to build a solid portfolio. It’s crucial to understand the different types of Forex trading strategies, how they play in the market, and how they’ll benefit your profile. Additionally, you should understand the risks involved and be sure to implement risk management strategies.
Ultimately, you want to prioritize discipline, objectivity, and mindfulness. Small, consistent wins will give you better results over time than an approach that’s all about chasing the next big win.
Learn the best Forex trading strategies from our funded traders. Join now to access our community.