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Top Forex Trading Strategies That Actually Work

Trading in forex, you will come across several forex trading strategies -- some more complex than the others. It is immensely crucial to start forex trading with the right strategy. Some new traders get into trading with just guesswork and they may even get some beginner’s luck on their way, but there are only so many lucky guesses you can make. To see long-term profits, you need a well thought out trading plan. Moreover, a strategy that works for one person may not work for others. Every forex trading strategy is unique and leads to different results based on the trader’s investments, personality type, resources, and initial investments. In this article, we’ll discuss the best forex trading strategies for beginners to help you create the ultimate forex trading plan:

What is a forex trading strategy?

A forex trading strategy helps you in deciding when you should sell or buy a particular currency pair. It takes into consideration the different factors like your time horizon, risk appetite, trading style, historical data of the currency pair, and more. The strategy is made of several trading signals or ideal market price points that trigger the entry and exit decisions of the trader in foreign exchange trading.

Basics of a forex trading strategy

You can devise your forex trading strategy manually or through automated systems. A manual forex trading strategy is where you (the trader) use a trading platform to manually look for market signals for placing buy or sell orders. On the other hand, automated systems allow you to develop several algorithms that work on your behalf to find market trading signals and execute buy or sell trades accordingly. In automated systems, you choose your trading parameters based on which selling and buying decisions are taken. After you create the rules and conditions that you wish to apply to your trading, the algorithms apply these conditions to place trading orders on your behalf. There are two basic components of all forex trading strategies that you must know –

Risk tolerance

Risk tolerance refers to how much risk you are able and willing to take. The level of risk tolerance helps in determining a trading strategy suiting an individual trader uniquely. For example, if your risk tolerance is low and time-based, your trading strategy should be directed towards short-term investments with less volatility. However, if you have a high-risk tolerance, you can devise a trading strategy that includes long-term investments with enough volatility to reap profits in the long term.

Trading objective

One of the most important components of your trading strategy is your long-term trading objective. A trading objective refers to your purpose of trading and your end goal. It defines your trading strategy and how you plan to time your trades, place orders, and execute the same.

Example of a basic forex trading strategy

Assuming your trading strategy is set for the long-term timeframe with a risk tolerance that is equal to $1,000. Your trading strategy includes a trading objective of gaining $500 every month by trading currency pairs near major financial news announcements. Assuming that you expect the interest rates in the US to increase compared to Australia due to a sudden economic shift in the American economy, you buy more USD/AUD since the increasing interest rates in the US compared to Australia will increase USD’s demand and USD/AUD will also increase. The currency pair is currently trading at 1, and you buy 500 units of the same for $500. After a few days, the interest rates in America increase and the exchange rate increases to 2.3, reaping you a profit of $650 [(2.3-1)*500] and satisfying your trading objective through a successful trading strategy.

The top forex trading strategies to boost your profits

1. Range trading strategy

Range trading in forex is when you trade between the low and high prices of the currency pairs in a given period. You identify the support and resistance levels of the currency pair and place your trades around these levels. Here is how the range trading strategy can help you –

  • During a resistance level, identify an overbought currency pair, which has hardly any more buyers left and its trend is likely to reverse with a falling price soon. Exit the market by selling the currency pair before the prices start falling, which could result in losses.
  • During a support level, identify an oversold currency pair that currently has a supply higher than the demand, and it's likely to witness a trend reversal wherein the prices will stop falling and start increasing. Enter the market by buying the currency pair and profit from the uptrend.

2. Position trading strategy

A position trading is a long-term strategy where you hold onto a strong currency pair’s position for a long period of time in order to benefit from long-term gains. When you hold a currency pair for a long period of time, you give the pair enough time to move in the market and increase your profit opportunities. The longer you hold onto the position, the higher the chances for the prices to move up in a volatile market condition. Minor market fluctuations do not influence this strategy as it is conducted with an aim to focus on a long period of time, like months or years. To benefit from this strategy, you should keep a close eye on central bank monetary policies, cyclical trends, and the political developments in the economy. Here is how you can profit from the position trading strategy–

  • Wait for the currency pair’s market prices to improve over a couple of months or years and identify the resistance level. As soon as the price reaches the resistance level, exit the market to gain profits.
  • In the opposite situation, in the case of price expansion in the long-term, identify the support level of the currency pair. Enter the market by buying the currency pair right before the support price to benefit from the rising prices later.

3. Price action trading strategy

The price action trading strategy enables you to analyse and understand the market situation and make decisions based on the currency pair's actual and current price movements. Since it involves studying the recent and historical currency pair prices, it acts as one of the best trading strategies for finding the right buying and selling opportunities. The strategy can be used in all sorts of time frames, from short to medium and long. Here’s how you can trade with the price action trading strategy –

  • When the stock follows an uptrend over a period of time, buy more of the currency pair to reap more profits.
  • If the currency pair prices face a downtrend, it is best to exit the market to avoid further losses.
  • Set a ceiling and flooring price when the market is less volatile. If the currency pair price falls between the floor and ceiling price, you can make decisions considering the floor and ceiling prices as support and resistance price levels respectively to find the ideal entry and exit signals.

4. Swing trading strategy

Swing trading strategy is about speculating a currency pair movement over a couple of days or months to benefit from an anticipated price swing/move. The currency pair is held for a few days or even months with an aim to profit from the future price swings. You can pick the top price move or the bottom price move and enter into buying or selling positions accordingly. This strategy aims to capture the most from a price move, especially in volatile markets. It involves identifying when the currency pair prices are most likely to move, keeping in mind the market sentiment and ongoing economic/financial news if any. You mitigate any short-term risks and weekend downtrends when you hold a trade position with this strategy. Instead, you expose yourself to mid-term gains, which, when made consistently, compound into incredible annual returns.

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5. Scalping trading strategy

Scalping refers to buying and selling of the forex currency pair with small price gaps. It is mostly used by traders who only want to hold a currency pair for a brief time to make quick profits. This eliminates any risks associated with market reversals, which makes this forex day trading strategy best suited for traders who do not like to wait for more extended time periods to earn profits. The scalping trading strategy works best in a volatile market where traders look for constant fluctuations in smaller increments. With this strategy, you buy and sell currency pairs within a few minutes to take advantage of even the most minor price moves.

6. Trend trading strategy

During trend trading, you determine if the currency pair price is following an uptrend or a downtrend. Once the trend is identified, you can choose to either exit the market or enter the market to maximize profits. The trends are generally highly affected by interest rates, economic stability, government policies, and inflation. Here is what you do once you identify the market trends –

  • If the currency pair is facing an uptrend, it's a buying signal, and you should enter the market since the prices will most likely continue to increase.
  • A downtrend gives a selling signal, and you should exit the market to minimise losses since the prices may continue to decrease.
  • When the markets do not follow a particular trend, that means they won’t go up or down in a prolonged period of time and you should wait.

7. Carry trade strategy

A currency carry trade in the forex currency exchange market involves borrowing (or buying) money from a currency with a low interest rate to short (or sell) a currency with a high interest rate. The low interest rate currency is called funding currency, and the high interest rate currency is called the asset currency. It follows the ’buy low, sell high’ rule, which means you buy a currency with the lowest interest rates and sell the one with the highest interest rate to benefit from the spread between the two rates. Here is how you benefit from the carry trade strategy –

  • As soon as you receive some news about a particular country’s central bank that is planning to decrease interest rates, you should buy more of that currency pair to maximize profit till the time interest rates are still high. Then, you should fund the currency pair with higher interest rates and sell it off to benefit from the higher rates.
  • If you receive a piece of news about a country’s central bank increasing its interest rates, you should sell the currency pair to avoid any losses before the interest rates fall.
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8. News trading strategy

News-based trading takes advantage of the repricing of currency pairs due to a news event. Right after a big news announcement, there is almost always a sudden change in the currency pair prices. Experienced traders can use this strategy to buy or sell the affected country’s currency pairs immediately after key news launches. This strategy is considered one of the most advanced forex trading strategies since it requires a close look at the news and the markets simultaneously. You need to closely monitor economic calendars and data for critical new releases if you want to benefit from news trading strategies. It is also advised to watch a market critically before the news breaks out in the media and determine the ideal support and resistance events, as that would help you to react swiftly after the news announcement. Here’s how you can trade with the news trading strategy –

  • Let us consider a forex trading strategy example of an increase in foreign direct investment in the US. This would positively impact the currency pairs that include US Dollars (let us consider GBP/USD). The news announcement would make you immediately buy as many GBP/USD as possible to maximise profits.
  • Similarly, in the opposite situation, let us consider a major economic downturn or political instability in the US. This would negatively impact the GBP/USD currency pair, and the news announcement will give you a heads up to sell as many GBP/USD forex as you have as soon as possible to avoid the losses.

How to create a forex trading strategy

1. Understand the type of trader you are

Before delving deeper into creating a trading strategy, you must understand what type of forex trader you are and your trading personality. Then devise a trading strategy that will suit your trading style the best and reap successful results. Assessing factors like your trading frequency, risk tolerance, end goal, market expertise, control on emotions will help you better understand your trading personality, based on which you can create your own trading strategy.

2. Choose a timeframe

You can decide if you want to choose fast (minute or hourly charts), medium (weekly or monthly charts) or slow (yearly charts) timeframes based on the questions you ask yourself above. This will help you categorise yourself into a short-term trader (forex day trading or scalping), a medium-term trader (swing trading) or a long-term trader (position trading).

3. Decide the market conditions you want to trade

Different strategies suit different market conditions. For instance, a trading strategy that you have already devised for a trending market may not work for a range-bound market or breakout market conditions and vice versa.

  • A trend market condition refers to a situation when the market is either moving in an upward or downward direction for a long period of time.
  • A range market condition refers to a situation in which the currency pair prices fluctuate between their high and low price.
  • A breakout market condition refers to a situation when the currency pair price either moves above its resistance price or below its support price.

4. Define your market triggers and set up

The market set-up refers to the favourable market condition that you want to occur in order to open a trade. It can be a market condition when prices are increasing, falling or moving sideways and helps you understand the right time to enter or exit the market. Triggers are the potential entry or exit points that tell you to buy or sell trade finally. An entry or exit trigger is also the technique that you follow to place the trades. This technique can help you enter or exit the market through candlestick patterns, oscillators, bar charts and more. When deciding on an exit trigger, also choose the stop-loss order that will help you minimise trading risk when things do not go your way.

5. Test your strategy

The last step is to test your trading strategy after noting down the trading rules that you will be following. A trading strategy can be tested by recording trades and applying the strategy to the historical price movements of the currency pair to check if the signals that your strategy provides match the market’s direction.

How to choose the best forex trading strategy?

  • Select the timeframe between a 15-minute chart to a yearly chart that suits your trading style the most.
  • Find the position size you want to trade and set the maximum risk you can take for each trade.
  • Identify how frequently you wish to enter new positions in the market.
  • Match all the above three elements with your trading objective so that everything aligns before you start trading.

Utilise these trading strategies today to maximise your profits in forex

Using the top trading strategies can enable you to make successful trades in the forex market. It helps in identifying the ideal entry and exit points and allows you to maximise profits and avoid losses to a great extent. Without trading strategies, it is not easy to sustain in the forex market. It is best advised to test trading strategies with smaller trades initially and then work your way up with more significant invested amounts once you gain complete confidence in the performance of the strategy. Blueberry Markets is a leading forex broker in Australia that also offers you the right tips, strategies and help you become a successful forex trader today. Sign up for a live trading account or try a risk-free demo account.

Frequently Asked Questions

Which forex trading strategy is the best?

The right strategy for forex trading depends a lot on your requirements, budget, mindset, resources, and market condition. There is no one right strategy that can work in all situations. That is why it is best to be informed about the top forex trading strategies so that you can use the right ones at the right time.

Is there a 100 percent forex trading strategy?

No, there is no 100% winning forex trading strategy. The only way to avoid loss is by not trading at all. However, combining a few trading strategies works wonders!

How to start forex trading in Australia?

It is easy to begin trading in Australia since it is entirely legal. You can start by signing up on a reliable and leading forex trading platform and get started right away.

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