Forex trading strategies are those used by forex traders to determine whether to buy or sell a currency pair. Forex strategies can be based on many things - including fundamental analysis and technical analysis.
It’s also worth noting that markets move quickly and any trading strategy should be used alongside considered analysis and good risk management!
You can find out about different trading strategies below.
What are forex trading strategies?
There are many different strategies used by traders. Here are some of the most popular:
- Trend trading
- Swing trading
- Range trading
- Momentum trading
- Breakout trading
- Reversal trading
Firstly, in order to understand how to forecast trends to make profitable trades, it’s crucial you understand support and resistance - as this informs each trading strategy.
What is support and resistance?
In order to understand range trading, it’s essential you understand resistance and support.
In a chart with an upwards movement, the peaks before the graph line moves downwards again are called resistance - a price that a currency will likely not surpass. The troughs before the line moves up again is called support - a price that a currency will probably not fall below.
The red line below is an example of support:
And here you can see an example of resistance:
So - what causes support and resistance levels? When a price begins falling to support, traders selling this pair consider closing their positions as they assume there can be buying pressure, which might cause a reversal. Sellers closing their positions and buyers stepping in simultaneously can cause a price to reverse in these areas.
Resistance and support create ranges that traders will identify using technical analysis (read about this on our Technical Analysis blog), indicating that markets are unable to push beyond a specific high or low. To identify the range, a currency should have recovered from a support area at least twice and also have retreated from a resistance area at least twice.
It’s important to note that resistance and support levels can change - for example, if a price breaks through a resistance, that line will now be called support when it hits it to rise again.
How do you identify support and resistance levels?
Here’s the criteria you should look for (as identified by Wysetrade):
- Swing highs and swing lows (in other words: the highest or lowest points the price reaches during the time period)
- Multiple rejections of an area (in other words: when the price moves away from the swing highs or swing lows)
- Has acted as both support and resistance (in other words: where the line becomes both at different points)
- The move away from the area was significant (in other words: a significant jump away)
- Was recently respected (in other words: price has reversed from there in a recent time period)
Should you make a trade when you’ve identified the support and resistance levels?
Not so fast! It’s important to note that just because prices hit a certain area, that doesn’t mean you should jump into a trade. You should always wait for price action confirmation before considering a trade.
So how do you find this confirmation? Confirmation can come from time frame confluence - so you essentially want each time frame to be telling you the same thing. For example, if you have a bullish trend on the monthly chart you’re looking at, you want the same bullish trend reflected in the weekly chart too.
When drawing your support and resistance levels, work from the higher time frames and move downwards (for example: start with a monthly chart, then move to a weekly chart). This will make the bigger patterns easier to see.
The key thing to remember when drawing support and resistance levels is to keep it simple: less is more! Look at the big picture - it will be the most informative.
What is trend trading?
Heard of the phrase ‘the trend is your friend’? Well, this is trend trading: it involves predicting an upward or downward spiral in a currency price and placing trades according to these trends.
This is a relatively simple strategy - and so is ideal for beginner traders. Most traders use this method, and will look at recent trends to predict where currency prices are likely to move in the near future. They’ll look at a range of indicators, including moving averages and directional indices.
So - how can you find the trends when looking at a chart? To do this, draw a line across the peaks of the points. You need to ask yourself when trend trading if the currency pair trading higher or lower than it was in a given time period - for example, three or six months ago?
If the highs become lower and lower (therefore the line declines) this is a downward trend (known as a bearish trend). Or, if the highs become higher and higher (therefore the line inclines), this is an upward trend (known as a bullish trend).
You can see an example of a bullish trend below:
And here is an example of a bearish trend:
It’s worth noting here that strategies - like trend trading - aimed at ‘selling tops’ or ‘buying bottoms’ are methods of capturing the big wins, but come with a possibility of entering the market on a false high or low, so should be treated with caution.
What is swing trading?
Swing trading relies almost exclusively on technical analysis to identify where an asset’s price is likely to move next in order to profit from an anticipated price move. It operates on a risk/reward basis - the idea that you risk a little to make a lot (for example, risking $700 to make $12000).
Unlike other types of trading strategies, swing traders look only to capture a chunk of the expected price move, and then move on to the next trade. Put simply, it focuses on profiting from short market moves as opposed to longer term trends.
What is range trading?
Range trading is a popular strategy often used for currencies that are not usually subject to a lot of fluctuation and those in stable and predictable markets - in other words, currencies that aren’t often subject to surprise news.
So - when should you use range trading? This should only be used when you think that a currency will fluctuate between specific highs and lows. Like trend trading, range trading also involves identifying opportunities for trade exit and entry levels.
As with any form of trading, it’s important to note that range trading comes with risks - a currency will only fall between a certain high or low for so long.
What is momentum trading?
Momentum trading is based on the idea that a pattern in the increase or decrease of a currency is likely to continue.
For example, if you look at a chart and notice that a currency has been steadily increasing in value, momentum trading is based on the idea that this increase will continue, and so trades will be placed with this in mind. This will affect your decisions to buy or to sell.
You can see an example of upwards momentum (a bullish trend) below:
What is breakout trading?
Essentially, a breakout is when a price moves beyond a certain level or trading range. So breakout trading is entering trades when the momentum is in your favour and riding the trade until volatility dies down.
Here is an example of a breakout, where you can see in April the price broke through the resistance line:
What is reversal trading?
Reversals are what they say on the tin: the reversing of a trend. In a bullish market (uptrends), a reversal is a fall in price from an absolute high. In a bearish market (downtrends), a reversal is a rise in price from an absolute low.
The idea behind reversal trading, then, is entering a trade at these falling or rising points using a counter-trend methodology - and can be incredibly lucrative when done well.
For example, looking at the level of support and resistance below, the prices meet these areas and then reverse.
Should you withdraw or look to grow your account? Here’s the secret to increasing your profits…