Investing > Forex Trading Strategies

Forex Trading Strategies

Use forex trading strategies that work, and you’ll enter (and exit) the markets with a bang.

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Updated July 16, 2021

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The year 2020 has been a rollercoaster—but the trends set in forex then have continued to roll onwards.

Since the COVID-19 fallout began in March, forex trading volume has increased by 300%. Today, this is a market where around $6.5 trillion is traded globally every day—and everyone wants a piece of that ludicrously gigantic pie. 🥧

Millions have entered the market this year just in the US, and brokers are competing for their trust (and money). This competition has made the present moment a perfect time to start trading quickly and cheaper than ever. Seriously—most brokerages will give you a trading platform for $0.

If you have fire in your heart and want to make money for forex, that’s the most important thing. However, it’s also crucial to have a good strategy because not having one is like throwing your money into a well and waiting for those profits to start rolling in (they won’t).

To make choosing a strategy easy, we’ve made a list of the most popular trading tactics and separated them by how much time they take to implement and how risky they are. Some are very beginner-friendly and can make you your first profits today, while some take more time to master but will bring pure joy (and material gain) once you figure them out. Let’s check out a few forex strategies that work, and see which one is perfect for you.

What you’ll learn
  • What is Forex?
  • Forex Trading Strategies Explained
  • Popular Forex Trading Strategies
  • Start Trading Forex in 4 Steps
  • What You Have to Know Before Trading
  • Risks of Trading Forex

What Is Forex? 🤔

Forex stands for “Foreign Exchange” and it is a global currency marketplace. Traders from all over the world can buy and sell currencies here through their computers and make profits day in and day out by anticipating what’s going to happen in the markets.

The key to being a successful trader is knowing how to predict whether prices are going up or down. Knowing how to trade forex includes understanding charts, analyzing them, and paying attention to important global events—although, if you want to specialize in one area, you don’t have to know everything.

If you have the necessary knowledge, then you only need a starting capital as well as a good forex broker to invest through. When all of that is taken care of, the last piece of the puzzle is choosing a strategy that works—let’s see why this is so important.

What Are Forex Trading Strategies (and Why You Need One) 🛠️

You can approach the stock market without a particular strategy and just buy popular stocks and funds—likely, you’ll make a lot of money in the long run and everything will be ok. However, forex is not like that.

Exchanging currencies is all about noticing small opportunities and exploiting them quickly. Making these predictions is a pretty common and straightforward process—and it’s usually based on simple maths.

This image shows a happy young forex trader working on this laptop
Forex traders exchange currencies as their prices change to make a profit.

Don’t worry, you don’t have to be a mathematician—most forms of forex trading are relatively easy to get used to and that’s where trading strategies come in. Mastering a simple strategy will allow you to make correct predictions and profit most of the time unless a black swan event like COVID-19 happens.

But even then, if you can adapt quickly, you will make an even greater profit. Randomness and chaos affect all traders, and the more confused they are, the more opportunity you have to strike gold.

One more huge benefit of knowing about strategies is that all traders use them. If you know how these tactics work, you know what the forex people of the world are thinking—this way, you will know what they’re going to do in advance and you will be prepared.

🇺🇸 Are you in the US? Take a look at our report on the leading forex brokers in the US.

What Are the Best Forex Trading Strategies?

The best strategies are those that work, have always worked, and will continue to work in the foreseeable future. We will now list and explain these strategies and rate how beginner-friendly, time consuming, and risky each one is. Hopefully, you’ll be inspired by one or two and may even start making profits soon. Let’s see what these are:

  • Range Trading
  • Trend Trading
  • Position Trading
  • Day Trading
  • Forex Scalping
  • Swing Trading
  • Carry Trade
  • The 50 Pips a Day Strategy

1. Range Trading ↕️

This strategy consists of looking at a price chart and finding the so-called resistance and support lines. You can make a resistance line by looking at the highest price points over a certain period and connecting them with a straight line. 

Thus, the resistance line will represent the highest usual price—everything that goes beyond it is a bubble and it means you should sell as you won’t get a better price anytime soon. You can think of a resistance line as an upper price limit of a currency pair—if the price goes beyond it, that means that traders have overbought and that the price will drop very soon.

The support line is just the exact opposite of the resistance line. You just take all the points on the chart where the price dipped and draw a straight line through them. If the price goes below this line, it means that traders have oversold and that it’s prime time to buy your currencies while they’re cheap.

Graph showing support and resistance lines in range trading
Support and resistance lines in range trading. Image by TradingView.

As you can see from the bottom part of this graph, the blue boxes represent peak prices and the red ones represent bottom prices. Once you find the usual top and bottom points, draw lines through them and treat everything that falls outside your two lines as a perfect buying/selling opportunity.

This tactic only works if the markets are stable and passive. If the prices are going up or down, you need a different approach, and if the prices are too volatile, using range trading might prove impossible.

Other than that, it’s one of the more simple approaches to forex but requires a substantial amount of time from the trader. Nonetheless, this strategy is recommended for complete beginners who are just getting introduced to forex trading.

Pros

  • Works best in a low-volatility market
  • Good strategy when the price is in relative stagnation (it’s not going up or down)
  • Safe, beginner-friendly strategy that requires minimal research tools

Cons

  • Relatively time-consuming
  • Not the most profitable approach
  • Research is necessary

2. Trend Trading 📉

Unlike range trading, this strategy uses price trends to find buying and selling opportunities. Here you must also find the lowest lows in the price chart and the highest highs. Then you should draw lines through them and that will represent the price trend—this can either be an upward or downward trend.

This chart shows how an upward trend looks on a price chart.
Price trend indicated by rising highs and lows. Image by TradingView.

As you can see on this chart, the red circles mark the dips in the price of the EUR/USD pair, and the blue circles represent the high points. So, if the highs are steadily getting higher and the lows are steadily getting higher, this is an upward trend. 

That tells you you should buy the currency pair when it dips and sell when the price surpasses the latest high point—or you can hold it for a while and sell when the price grows a lot. Naturally, the approach is the opposite if you have a downward trend on your hands.

In summary, you have a checklist that looks like this:

  • Are the highs getting higher over time on average?
  • Are the lows getting higher over time too?
  • Is there no news about something that will reverse this trend?

If the answer to all these is yes, you usually have a steady upward trend on your hands and you can exploit it. However, never get too excited with forex—no one can truly predict what’s going to happen in the markets, so it’s best to play it safe.

Pros

  • Very approachable for new traders
  • Good risk-reward ratio
  • There is always an abundance of trading opportunities

Cons

  • Slightly higher-risk and less beginner-friendly than range trading
  • Studying trends is time-consuming and must be done very thoroughly


3. Position Trading 📊

This is a long-term strategy that requires fundamental analysis but also following macroeconomic trends and relevant news. The idea is to pinpoint the so-called “head and shoulders” price points over a long period and use them to learn whether prices are going to move up or down in the foreseeable future.

This graph shows the "head and shoulders" pattern in position trading
The “head and shoulders” pattern in position trading. Image by TradingView.

As you can see in the graph above, the places where the prices stay very high for a long time are the head and shoulders points. Finding these areas and drawing a line through them can tell you where the prices are going. Short-term price fluctuations are not considered here—it’s just about figuring out the big picture.

For this strategy to work, you need to look at price charts over a long period—months, or even years—and hold your position for a long time if it’s an upward trend (or short the position if the prices are going down). This is a patient trader’s game and you can use this tactic for forex as well as stocks.

In this example, we can see the Germany 30 index. An important thing to note is the effect that Brexit had on the movement of the price trend—you need to analyze charts and follow the news just so you can take major economic events into your calculations.

📱 Are you a trader on the go? Check out the top forex trading apps for mobile access to the forex market.

Pros

  • Very little time is required
  • Good for long-term traders
  • Very favorable risk-reward ratio
  • Works on the stock market too

Cons

  • Requires more thorough research over a longer period
  • Global economic events can impact your strategy massively
  • Rare trading opportunities

4. Day Trading ⏲️

If you want to invest occasionally, day trading is not for you—but if you want to make forex your job, this can be the strategy you’ve been looking for. Day traders open and close all their positions during the same trading day—nothing is left to sit overnight.

This strategy is all about finding small daily price fluctuations, buying low, and selling high. Trades are executed in a matter of hours, if not minutes, and you usually cannot make high returns on any single one. However, a few trades every day will start to pile up if you do them right—and you will amass enough capital to make every trade count.

This chart shows multiple price dips in a single trading day.
Several price dips in one trading day. Image by TradingView.

This chart shows all price dips throughout a single trading day. Ideally, you want to buy when the price is at its lowest and sell when it’s at its highest. As you can see, at the end of the trading day, the price usually goes down because all day traders want to sell their positions before it’s bedtime. 

Upward trending financial instruments are always a good target for day traders. In this case, as long as you buy in the morning, you will be able to sell high in the afternoon—that’s a low-risk, OK-reward situation. 

The product type you choose to trade will determine how risky this strategy is, but you’ll usually be dealing with small price changes, so your balance won’t suffer much if you make a bad trade. This makes leveraging your trades more viable as the risk-reward ratio is manageable.

Pros

  • Favorable risk-reward ratio
  • Abundant trading opportunities

Cons

  • Day trading is a full-time job
  • Requires strong technical analysis

5. Forex Scalping 🔪

For those who don’t know, scalping forex means making quick small trades and making a very small profit from each one. Scalpers open and close multiple positions each day either manually or with a trading algorithm that uses your guidelines to know when to buy/sell.

Scalping is as time-consuming and profitable as you want it to be. Individual trades are usually opened and closed within a few minutes but you can make as many of these as you want throughout the day.

This chart shows support and resistance levels that scalpers need to determine when to buy and when to sell.
Lowest and highest sell prices indicated by moving trend lines. Image by TradingView.

First, you must identify a trend as you would when trend trading—make sure that the price highs are growing and that price lows are moving up as well. Then, you should buy the dip, hold as the upward movement has momentum, and sell as soon as prices reach the resistance line.

Pros

  • Applicable to almost all financial instruments

Cons

  • Many forex brokers don’t allow scalping and closing trades too quickly can get your account closed and your funds frozen
  • Very low risk-reward ratio
  • The most time-consuming out of all forex strategies

6. Swing Trading 🏌️

This is a mid to short-term trading strategy that entails predicting price trends and buying/selling accordingly. This is similar to trend and range trading, but swing traders inspect price trends in a smaller time frame and close trades within a few hours or days.

Because swing trading is a short-term strategy, traders only need to focus on price analysis rather than long-term macroeconomic trends and important global developments. This makes swing trading simpler but also relatively risky since price changes are always more hectic on a day-to-day basis.

This chart shows trend changes
Identifying trend changes is key for swing trading. Image by TradingView.

Identifying price trends by finding the “highs” and “lows” is key here. If both the high and low price points are moving up together, this means you have an upward trend on your hands and that you should enter a long position. If the opposite were true, shorting would be the way to go.

Pros

  • Not very time-consuming
  • Average risk-reward ratio

Cons

  • Holding overnight positions carries risk
  • Occasional trading opportunities

7. Carry Trade 🧳

This means borrowing one currency at a low rate and then investing in another currency that provides a higher rate. Doing this will produce a positive carry on the trade—hence the name.

The profitability of your trade will depend on two things—the difference in interest rates on the two currencies you’re exchanging, and the amount of your initial capital/borrowing power. This means that profits can be small but also substantial, it all depends.

Plus, there’s always risk involved. Since carry trades usually involve leverage, they have the potential to be very risky.

To make a good trade, you need to look at the fluctuations in interest rates over a medium to a long period (months or even years). Ideally, you should borrow a currency that has a low, declining interest rate and get a currency that has a high, increasing rate—that way your profits will be as good as they can be.

Pros

  • Not time-consuming
  • Average risk-reward ratio
  • Very high profits are possible if you grab the right opportunity

Cons

  • Good trading opportunities are rare
  • Dependant on very specific upward trends

8. 50 Pips a Day 🪙

If you want a fresh and popular strategy with a clear daily financial goal—then the 50 pips a day forex strategy is it. At 7 a.m. GMT, after the candlestick closes, traders enter two opposite positions with pending orders. When one order gets triggered by a price movement, the other one gets canceled automatically. This way, there’s no way to lose.

Your goal is 50 pips and the stop-loss order is usually set somewhere between 5-10 pips—that’s under or above the 7 a.m. point. After you’ve set everything up, it’s time to relax and let price changes take care of the rest.

The orange box in the chart above represents the 7 a.m. candlestick point that is crucial for this strategy. Ideally, you want the bar after the candlestick where you placed your orders to be as high or as low as possible—but even if it isn’t, you can cancel your orders and manage risk that way.

Pros

  • The least time-consuming strategy on this list
  • Very low risk

Cons

  • Profits are limited to 50 pips a day (what if the price changes by 300 pips?)
  • Limited to one trade per day for each currency pair
  • You need to watch both pending orders so you can cancel one in time when prices change

Start Trading Forex in 4 Steps 📈

Getting into forex has never been easier—since the COVID-19 breakout, millions of new traders have stepped into the markets and global trading volumes have gone up by more than 25%.

Naturally, forex brokers have been competing to pick up as many of these newcomers, making their services even cheaper and more accessible than before. Here’s what you should do to make the best of this situation and start trading.

1. Find the Perfect Broker For You 🏆

Forex brokers offer many different financial instruments—currency pairs, cryptos, CFDs, spreads, etc.

You want a brokerage that offers what you need, is safe, has a great trading platform, and most of all—dirt cheap. Some of the top forex brokers in the US, as well as many top UK brokerages, fit that description perfectly.

2. Open a Brokerage Account 📱

Once you find your perfect match, signing up is easy and fully digital. You just need to give the broker some personal info and make a small deposit (sometimes that deposit is zero).

Fees
Average spread EUR/USD standard

Varies

N/A

All-in cost EUR/USD - active

N/A

N/A

Minimum initial deposit

€100

$0

General
Total currency pairs

50

105

Demo account?
Social / copy trading?
Rating
Fees
Average spread EUR/USD standard

N/A

0.75

All-in cost EUR/USD - active

N/A

N/A

Minimum initial deposit

$0

$50

General
Total currency pairs

105

47

Demo account?
Social / copy trading?
Rating
Fees

Average spread EUR/USD standard

Varies

N/A

0.75

All-in cost EUR/USD - active

N/A

N/A

N/A

Minimum initial deposit

€100

$0

$50

General

Total currency pairs

50

105

47

Demo account?

Social / copy trading?

3. Practice and Learn 📖

Almost all forex brokers have demo accounts. These are training accounts you can use to practice trading with virtual money instead of real cash.

This is a great way to learn how the platform works and see if your analytical ability is providing results. Some brokers offer great educational content that can bring you from zero to hero in no time—check out what the top forex brokers for beginners have in store for new traders.

4. Identify Opportunities and Close a Trade 🎯

Once you’ve set everything up, learned your strategies, and practiced a bit on the demo account, it’s time for the real deal. Analyze the markets to find a good opportunity, open a trade, and set stop and limit orders.

🎓 Looking for more advanced strategies? Learn about the ascending triangle.

What You Have to Know Before Trading Forex

If you’re completely new to forex then these strategies might not make complete sense—that’s because they use some concepts you must learn before you can go deeper into the mysteries of forex. Here are a few tips on how to prepare yourself if you’re new to the trading game.

Researching the Market Comes First 📊

Opening a trade before researching the market is not what you want to do. The prices of different currencies might depend on completely unrelated factors because they are governed by different banks, institutions, and market conditions.

Forex is traded in an over-the-counter market (OTC)—this is a system of banks that hold copious amounts of currencies and sells them to traders (and buy from them) directly. Since banks have huge appetites, this means you can always find a buyer and seller for any sensible trade you wish to make.

The big banks that make up this forex network are called market makers for apparent reasons—they literally created the market—and they are spread across 4 major forex centers: Tokyo, Sydney, London, and New York.

Since these centers span all time zones, traders have 24-hour access to the global forex market and can trade whenever they wish. All this and more impacts the forex market, but learning how to trade forex should be your priority if you’re just starting. 

🇬🇧 Are you a UK-based trader? Take a look at the most popular UK forex brokers.

Find out what Influences Currency Prices 💵

Many factors can affect the price of a currency—some are impossible to predict, but most can be anticipated if you just follow the right news. Like the economy at large, forex prices are pushed by supply and demand, but also some other “irrational” forces like mass psychology amid a financial crisis and so on.

Factors that affect forex prices
Exchange rates are influenced by a plethora of factors.

The image above illustrates some of the main factors you can look at to analyze forex price changes. However, there’s always more to macroeconomics—let’s look into this in more detail:

  • Central Banks Make the Rules – As the highest financial authorities in their countries, central banks can inflate and deflate currencies quickly through their decisions. For example, if you’re dealing with USD a lot, make sure you follow what the FED and the government are doing. As soon as a major decision is announced, traders start acting like it’s already been realized and prices change.
  • News in General – Major news stories tend to spark traders’ imagination and cause a chain reaction that can influence currency prices. For example, a huge infrastructure project in a developing country is a sign their currency might be worth more in the future, so traders buy it and its price goes up quickly. Politics are very important here too.
  • Trader Sentiment – If enough traders think that a currency is going bust and start selling—the currency will lose value dramatically. Even if the market isn’t thinking rationally, its opinion is important—that’s why you should consider market sentiment when trading.
  • Your Broker’s Prices – This might not affect global price trends, but your broker’s pricing will massively impact your balance—and that’s the most important thing here. Before you start trading, make sure you find a cheap service and that you understand your broker’s commissions and fees.

Know the Risks of Trading Forex ⚠️

There are inherent risks to trading forex, and some that can leave you penniless before you even start trading. However, even a minefield is easy to navigate if there’s a marked safe path on it. 

If you go online and look at forex brokerage reviews and the comments people put up, you’ll probably come to the conclusion that every single broker will steal your money. Although many brokerages are shady and scammy, this isn’t true for the real top forex brokers of the world. 

However, brokers often won’t tell you everything you need to know and this is where problems arise. Read through the terms and conditions or check out a comprehensive review of a broker you like—a brokerage might freeze your funds for things like scalping and other actions it doesn’t allow (which are in the fine print of the terms and conditions document you agreed to).

Also, make sure your broker has negative balance protection, especially if you’re a beginner—here’s why. Since you need a lot of money to make significant profits with forex, brokerages can lend you money through margin trading.

This means you can borrow up to 10 or even 300 times your account balance and make a trade. If you win, that’s great, but if you lose, you can actually end up owing your broker money you don’t have—negative balance protection means that cannot happen, so look for it in every broker you research.

Beware—Forex Scams Are not Uncommon 🚨

The Forex market isn’t the most regulated machine in the world and scam brokers, investment advisors, and other schemes pop up every day. This goes double for the time we live in—fraudsters have become creative in the COVID-19 era and thousands of unsuspecting traders have fallen for never before seen tricks

So, knowing how to avoid forex scams is key. The first thing you need to check is whether the brokerage you’re with is well-regulated. If it’s under the watchful eye of the main financial authorities in its country, that’s a good sign. 

Also, watch out for “signal sellers”. These are companies or individuals who claim they can provide you with the latest price updates before everyone else gets them.

Even a small-time advantage is huge in forex trading, but don’t be too trusting. Most signal sellers are scammers and just want to get your money and disappear with it—be very skeptical when it comes to these things.

One more new threat is “robot sellers”. Essentially, they will claim to have a trading algorithm that can trade for you while you sleep and produce serious returns to boot.

There are trading algorithms out there but we’re still far off from having a truly effective forex trading robot that can just take the wheel for us. If you’re looking for a trading algorithm, be careful and research it as you would the market before making a big trade.

All reviews, research, news and assessments of any kind on The Tokenist are compiled using a strict editorial review process by our editorial team. Neither our writers nor our editors receive direct compensation of any kind to publish information on tokenist.com. Our company, Tokenist Media LLC, is community supported and may receive a small commission when you purchase products or services through links on our website. Click here for a full list of our partners and an in-depth explanation on how we get paid.

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