Best Forex Trading Strategies

Forex is the largest trading marketplace globally, with billions of dollars worth of currencies changing hands daily in the forex market.

In this guide, I reveal the best forex trading strategies for both beginners and experienced traders alike.

Ready to start trading? Consider reading my guide to the top online forex brokers May 2023

Key Takeaways

My key takeaways when putting together your forex strategy would be to use a mixture of successful trading strategies using the trading platform of your choice.

Whilst there is no single one size fits all way to trade forex, a successful forex trading strategy may include one or all of the following, depending on your trading style or level of expertise:

Why use Forex Trading Strategies?

Like any investment market, traders will need to have a solid strategy in place when trading forex. This will give you the best chance possible of making consistent gains in this fast-paced trading industry and enable you to trade forex successfully.

There are many forex strategies to choose from, some of which are more suitable for beginners. Experienced traders will generally have several forex trading strategies that they utilize at any given time, depending on market conditions.

What is the Most Profitable Trading Strategy in Forex?

As I explain throughout this guide, there is no such thing as the ‘most profitable strategy’ in forex. Instead, what might be considered the best forex strategy for one trader might not necessarily be the case for you.

For example, experienced traders with a firm grasp of technical and fundamental analysis and chart analysis may opt for a day trading strategy. Complete beginners, on the other hand, might be more comfortable with a swing trading strategy, considering that traders have more time to act.

The Best Forex Trading Strategies

In this section, I will run through some of the best forex trading strategies for various levels of experience.

This will enable you to make an informed decision when picking a forex strategy that suits your skill set and trading goals.

Forex Swing Trading

A position may remain open for several days or even weeks, but rarely more than a couple of months which is more relevant for position traders. The main concept with this strategy is to enter positions in line with broader trends to find the right buy and sell signals.

For instance, if EUR/USD has been on a prolonged decline for several days, a swing trader would look to capitalize on this for as long as the trend remains in place.

Pros and cons of swing trading

I found that this strategy is suitable for beginners that may perhaps require more time to make a decision on the future direction of the market. There is no requirement to exit a position before the market closes, so the pressure is somewhat reduced.

Another benefit is that a much larger focus can be placed on fundamental news developments, rather than other indicators. For instance, interest rate hikes, economic reports, and job growth.

Although this might be one of the best forex trading strategies for beginners, the main drawback is that the position can remain at a loss for extended periods of time. This is because the duration of a forex swing trade can last for several days or weeks.

Forex Day Trading

This means that forex day traders will usually keep a position open for several hours or even minutes. Day traders will look to make small percentage gains on each position, across several trades each day.

Pros and cons of day trading

The main benefit of this trading strategy is from a risk perspective. As these positions are usually only active for a number of hours, major currency pairs like EUR/USD will rarely move by more than a percentage point during this period.

This will reduce the risk of losing a large amount of capital on a single trade.

On the flip side, I found that this strategy is best utilized for experienced traders. This is because in order to speculate on the future direction of a currency pair in the proceeding hours, traders will need to be well-versed in chart analysis and other external indicators.

Forex Scalping Strategy

Target gains are typically a few basis points, which is a micro-fraction of a percentage. In reality, I found that the only way to make consistent gains through a scalping strategy is by having access to high-frequency software.

The software will automate the scalping trading process by entering buy and sell orders at specific support and resistance levels.

Pros and cons of scalping trading

Scalping is one of the best forex trading strategies for experienced traders that have access to proven software that can automate the buying and selling process. Scalping is also favorable in terms of managing risk as losing positions rarely amount to a few basis points.

The main drawback is that scalping is not really feasible without automated software. And of course, those with access to software with proven results will not make this available to the general public.

Price Action Forex Trading Strategy

Instead, the primary focus is on the price history of a forex pair, and how this might influence its future direction.

I should also note that the price action strategy in forex does not take into account fundamental news that would ordinarily impact the price of a currency pair.

Ultimately, this forex trading strategy requires traders to make a subjective decision on whether a pair will rise or fall in the short-term, based on current and historical prices.

Pros and cons of price action trading

I would argue that price action trading may be suitable for traders that do not currently possess any technical analysis skills, as is required when day trading.

Another benefit is that price action trading enables the trader to create a strategy that is unique to their own subjective viewpoints, rather than following the herd so-to-speak.

However, without any technical indicators or fundamental data in place, this type of trading is often guesswork for the absolute beginner that doesn’t understand chart analysis.

Trend Trading

By identifying whether a forex pair is in the midst of bullish or bearish momentum, the trader can enter positions accordingly.

In many cases, when a forex pair experiences higher highs and lower lows, this indicates that the trend is moving bullish. And vice-versa in the case of lower highs and higher lows.

Pros and cons of trend trading

Successful trend trading positions can result in extended gains when momentum is firmly in place. This can be amplified when support or resistance levels have been identified, assuming that the trader has speculated in the right direction.

Another benefit of trend trading is that it enables traders to enter sensible stop-loss positions, ensuring that losing trades are minimized financially.

I should, however, stress that trend trading does require a reasonable understanding of technical indicators, especially those that are tasked with highlighting momentum and support and resistance levels.

Forex Position Trading

Position traders hold forex positions for a month or even a year. This strategy aims at increasing exchange rates over a long duration. Forex position trading is a better solution for those people who do not dedicate hours daily for trading.

Picking the Best Forex Strategy For You

Now that I have discussed some of the most common forex trading strategies, the next step is to help you get set up with a strategy of your own.

I explain some of the main considerations to make when trading currencies in the following sections.

Time Dedication

Trading on forex markets can be labor-intensive, especially when it comes to analyzing pricing charts and deploying other indicators.

If you don’t have several hours to spare each day, swing trading might be a more suitable strategy. As I covered earlier, these positions can remain open for several days or weeks, and the main focus is staying with prolonged trends of momentum.

For instance, as global inflation levels crept higher in 2022, most USD-centric pairs saw a prolonged increase in value.

Technical Prowess

This can take several years to master, so some more advanced strategies will only be an option for experienced technical traders.

If you do not yet have a grasp of technical and economic indicators, alongside chart analysis strategies, a focus on fundamental driven methods might be more suitable.

This will require you to keep tabs on core news developments that will likely impact the value of a currency pair, for prolonged periods.

For example, when the UK voted to leave the European Union, GBP/USD declined in value by a considerable amount, for many extended months.

Trading Capital

Scalping for example, requires significant amounts of capital, considering that profit margins are often just a few basis points.

The only way around this is to utilize high levels of leverage, which is certainly not advisable for beginners.

Trend trading is more suitable if you only have a small amount of capital to invest in the forex market, as pricing momentum will often remain in place for several days or weeks. This can facilitate wider profit targets.

What Are The Best Forex Trading Tips?

Bankroll Management

One of the best tips to incorporate as a beginner forex trader is bankroll management. This refers to the amount of money that can be risked on any single forex trade, in relation to your current bankroll.

• The general rule of thumb is never to risk more than 1%.
• For instance, if you have an account balance of $500, the 1% rule means that the maximum position size should not exceed $5.

The maximum position allowed will rise and fall depending on the size of your account balance at any given time. This means that you can attempt to build your bankroll in a slow, methodical, and risk-averse manner.

Risk Management

Risk management comes in all shapes and sizes. But as a beginner, the most effective tool at your disposal is stop-loss orders.

A stop-loss order instructs your chosen broker to close a forex trade when it declines by a certain amount. For instance, if the trade declines by 2.5%.

This will ensure that you never lose too much on a single trade and ultimately, protect your bankroll in the long run.

Deal With Emotions

Experienced forex traders know how to deal with the emotional side effects of losing positions. After all, it is not possible to generate gains 100% of the time.

This is one of the biggest pitfalls for beginners, as a losing trade can often result in irrational decisions.

This might, for example, see an inexperienced trader increase their stakes to make the money back on the following position.

Dedicate Time to Technical Analysis

I would argue strongly that the only way to make a success of forex trading is to have a firm understanding of market indicators. Not only how to deploy them, but interpret the information being presented.

While this can take a long time to truly master, technical analysis sits at the forefront of forex trading. This will enable you to expand your horizons through a variety of different forex trading strategies, whether that’s day, trend, or position trading.

How do You Know When to Buy or Sell Currency Pairs?

• When there is more demand for US dollars over the British pound, for example, the price of GBP/USD will decline.
• And when there is more demand for euros over the Japanese yen, the price of EUR/JPY will invariably rise.

The key issue at hand is knowing how to speculate on the future demand and supply of a specific currency pair. This is where a forex trading strategy can be of great assistance.

For instance, I mentioned earlier that forex traders with experience in chart analysis and technical indicators will likely find that day trading offers a viable option.

Traders will explore indicators surrounding volume, momentum, volatility, and more to assess whether a currency pair is likely to rise or fall in value.

Swing traders can place more emphasis on the fundamentals. This means making forex trading decisions on the back of relevant news stories and economic developments.

A great idea here is to niche down into a specific research area, such as interest rates or job growth reports.

Irrespective of your chosen forex trading strategy, it is beyond the realms of possibility to know whether a currency pair will increase or decrease each and every time.

You will always encounter losing trades at some point, but by having a bankroll and risk-management strategy in place, losses can be minimized.

What is the 5-3-1 Trading Strategy?

I have broken this strategy down into three parts.

1. Pairs (5)

Initially, this strategy will dictate which pairs to focus on so that you can become proficient in a small number of currencies. After all, some forex brokers will support more than 100 different pairs.

Rather than trying to become an expert in all currency pairs, this strategy will require you to pick five.

If you are a beginner, this should consist of five major pairs and ideally, currencies that are actively traded in your current timezone.

2. Strategies (3)

The 5-3-1 concept also dictates that you should never attempt to master or utilize more than three strategies.

This should incorporate the trading strategy itself, preferred data points (e,g. MACD or RSI), and managing risk (e.g.1% stop-losses).

3. Time consistency (1)

The third aspect of the 5-3-1 strategy is relevant to time planning. This suggests that you should pick a time each day to trade, and stick to it religiously.

This will enable you to get to grips with certain trends that occur during your chosen time period.

Conclusion

In summary, I have discussed some of the most utilized forex trading strategies in the market.

Some strategies are more suitable for experienced traders with the ability to perform high-level technical analysis, while others require automated software that is not readily available.

I found that beginners, on the other hand, may be best suited for a swing trading strategy that is largely reliant on fundamental news developments, rather than technical analysis.

Regardless of the chosen strategy, it is imperative to have risk-management methods in place to protect your forex trading capital and a quality trading platform to help you manage your trades.

At a minimum, this should include a stop-loss order on all positions and a solid understanding of bankroll management.