Successful forex trading strategies

Plenty of trading strategies can give you a winning edge in the market. But bear in mind, there’s no one 'golden strategy' that suits everyone.

Oct 10, 2023 - 10:26

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Successful forex trading strategies

Plenty of trading strategies can give you a winning edge in the market. But bear in mind, there’s no one 'golden strategy' that suits everyone.

When looking for the perfect Forex trading game plan, it's all about matching it to your individual style and risk appetite. Making profits boils down to racking up more wins than losses, no matter what strategy you're using.

So, what's the best Forex trading strategy out there?

To answer that, we first need to know how to choose a suitable forex strategy. There are three main factors to consider.

The Time Frame

Your chosen time frame should mesh with your trading style. For instance, how a 15-minute chart moves is totally different from a weekly one. If you're looking to become a scalper (someone who profits from small, short-term changes in price trend), you'll want to focus on lower time frames like 1-minute and 15-minute charts.

If, however, you're more of a swing trader, both 4-hour and daily charts might be more beneficial. Also, ask yourself: How long do I want to stay in a single trade? Remember, there are various strategies tailored for long, medium, and short-term periods.

Trading Options

How often you're planning to open positions plays a key part in selecting your strategy. If you like swift movement and multiple trades in quick succession, the scalping approach could work best for you.

Those who lean towards macroeconomic reports and fundamental analysis might prefer higher time frames with larger positions as they spend less time checking charts.

Position Size

The size of your trade is crucial too. Beware! Taking on more risks than you can handle could lead to significant losses. So, put a cap on the risk for each of your trades. It's common practice among traders not to risk more than 1% of their total account on any single trade.

To give you an idea, with a $30,000 account balance, you should only risk up to $300 on a single trade at a 1% risk limit. This limit can vary depending on your personal risk tolerance—it could be 0.5% or even up to 2%. Remember, a larger position size means fewer trades should be opened.

Now we’ve got that clear, let’s look at three winning strategies!

Scalping

In forex scalping, you aim to make small yet constant profits by focusing on minute changes in the market and opening multiple trades every day. A scalper scoops up many minor profits with the aim of accumulating substantial earnings altogether. This is the exact opposite of holding a position open for an extended period. Given the liquid nature and swift shifts in the forex market, scalping has gained quite a bit of popularity.

Within this approach, the trader tries to snatch around 5 pips per trade. Even though the profit per transaction is small, the regularity of successful activity gives them stable earnings. Remember, in scalping, dilly-dallying in a single trade for too long won't do you any good. Constant vigilance for spotting new opportunities is a must.

Day Trading

This one's about dealing with currency pairs within a trading day. It's ideal for all markets but quite a darling of the Forex world. The name gives it away—you open and close all trades on the very same day. To keep potential risks under wraps, no positions should be left open overnight. Unlike scalpers, who are on constant watch of their open trades throughout the day, day traders abide by different time frames, like 30 minutes and 1 hour.

A popular choice among day traders are strategies based on financial news. Events such as economic data releases, elections, GDP figures, and shifts in interest rates spur dramatic market movements. Besides setting a limit for individual positions, day traders often have a daily risk limit too, which is typically around 3%. This approach ensures your capital and account stay safe and sound.

In the chart above, you can notice how GBP/USD moves on an hourly basis. Horizontal support and resistance lines help us find trading opportunities alongside price trends. Since the price goes upward in this case, our attention is on the resistance.

Once the price immediately heads south after hitting the horizontal resistance, it signifies a potential point to open a position. Placing a stop-loss order a bit above the previous swing high can safeguard you from any drastic upward breach of the resistance line. Ideally, you'd place your stop-loss order about 25 pips beyond your entry point.

To cash out your profits, mark your position at the downside horizontal support. Once the price reverses downwards, it’ll pull in a neat profit of about 65 pips.

Position Trading

When it comes to longer-term strategies, position trading takes the cake. In these slow-cooking approaches, more weight is given to fundamental factors compared to short-term strategies like scalping or day trading. Insignificant market changes get overlooked as they hardly influence the big picture in this strategy.

Much like fortune-tellers, position traders try to foresee cyclical trends by keeping an eye on central bank policies and monetary evolution. They might open only a few trades a year, but their target profits are somewhere in the north of several hundred pips. This strategy is a test of patience, as it takes weeks, months, or even years to mature fully. For example, by observing the downward trend of the Dollar Index (DXY) on a weekly chart, they might decipher that the market direction is turning.

The huge monetary stimulus created by the Federal Reserve and the Trump administration to support the economy further causes the dollar's value to depreciate. Position traders could capitalise on this situation by selling dollars.

The macroeconomic environment and long-term technical indicators would primarily determine their exit strategy. Technically speaking, they'd plan to call it quits when they feel the current recession is nearing its climax. In four months, from March through July, you can spot DXY trading over 600 points lower due to these events.

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