Top 15 Forex Trading Strategies Here you can find the top 15 forex trading strategies. From this writing you can get familiar with the basics of the most common trading strategies and trading techniques used by hedge funds, big banks, top speculators, and retail traders. Let’s start! But before we jump into the strategies let’s discuss the different trading styles first. 1
Trading Styles Position Trading It has the longest trading time frame. Position traders can hold their positions from months to years. Typically, short-term price fluctuations are ignored. This trading style focuses on the long term trends.
Swing Trading A swing trader usually holds his positions for a period of days or weeks. Because swing trading takes place over a period of days to weeks, this trading style does not necessarily require constant monitoring.
Day Trading A day trader usually enters and closes positions on the same day. A day trader does not hold any positions overnight. With this style of trading large price moves are uncommon, and a day trader relies on frequent small gains to build profits.
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Scalp Trading Scalp trading is an extremely active form of day trading that involves frequent buying and selling throughout the trading session. Scalp traders target the smallest intraday price movements and rely on frequent and very small gains to build profits. Positions are generally held for a period of seconds to minutes. Because gains are small on any one trade, scalpers may place dozens or even hundreds of trades each trading session. We have to divide the trading styles into two subgroups:
Trend Trading A trading strategy that attempts to capture gains from an asset’s momentum in a particular direction.
Countertrend Trading The opposite of trend trading. This strategy assumes the current trend will reverse and attempts to profit from that reversal.
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Technical Analysis Technical Analysis is a method used by traders to forecast the future price movements based on an examination of past price movements. Different traders use different tools of Technical Analysis based on their preferences.
1. Moving Average This is one of the most popular technical analysis tool. A moving average (MA) is based on past prices and this is why it is called a trend-following indicator. The two most commonly used MAs are the simple moving average (SMA) and the exponential moving average (EMA). The simple moving average (SMA) is the simple average of a security over a number of time periods. The exponential moving average (EMA) gives more weight to more recent prices. The most common use of MAs are to identify the trend direction and to determine support and resistance levels. The length of the MA to use depends on the trading objectives. Shorter MAs are used by traders who focus on short-term trading and longer-term MAs are used by traders who focus on long-term trading. MAs can also give trading signals when two averages crossover. 4
2. Other Indicators Technical Indicators are mathematical calculations based on historic price and volume data. Usually indicators overlay on the price chart to indicate where the price is going, or whether the price is in an “overbought” or an “oversold” condition. Indicators are divided into the following groups: Trend indicators These indicators are used to identify a trend. It is highly advised to trade in the direction of the trend with these indicators. Most popular trend indicators: MACD, Parabolic SAR, or the previously mentioned Moving Averages. Momentum indicators These indicators are most useful for determining overbought and oversold positions and can be very useful in signaling the start of a new trend. Most popular momentum indicators: RSI, Stochastics.
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Volume indicators As the name suggests, these types of indicators show the volume of trades behind a particular price movement. Unfortunately on the forex market it is very difficult to measure volume since it doesn’t have a central exchange but several trading hubs. Most popular volume indicators: Force Index, Money Flow Index Volatility indicators Volatility indicators generally use ranges to show the behavior of the price and the volume behind any movements. Most popular volatility indicators: Bollinger Bands, Average True Range.
3. Candlestic Patterns Candlestick pattern is a movement in prices shown graphically on a candlestick chart. The recognition of the pattern is subjective and programs that are used for charting have to rely on predefined rules to match the pattern. There are 42 recognized patterns that can be split into simple and complex patterns.
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Most popular Single patterns: Doji, Hammer, Inverted Hammer, Hanging man, etc. Most popular Complex patterns: Engulfing Bullish Line, Engulfing Bearish Line, Evening Star, Morning Star etc
4. Chart Patterns A chart pattern is a distinct formation on a chart that creates a trading signal. Chartists use these patterns to identify current trends and trend reversals and to trigger buy and sell signals. The theory behind chart pattern is based on the assumption that history repeats itself. Most popular chart patterns: Head and Shoulders, Double Tops and Bottoms, Triangles etc.
5. Elliott Wave Traders use this technique to analyze financial market cycles and forecast market trends by identifying extremes in investor psychology, highs and lows in prices, and other collective factors. Ralph Nelson Elliott (1871–1948), a professional accountant, discovered the underlying social principles and developed the analytical tools in the 1930s. 7
He proposed that market prices unfold in specific patterns, which practitioners today call Elliott waves. Elliott wave analysis distinguish two major patterns: Five wave pattern (dominant trend) and Three wave pattern (corrective trend).
6. Fibonacci Numbers It is a very popular tool among traders. It is based on the key numbers identified by mathematician Leonardo Fibonacci in the thirteenth century. In technical analysis, Fibonacci retracement is created by taking two extreme points (usually a major peak and bottom) on a chart and dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and 100%.Once these levels are identified, horizontal lines are drawn and used to identify possible support and resistance levels.
7. Combinations Experienced technical traders use not one but usually more of these techniques at the same time. They combine different technical trading tools to achieve better results.
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Fundamental Analysis Fundamental Analysis is a method attempts to discover the true value of different assets by examining related economic and financial factors.
8. Classic It is a trend following technique when a trader compares two economies and buys the currency of the economy which performs well and sells the currency of the poorly performing economy.
9. Carry Trade A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. The trader who uses this strategy attempts to capture the difference between the rates.
10. Correlation Trade The trader tries to discover hidden opportunities by analyzing correlated assets. When he finds such an opportunity he places his bet on the chosen currency that based on his analysis will follow the price move of the correlated assets. (e.g. CAD – Oil) 9
11. Hedging A hedging is an investment technique used to reduce the risk of adverse price movements in an asset. Hedging is a useful strategy that can help protect portfolios from uncertainty.
News Trading Important economic datas and central bank events can have a huge impact on the currency market. These are one of the most important catalysts for short-term movements. Traders who are trading news are trying to utilize these opportunities.
12. Trading in the news The trader trades the news immediately after it came out. With this technique a trader has two options. First to trade „in the direction of the news”. Or to trade in the opposite direction of the news and betting on the „news fading”.
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13. Trading the aftermove of the news A technique when the trader waits for the price to reaches an important level (supply/demand level). When it is reached the trader has two options. First to trade in the direction of the news. Second to trade the turning and enter in the opposite direction of the news .
14. HFT High-frequency trading (HFT) is a type of algorithmic trading. It is a special type of scalping. It is the use of sophisticated technological tools and computer algorithms to rapidly trade different assets. It is characterized by high speed, high turnover rates, and high order-to-trade ratios. Specialized trading firms use these „robots” to trade very small market movements. Most often these „robots” are used around news time.
15. The Combination Probably the best approach is to combine them all. Here at Forex Behind The Scenes we combined the best attributes of the above mentioned technique groups. We combined Technical Analysis, Fundamental Analysis, News Trading, and the most important market moving factor Market Psychology. We call this combination „The Profitable Way of Thinking”. 11
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