What is a Forex Trading Strategy?

 

A forex trading strategy is a system made by a forex trader with a set of rules that determine when to buy or sell a trading instrument. Mainly, the forex trading strategies could be of two types: technical and fundamental.

Fundamental trading requires to analyse various aspects like macroeconomic factors, economy and industry conditions of certain countries, political situations and more, i.e. require to have a solid economic education.

On the contrary, Technical trading strategies are way more easier to understand and implement. There are several approaches that could be used by a trader to create his own strategy that suits him in terms of perfomance, ease of use and other factors.

Fundamental vs Technical analysis

Which forex trading strategy is profitable?

Every single trader ends up with this question and there are some valid points that have to be mentioned.

As mentioned above, a trading strategy must suit your personality and therefore some experimentation may be required. One of the key aspects as well is to define a timeframe for your trading style. There exist several types of trading styles from short timeframes to long timeframes.

For some people, it is more comfortable to stay in the market for a really short time while others prefer to ‘set and forget’ type of trading. Traders also may vary their trading based on the current market conditions.

  • Scalping – This type of trading represents very short trades, sometimes held for a few minutes or even seconds. A scalper seeks for getting a few pips of profit before exiting taking very low risk. This strategy requires to use of low timeframe charts from 1 Minute to 15 Minutes.
  • Day trading – This trading is mainly related to activity within one day, i.e. a trader can open a trade in the morning and close it before the end of the day. The main used timeframe for this type of trading is 1 Hour. The main benefit of such a strategy is that it eliminates the risk of being affected by big moves that happen overnight. Day trading strategies are useful for beginners in Forex.
  • Swing trading – Type of forex trading strategy when positions could be held for several days. The widely used timeframe for swing trading is 4 Hours or even Daily. Swing traders can hold positions both overnight and over the weekend so they accept this kind of risk.
  • Investing – also named positional or long-term trading which is usually associated with trend following to get max profit from major price movements. A long-term trader mainly uses Daily or even Weekly charts. Most of the time this strategy requires macro analysis of key economic factors and is suitable for traders that have patience and discipline.

Scalping forex trading strategy

As an example of a scalping strategy, there is the following one. As mentioned earlier, scalping is a strategy for lower timeframes so we use the particular setup:

  • 1 Minute Timeframe
  • Bollinger Bands with Period 10 and Deviation 1
  • Stochastic indicator with %K period 10, %D period 3 and Slowing parameter 3

The strategy is as simple as that: when a 1-minute candle closes below the Lower edge of a Bollinger Band and the Stochastic indicator is below the 20 thresholds, we place a Sell order with the stop beyond the opposite Upper Band.

We close the Sell position when any bar closes above the Upper Band, as shown in the image below.

The Buy setup is the opposite: we enter Buy when the 1 Minute bar closes above the Upper Bollinger Band and Stochastic is above the 80 threshold. Liquidation of Buy position is made when the candle closes below the lower edge of the Bollinger Band.

scalping trading

Day trading forex strategy

The sample of day trading strategy could be the simple using of Supply and Demand with Swap zones indicator on 30 Minutes chart.

The strategy is easy to use: when price breaks the Supply zone we place a Buy order with a Stop-loss slightly below the broken zone. We hold this position till the end of the day.

The Buy setup is similar: we enter Sell trade when the Demand zone is broken on the 30 Minutes timeframe and close the position at the end of the current day.

This strategy is fairly simple to manage because you can find the entry setup, enter the position, place your stop-loss, and just get back to your terminal at the end of the day to close it.

day trading

Swing Trading

As a strategy for swing trading, the following setups could be provided. Using the Multiple indicator with multi-frame possibility that allows getting signals on up to 10 criteria at once.

On H4 charts we enter Long when all the internal indicators show green blocks forming a united entry signal. We close the position when the opposite Sell signal occurs.

Short trades are executed when all the blocks of the certain bar show red blocks forming a sell signal. The trade is closed when opposing Buy possibility shows up.

Swing Trading

Investing

The last-mentioned strategy type is investing that is usually associated with long-term trading. One of the ways to trade this strategy is to use the Supply and Demand Multi Timeframe Indicator that shows the zones of Demand and Supply that have been formed by a fractal price action pattern.

The basic idea behind it is to use it on Daily charts and above to enter Long trades when the price enters the Demand zone formed by the indicator. The target for that trade is the opposite Supply zone. The stop-loss could be placed beyond the lower edge of the demand zone.

For Sell trades it is the vice versa set up – when the price enters the Supply zone, the Sell trade should be executed with the target at the opposite Demand zone and the stop-loss slightly above the Supply zone.

For this strategy there are also two approaches available: you can either set and forget, i.e. enter the trade, place Stop-loss and Take-profit and wait till price hits one of them, or periodically monitor how the trade goes and trail the stop or at least move it to break even to protect the profit.

long term investments

Conclusion

It’s important to mention that overall trading is about winning and losing and every trader’s goal to keep the risk under control. You can do it either manually or using Risk Manager software. There are no simple Forex trading strategies that can give 100% profitable trades and so do not trust someone who is promising you risk-free opportunities.

At the very start, you should use demo trading accounts (see our broker reviews to know which brokers offer them) to test several types of trading strategies to learn which one suits you most. After a successful period of trading on a demo, the next step could be making a deposit to a live account. Just remember that the main goal of a trader is to lose as little as possible, the winners will come themselves.

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