A guide to forex trading strategies

1. Be aware of what type of trader you are and what types of strategies exist. However, it is not as simple as selecting a single trading strategy, as traders can choose to employ a single strategy or combine several.
2. Define your criteria for selecting a forex trading strategy. You should analyse factors that can help narrow down your search. What is FX and how does it work?​
3. Decide whether you want to go long or short. This depends on whether you think the currency pair's value will rise or fall over time - see our example guide on how to short pound sterling.
4. Choose your currency pair. Your strategy may change based on if you choose a major, minor, or exotic currency pair, as some are more stable or volatile than others.
5. Calculate the size of your position. Place your trade and make sure you monitor positions carefully for trends, breakouts, and anything else that may encourage you to switch strategies.

Forex scalping strategy

Forex traders who prefer short-term trades held for just minutes, or those who try to capture multiple price movements, would prefer scalping. Forex scalping​ focuses on accumulating these small but frequent profits as well as trying to limit any losses. These short-term trades would involve price movements of just a few pips​, but combined with high leverage, a trader can still run the risk of significant losses.

This forex strategy is typically suited to those that can dedicate their time to the higher-volume trading periods, and can maintain focus on these rapid trades. High volume trading periods include:

• 8am to 12pm (UK time) when both New York and London exchanges are open
• 7pm to 2am (UK time) when both Tokyo and Sydney exchanges are open
• 3am to 4am (UK time) when both Tokyo and London exchanges are open

The most liquid FX currency pairs are often preferred as they contain the tightest spreads, allowing traders to enter and exit positions quickly. Some examples include:

• AUD/USD – 0.6 pips minimum spread
• EUR/USD – 0.5 pips minimum spread
• USD/JPY – 0.7 pips minumum spread

Forex day trading

If you want to trade for short periods, but aren’t comfortable with the fast-paced nature of scalping, day trading is an alternative forex trading strategy. This typically involves one trade per day, which isn’t carried overnight. Profit or losses are a result of any intraday price changes in the relevant currency pair.

This type of trading would require sufficient time to research and monitor the trade, as well as a good understanding of how the economy could affect the pair you’re trading. If major economic news were to hit that day, it could affect your position. Find out more about forex day trading.

Forex swing trading

For traders who prefer a mid-term trading style where positions can be held for several days, there is swing trading, which aims to make a profit out of changes in price, by identifying the ‘swing highs’ or ‘swing lows’ in a trend.

Although this strategy normally means less time fixating on the market than when day trading, it does leave you at risk of any disruption overnight, or gapping. Learn more about swing trading strategies.

Forex position trading

The most patient traders may choose the forex position trading​, which is less concerned with short-term market fluctuations and instead focuses on the long term. Position traders will hold forex positions for several weeks, months, or even years. The aim of this strategy is that the currency pair’s value would appreciate over a long-term period.

Forex position trading is more suited for those who cannot dedicate hours each day to trading but have an acute understanding of market fundamentals.

1. Bounce strategy

Many forex traders believe levels that were important in the past could be important in the future. This follows the logic that if a market dropped to a specific level and then ‘bounced’ back, the market viewed this support level as a good place to buy. So, if the forex pair slips back to that level again it could, therefore, signify a potential trading opportunity.

2. Running out of steam strategy

Similar to analysing support levels, forex traders also analyse resistance levels. The resistance level is a point where the market turned from its previous peak and headed back down. If a market is appreciating but then suddenly falls, the overall view is likely to be that the price is getting too expensive. This forex trading strategy mirrors the bounce strategy. We are looking for the forex pair to ‘run out of steam’ near that previous high and then go short and sell to try and profit from a slide in price.

Such strategies, based on previous highs and lows on a chart, can make risk management relatively straightforward for any trader. For instance, if we are looking for a bounce off a level, our stop loss can go below that previous low point. If we are looking to sell short when a market starts to falter near a previous high, then many traders will place a stop loss above that previous high.

The forex strategy example below shows how a high from the previous day in the AUD/USD currency pair ended up being the place where the market twice ran out of steam the following morning.

3. Breakout strategy

Resistance and support levels are dynamic and are prone to price breakouts in either direction. If the price exceeds important support or resistant levels it is likely to breakout. Many traders could view this as a potentially important change in market sentiment​​.

Previously when the forex pair was up at that high, the sellers moved in and the price fell, suggesting the market had reached an overvalued level. If that old high is breached, also known as breaking resistance, then something has clearly changed. Traders are now happy to keep on buying where previously they thought the price was too expensive.

This can be an effective forex trading strategy for catching new trends​​. Every journey starts with a single step. When direction in the markets changes then the breakout trading strategy is often one of the early signals. The example shown is for EUR/USD – a longer-term breakout on the daily charts.

4. Breakdown strategy

Similar in function, but in the opposite direction to the breakout strategy is the breakdown strategy. This forex trading strategy is designed to jump aboard a move when a forex market slips below a previous support level. Once again, many traders could view this as a change in sentiment towards the market. Suddenly a level where buyers were happy to buy as they viewed the market as cheap and expected it to rise – has been broken. This breakthrough of what is known as a support level can be viewed as an opportunity to short sell and try to profit from further weakness in price.

The example shows USD/JPY on an hourly chart. It is an important example as it demonstrates that, in the real world, even the best forex trading strategies do not work all the time. There is a false signal (highlighted by the circle) before the effective signal (highlighted by the black arrows) that saw the market really start to fall.

5. Overbought and oversold

The forex trading strategies mentioned so far have been based on chart patterns​ and the use of support and resistance levels. Our last strategy takes a more mathematical approach, using something called the Relative Strength Index (RSI). This belongs to a family of trading tools known as oscillators – so-called because they oscillate as the markets move. When the RSI is above 70%, the market is thought to be overbought. This means that it could be getting overstretched and some traders will use this as a signal to expect the market to fall back.

Oversold is when the RSI goes below 30%. Traders will be watching closely, expecting any weakness to run out of steam and the market to turn back up and use this as a buy signal. The FX example in this chart highlights some of the buy and sell signals that came from the overbought/oversold strategy on a daily EUR/USD chart.

Hedging forex

To protect oneself against an undesirable move in a currency pair, traders can hold both a long and short position simultaneously. This offsets your exposure to the potential downside but also limits any profit. By playing both sides of the market, you can get an idea of the direction the trend is heading, so you can potentially close your position and re-enter at a better price.

Effectively, you’re buying yourself some time in order to see where the market is going, giving yourself the opportunity to improve your position. This is particularly useful is you suspect the market to experience some short-term volatility. Therefore, hedging forex​ is useful for longer-term traders who predict a forex currency pair will act unfavourably but then reverse shortly after. Hedging as part of your forex strategy can help reduce some short-term losses if you predict correctly.

Price action forex trading strategy

To trade forex without examining external factors like economic news or derivative indicators, you can use a forex trading strategy based on price action. This involves reading candlestick charts and using them to identify potential trading opportunities, based solely on price movements. Generally, this strategy should be used alongside another forex trading strategy like swing trading or day trading. This way, price action can be combined with a broader strategy to help mould a trader’s next moves.

Using the price action strategy​ when trading forex means you can see real-time results, rather than having to wait for external factors or news to break. However, a crucial consideration for those who might use the price action strategy is that it’s very subjective, so while one trader might see an uptrend, another might predict a potential turnaround for that particular forex pair, or that time period.

1. See how much time you can set aside. Whether it's a full-time job or part-time hobby, you must decide how much of your day you can commit to forex trading.
2. Set some trading goals. These ideally are measurable and have a specific timeframe attached.
3. Evaluate the different strategies. Whether you're a day trader, swing trader, or position trader, read in-depth about each different strategy to see which suits you best.
4. Assess your level of risk. You should think realistically about how much capital you're willing and able to risk, as the forex market can be volatile.
5. Fill out a trading diary or journal. This is good for measuring performance over time, and you can see where exactly you made profits or went wrong in each trade in order to learn for the future.