The trading strategy is among the most effective weapons of a successful trader. It summarizes the way how a trader views the market, how he analyzes it and specifies the entry trigger to open a trade. Most trading strategies also include exit points (take-profit and stop-loss levels) which, combined with other important aspects of risk and money management, form a complete trading plan. In their most basic form, online Forex trading strategies need to provide a clear trigger of when to buy or sell a financial instrument and where to exit the position.
In this article, we’ll provide a list of Forex trading strategies that work, grouped by their underlying market analysis. Note that even the most reliable Forex trading strategy doesn’t have a 100% success rate, and what matters is its profitability and consistency over a large sample of trades. Our Top 10 Forex systems have proved to have exactly that, if you know how to apply them correctly.
Back-Test the Strategy
Once you find a suitable trading strategy, it’s important to back-test it using historical data or future-test it on a demo account. You need to get a feeling for the strategy before you start using it on a real account, which means that you should also stick with one strategy until it proves either successful or unsuccessful. Generally, combining different Forex trading strategies together while in the trial phase is not advisable as it disperses your focus and can lead to costly mistakes down the road.
Technical Strategies – Indicator-Based
- MA Crossover
The Moving Average Crossover strategy is one of the simplest Forex trading technical strategies that probably every trader has stumbled upon. This is not to say that it’s ineffective, as the MA crossover strategy can indeed produce significant profits if you get the parameters right. The strategy is based on two moving averages – a slower and a faster one – and generates a buy signal when the faster MA crosses the slower MA from below, and a sell signal when the faster MA crosses the slower MA from above.
- Mean Reverting Strategy
Currency pairs tend to revert to their mean value after certain events cause them to overshoot their average exchange rate. The mean-reverting strategy tries to benefit from that by triggering a sell signal if the price shows to be high relative to its historical mean, and a buy signal if the price is low relative to its historical mean. Again, traders can use moving averages to determine the average historical price. Simply place a slow MA (e.g. 50 periods) and use a faster MA (e.g. 10 periods) to assess the current exchange rate relative to its average value.
If the faster MA crosses the slower MA from below, we can expect that the price will likely revert and enter with a sell position. Similarly, if the faster MA crosses the slower MA from above, we can enter with a buy position. Note this is a contrarian approach to the typical MA crossover strategy, and can produce fake signals if the market starts a strong trend.
- The Divergence Strategy
The third indicator-based strategy that we’ll discuss is the divergence strategy. It’s based on an oscillator, such as the RSI, and relates the current price-action to the value of the indicator. If the price makes a lower low but the indicator makes a higher low, a bullish divergence forms and triggers a buy signal. Similarly, if the price makes a higher high but the indicator makes a lower high, a bearish divergence forms and triggers a sell signal.
Price-Action Trading Strategies
- Trend-Following Strategy
Instead of searching for books titled “Forex Trading Secrets Revealed” or “Secret Forex Strategies Revealed”, you can simply adopt a trend-following trading strategy.
There’s a simple reason why trend-following strategies are one of the best Forex trading strategies ever – they work. The famous trader Bill Dunn proved it in 1995 when he shorted the downtrend of USD/JPY in the beginning of the year and entered with a long position during the August-September uptrend. Trend-following strategies are based on trading the underlying trend, and staying inside the trend as long as it lasts. The strategy doesn’t involve complicated technical tools, and all you need is a basic understanding of trends (higher highs and higher lows in uptrends, and lower lows and lower highs in downtrends), channels and trendlines.
If a pair is showing a strong uptrend and the price is approaching the trendline or channel, enter with a long position and ride the trend until it reverses. The same rules also apply during downtrends, only that you would short the pair. So far this year, trend-following strategies would have generated significant returns which place them among the best Forex strategies in 2018.
The following video shows a simple trend-following strategy:
- Counter-Trend Trading Strategy
As it name suggests, a counter-trend trading strategy is based on opening a trade in the opposite direction of the underlying trend. Why would you do that? Because all trends occasionally form corrections on their way up or down. A correction is what forms the higher lows during uptrends, and lower highs during downtrends. They are measured with Fibonacci retracements, since the Dow theory suggests that each correction should reach around half of the primary move.
Once you see the price making a higher high or lower low, you can prepare to enter the market in the opposite direction and trade the correction. However, be aware that counter-trend trading carries more risk compared to a trend-following strategy.
- Pullback Trading Strategy
Pullbacks are not only a great way to enter a trade that you initially missed, but can also be used to develop a complete trading strategy based on them. Pullbacks occur after the price breaks a major technical level (support/resistance, trendline, channel…), reverses and touches the broken level again. Once we see that the broken level holds, we can enter in the direction of the breakout. Pullbacks are one of the most popular Forex tactics among day traders.
- Breakout Trading Strategy
Breakout trading strategies are based on catching the momentum which forms immediately after a break of a major technical level. Breakout traders are mostly day traders who look to enter the market immediately after the breakout. Stop-loss orders are often placed around major technical levels which get triggered after the level breaks and cause the price to spike up or down. The more important the level is, the more stop-loss orders are placed around it which increases the price-volatility after a breakout. Breakout traders often base their trades on S&R zones, trendlines and chart patterns.
- Swing Trading Strategies
Swing trading strategies try to catch the up- and down-swings in the market, which can take a few days or weeks to form. Since swing trading is based on longer-term setups compared to day trading, swing traders often combine fundamentals and technicals to enter the market. Fundamentally, swing traders can focus on short-term news volatility and the expected differentials in interest rates, while technically they usually focus on major S&R zones, trendlines, channels and chart patterns such as the Head and Shoulder pattern. The entry trigger can be a simple breakout of a technical level in the direction of the fundamentals. Once a trade is open, swing traders can hold their positions from a few days to a few weeks.
Fundamental Trading Strategies
- The Straddle Strategy
While fundamental trading strategies are usually associated with long-term trading, the straddle strategy is a fundamentally-based approach which tries to profit from the short-term volatility during major news releases. The strategy is based on placing two pending orders just before the news are released. A buy-stop is placed just above the current market price, and a sell-stop is placed just below the current market price a few minutes before the release. The idea behind the strategy is that after the release, the price will spike either up or down and trigger one of the pending orders in order to catch the move. However, spreads can widely increase after a major report and your pending order may be filled at a different price than anticipated, which is one of the main risks associated with the straddle strategy.
- Long-Term Currency Valuation Trading
Finally, it’s time for a long-term trading strategy where trades can be held open for a few months or even years. This strategy is based on currency valuation models, such as the balance of payments approach and monetary approach, and other long-term factors such as the overall trend in productivity and terms of trade. However, since long-term fundamental models don’t reveal precise entry and exit points, long-term traders should combine technical tools to identify the best place to enter their trades.
Pick a Strategy That Suits Your Trading Style
A major mistake that new Forex traders make and end up blowing their account is picking a trading strategy that doesn’t suit their trading style. Before searching for the best Forex trading system in the world, assess your trading style first.
It’s important to make a difference between trading style and trading strategy, as the former heavily impacts the latter. Trading styles include scalping, day trading and long-term position trading, to name a few, while a trading strategy refers to the way of analyzing the market to get clear entry and exit triggers. Naturally, scalpers won’t be interested in a trading strategy that involves measuring inflation differentials (no.10 in our list), while position trader could benefit from a trend-following strategy for example (no.4 in our list).
That’s the reason why it’s important to determine your trading style first. Do you enjoy fast-paced trading with small profit targets, or prefer longer-term swing and position trading? After you choose your preferred trading style, you should move on to pick the best Forex trading strategy for you.