As a trader, you may have come across the phrase, "forex trading strategy."
Is this some kind of a plan or a system Jim from the block told you about?
In this guide, we'll explain the top 10 forex strategies you can apply in 2021.
If you are new to the forex world, this guide can help you a lot, so make sure to stick to the end.
What do you need to know about forex trading strategies?
A forex trading strategy is a system used by a forex trader to decide whether to buy or sell a currency pair.
Consider a forex trading strategy to be a game plan for how you will approach trading. This plan will lay out a clear set of principles for buying and selling, maintaining positions, and managing available funds.
When developing a forex trading strategy, you need to establish certain goals. The majority of the strategies that are used are based on fundamental or technical analysis.
Forex trading strategies that depend on technical indicators place a greater emphasis on market circumstances and fluctuations.
While technical forex trading methods are based on technical analysis, fundamental forex trading strategies are based on fundamental elements such as economic or political factors.
Top 10 forex trading strategies
Now, here comes the juicy part of the article. Let's find out what are the top 10 forex strategies you can apply in 2021.
1. Carry trade
Carry trade includes purchasing a high-yielding currency against a low-yielding currency. The carry trade seeks to benefit from the difference between these interest rates.
Carry trade is classified into two types: positive and negative.
You buy high-interest-rate currency against low-interest-rate currency when you have a positive carry.
On the other hand, negative carry allows you to buy at a low interest rate against a high interest rate.
Let's use the carry trade on the currency market as an example.
Assume you're trading GBP/USD. The current GBP interest rate is 0.10 %, while the USD interest rate is 0.25 %. You place a buy order and go long on the pair. The pair rises.
Can you guess how much money you'll make?
It amounts to 0.15 %.
This is an illustration of the positive carry trade.
When the overall market picture is bullish, carry trading methods perform flawlessly.
You chose currency pairs whose respective countries must have a good outlook. For example, if GBP/USD is your pair, then the overall sentiment in the UK and the US must be favorable.
Pros
· Easy-to-follow strategy
· Your profit from a difference in the interest rate and price fluctuation
Cons
· Any change in the interest rate can turn your winners into losers
· Changing exchange rates can harm your carry trade
2. Day trading
Day trading is a popular type of trading in which you buy and sell a currency pair in a single trading day to capitalize on price swings.
Day trading is a type of short-term trading, but unlike scalping, you normally only take one trade each day and close it at the end of the day.
Day traders tend to set aside money at the beginning of the day, concentrate on their trading plan, and end with a profit or a loss.
Assume a trader has $1,000 in capital and a 55% win rate on his/her trades. However, they only put up 1% of their funds or $10 per trade.
To accomplish this, he or she places a stop-loss order. A stop-loss order is put five pips away from the entrance price of the transaction, and a profit-target order is set eight pips away.
This means that the potential profit for each trade is 1.6 times bigger than the risk (Eight pips divided by five pips).
Keep in mind that you want winners to outnumber losers.
Using the conditions above, you can make five entries and trade a currency pair for two hours during a busy time of day.
If a month has 20 trading days, the trader can make 100 trades on average.
Pros
· No overnight positions
· You can calculate your profits at the end of each day
Cons
· Requires constant monitoring
· It isn't profitable as compared to swing or position trading
3. Forex arbitrage
The idea behind forex arbitrage trading is to buy and sell divergent currency values but will eventually converge.
An arbitrageur is someone who applies the arbitrage strategy.
An arbitrageur anticipates that the price will return to its mean, allowing him or her to terminate the profitable trade in seconds.
The foreign exchange market is decentralized. As a result, there are times when the price of a currency pair quoted in one place differs from the price quoted in another.
The arbitrageur, who is aware of the circumstance, buys at a lower price and sells at a higher price.
Consider the GBP/USD pair. The price was quoted at 1.3926 by the Bank of London and 1.3927 by the Bank of America.
An arbitrageur would buy at Bank of America's quoted price and sell at Bank of London's quoted price.
Although the benefit of an arbitrageur in the above example is merely one pip, arbitrage trading chances frequently emerge for a brief period. So it's worthwhile to put out the effort.
Because arbitrage possibilities often arise throughout the day, many huge corporations take advantage of them. This is why the forex market is so heavily automated nowadays.
Pros
· Cut the emotion out of the equation
· Presents you with multiple trading opportunities
Cons
· As opportunities occur frequently, a delay in execution means a missed opportunity
· Not easily accessible for retail traders
4. Scalping
If you're new to forex trading, you've probably heard of the term "scalping."
Scalping in the forex market is swapping currencies depending on a number of real-time indications.
The goal of scalping is to profit by buying or selling currencies for a brief period and then closing the position for a little profit.
Its name is derived from the technique through which it achieves its goals. Over time, a trader attempts to "scalp" a large number of modest gains from a large number of trades.
Scalping is a lot like those intense action movies that keep you on the edge of your seat. It's thrilling, fast-paced, and mind-boggling all at the same time.
The primary goal of forex scalpers is to capture little amounts of pips as many times as possible throughout the day. As a result, these types of exchanges last for a few seconds to minutes at most!
The main goal of scalping is to open a spot ask or bid price and swiftly shut it for a few points higher or lower benefit.
A scalper must be able to effortlessly cross the spread. For example, if you are long GBP/USD with a bid-ask spread of two pips, your position will begin with a two pips unrealized loss.
A scalper must convert a 2-pip loss into a profit as fast as possible. To accomplish this, the bid price must climb above the ask price at which the trade was started.
Smaller swings occur more frequently than larger ones, even in relatively calm markets. As a result, a scalper can profit from a number of tiny fluctuations.
Pros
· Ability to catch quick profits
· Small wins can turn into bigger profits
Cons
· Highly stressful
· Requires you to look at the charts constantly
5. Position trading
Many position traders seek strategies that eliminate all of the difficulty.
Why?
Because they intend to be in this for the long term.
Position trading is the longest type of trading. Position traders hold positions for months or even years at a time.
They enter the trades and forget about it (not literally). The aim is to remain calm and wait for larger profits rather than scalping for a few pips.
This is a form of trading that is similar to investing.
This type of forex trading is just for the most patient traders and demands a solid understanding of the basics.
Because position trading is held for such a lengthy period, fundamental themes are the primary focus of market analysis.
Fundamentals drive long-term currency pair patterns, and it is critical that you grasp how economic data affects the market.
Assume you are a position trader, and you went long on GBP/USD on September 25 and exit on February 25.
As you can see on the chart, you would have made some cool profits, as the pair was in an uptrend.
Pros
· Don't take much of your time
· Best strategy considering risk-management
Cons
· Requires a lot of patience
· Need bigger stop-losses
6. Swing trading
Swing trading sits somewhere between day trading and position trading, with trades lasting anywhere from a few days to a few weeks.
The swing trader is simply looking for multi-day chart patterns in order to profit from larger price moves or swings than would normally occur in a single day.
Swing traders identify prospective trends and hold trades for extended periods, ranging from two days to many weeks.
It's ideal for individuals who can't watch their charts throughout the day but can commit a few hours to market study every night.
The goal is to focus on currency pair price movement so that you can enter at an acceptable level and exit with a profit later.
However, depending on your plan, you may be able to keep your spot available for several weeks.
Swing trading looks for swings within a medium-term pattern and enters only when there appears to be a strong probability of success.
In an upswing, for example, you should buy at swing lows. Short at swing highs, on the other hand, to profit from temporary countertrends.
Pros
· Perfect for those who don't have enough time for trading
· A more relaxed form of strategy than day trading and scalping
Cons
· Needs extensive research
· Swap rate for opening overnight positons
7. News trading
Okay, you turned on the television, and there is breaking news concerning an economic event that is going place.
You'll start scratching your head and remark, "Oh my goodness! I currently hold trade in GBP/USD. Will this news have an impact on me?"
Simply said, yes, it will since news moves the market.
When news breaks, especially critical news that everyone is watching, you can almost always expect significant movement.
You know the market will move somewhere, so this makes news trading worth a try.
As a news trader, your goal is to be on the right side of the move.
It is worth emphasizing that because there is so much market news, you must select your strategy for news trading.
While the markets react to economic news from other countries, the biggest movers and most closely followed news comes from the United States.
The United States continues to have the world's largest economy, and the US dollar is the world's reserve currency.
This means that the US dollar is involved in almost 90% of all forex transactions, making US news and statistics vital to monitor.
So, keep up with the US news.
Pros
· Quick profits due to increase volatility
· Trading volume increase with the news release
Cons
· Some brokers increase spread during news releases
· The news brings uncertainty to the market
8. Trend trading
Trend trading is a method in which traders wait for a clear trend to be developed before entering a position.
A trend occurs when the price moves in one general direction, such as up or down.
When a pair is heading upward, trend traders take a long position. Higher swing lows and higher swing highs describe an upswing.
Similarly, trend traders may choose to enter a short position when a currency pair is going lower. Lower swing lows and lower swing highs describe a downtrend.
To detect the trend direction and when it may be shifting, you must examine both price action and other technical tools.
For an uptrend to occur, the price must advance above recent highs, and when the price falls, it must remain above preceding swing lows.
This demonstrates that, despite the price swinging up and down, the overall tendency is upward.
A similar idea applies to downtrends, with traders looking to see if the price makes overall lower lows and lower highs.
When that no longer occurs, the downtrend is in doubt or gone, and the trend trader is no longer interested in holding a short position.
As you can see on this chart, the red arrows mark the dips in the price of the GBP/USD pair, and the blue arrows represent the high points.
So, if the highs and the lows are steadily rising, this indicates an upward tendency.
That means you should buy the currency pair when it is at a low and sell when it has surpassed the most recent high point, or you can keep it for a while and sell when the price has risen significantly.
Pros
· Easy to understand for beginners
· Presents with multiple trading opportunities
Cons
· Identifying trends takes a lot of time
· Not suitable when the market is going sideways
9. Breakout trading
A breakout is any price movement that occurs outside of a predefined range. This area is called support and resistance.
Breakouts can occur when prices rise over resistance levels, which is known as a bullish breakout.
They can also pop up when prices fall below support levels, which is known as a bearish breakout.
Breakout trading is an essential approach since breakouts frequently signal the beginning of heightened market volatility.
We may use volatility to our advantage by waiting for a break in a price level and then joining a new trend as it begins.
The idea of breakout trades is to enter the market just when the price makes a breakout and then ride the trade until volatility subsides.
Rather than following the herd and trying to enter the market when it is extremely volatile, it is preferable to look for currency pairs with very low volatility.
This allows you to position yourself and be ready when a breakout comes and volatility shoots up!
Pros
· Volatility can bring quick profits
· A good strategy for beginners
Cons
· It can be hard to detect levels of support and resistance
· Not suitable for every forex pair
10. End-of-day trading
There's a day, and then there's an end-of-day trading strategy.
For the end of the day, a trading strategy implies making trading decisions very close to or after the markets close.
Whereas day traders monitor charts throughout the day, entering and closing transactions as they see fit, end-of-day traders often trade at the close or the open.
News, shifting market prices, or day-to-day living does not distract you if you place your trades at the end of or after the trading day.
End-of-day trading setups allow you to cut through the noise, frequently result in lower rates, and allow you to trade with a limit or stop orders. This method is excellent for folks who want to keep working their regular employment.
Pros
· More convenient than day trading and scalping
· It doesn't take much of your time
Cons
· Riskier than day trading
· Trading during the less active hours
Final thoughts
So, there you have it.
All of the above trading strategies require you to have a trading plan. You are not gonna make any profits if you don't follow your trading plan.
Also, it's important to keep your emotions under control. With position and swing trading, there's isn't many emotions involved, but you need to cut down on emotional trading with other strategies.
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