Introduction
Forex trading can be a profitable venture if you have solid and tested forex trading strategies. By following your trading strategies, you will become more disciplined and not get distracted by false trading signals and noise in the market. Without a practicable trading strategy, emotions can take over your trading decisions, which can severely disturb your performance. Over time, as you apply the trading strategies in different market conditions, you will be able to further improve your strategies.
Technical or Fundamental Analysis: Which One to Use?
The forex trading strategies we discuss in this article use technical analysis. However, you can also use fundamental analysis to understand the market and try to predict the possible moves of the market. In fact, combining technical analysis with fundamental analysis can give you a complete picture of the market.
What you need to know before using forex strategies
The forex trading strategies we are about to discuss require you to study price action, use different technical indicators, and draw graphics to analyze price action to find profitable trading opportunities. After finding the trade setup, you will need to determine the entry and exit points before entering the trade so that you can execute your trade successfully. So, you need to start studying charts and try to find trade setups so that you can quickly spot trading opportunities and execute them profitably.
Top 10 Forex Trading Strategies
Though there are countless trading strategies, there are some strategies that you can consider applying while trading forex. The strategies have been back-tested and are expected to work in 2021. We discuss the strategies in detail below:
1- Breakout Trading Strategy
A breakout occurs when the price of an asset breaks beyond a key support or resistance level, which usually leads to huge price movements. To employ the Breakout strategy effectively, you need to know the support and resistance levels on the price chart.
Support and Resistance Levels
A support level is where the falling prices bounce up or stop moving further down. In other words, a support level on a price chart provides support to the falling prices, barring them from going down further. The resistance level on the price chart is where rising prices face resistance and stop moving further up. Usually, prices come down after hitting the resistance level.
Interpreting Price Chart to use the Strategy
In the price chart below, you can see the resistance line in green where the prices bounced off a couple of times but breached the line on the third attempt. The price action forms a bullish candle as soon as it crosses the resistance line, which is a sign of confirmation of bullish momentum. Another sign to confirm the breakout is the use of the Volume-weighted Moving Average (VWMA), which shows that the breakout is backed by an increased trading volume and is considered a sign of momentum.
Entry, Exit, Take Profit and Stop Loss Points
Once you spot the breakout trade setup, you should first confirm whether the breakout is genuine and not a fakeout. You can see in the chart below that the VWMA is up and the price consolidated after the bullish breakout candle and didn’t go down. After confirmation, you can enter the trade and put your stop-loss and take-profit points. You can set up your stop-loss just below the resistance line so that even if the prices fail to up, you can exit the trade without incurring much loss. You can use the average true range (ATR) of the previous 7 or 14 candles and set up ATR points up from the resistance line.
2- Bollinger Bands and MACD Strategy
Bollinger Bands are used in conjunction with the Moving Average Convergence Divergence (MACD) indicator to measure the volatility, strength, and direction of an ongoing trend. The MACD indicates whether the trend is waning, picking up momentum, or is about to break out of a range. The Bollinger Bands, on the other hand, can help you determine the entry points, gauge volatility, and confirm a breakout.
Interpreting Price Chart to use the Strategy
We will learn how to use the Bollinger Bands and MACD strategy to ride a trend and exit once we see weakness or reversal in the trend. You can confirm the uptrend when both the lines of the MACD indicator - the MACD line and the signal line - are above zero, with the MACD line above the Signal line.
As can be seen in the chart above, the MACD line is above the Signal line while the price makes a bullish candle at 20 MA, signaling the start of an uptrend. The price continues to move higher while hugging the upper Bollinger Band. When the price touches 20 MA from above, the MACD-Signal line crosses each other, signaling the weakness in the trend.
Entry, Exit, Take Profit and Stop Loss Points
A potential entry point for long trades could be when the price crosses 20 MA, with the MACD line above the Signal line, and both are above zero. The take profit can be set at critical support or resistance levels, depending on a long or short trade. In the case of long trades, the stop-loss point should either be trailed along with the lower Bollinger Band or trailed along the 20 MA to gain maximum profit from the uptrend.
3- MACD & Parabolic SAR strategy
The MACD & Parabolic SAR strategy is used to determine the trend and trade with the direction of the trend. Parabolic SAR is an indicator that plots dotted lines above or below the price and helps find out the potential trend reversals. Some traders also use Parabolic SAR as points for placing stop-loss points.
Interpreting Price Chart to Use the Strategy:
As illustrated in the chart below, the MACD line (blue line) crosses the Signal line (brown line) and the dotted line plotted by Parabolic SAR shifts below the price, signifying that the trend has changed. The change in trend is further confirmed by the MACD crossover.
Entry, Exit, Take Profit and Stop Loss Points
You can enter the long trade when:
● The MACD line crosses above the Signal line
● A bullish candle is created
● The dotted lines of the Parabolic SAR indicator shift from above to below the price action
You can enter your stop loss just below the dotted lines created by the Parabolic SAR indicator. If the price moves up, you can gradually move the stop loss above along the dotted line to lock in some profits.
4- RSI Divergence Strategy
The RSI, or Relative Strength Index, is a momentum indicator that signals overbought and oversold levels and oscillates between 0 and 100. We will use RSI Divergence to determine trend reversal and potential entry points.
For this strategy, you need to change the default parameters of RSI as follows:
1- Change 14 to 8
2- Change 70 to 80
3- Change 30 to 20
Interpreting Price Chart to Use the Strategy
You need to identify the areas where the trend of RSI diverges from the price action. For example, in the chart below, the price trend is down but the RSI diverges and is up, the setup signals an impending trend reversal. After some time, the price follows the RSI oscillator and makes an uptrend. Throughout the uptrend, the RSI remained above 40, indicating that the momentum was strong.
Entry, Exit, Take Profit and Stop Loss points
You should wait for confirmation and can enter the trade after you see the bullish candle forming on the price chart, which makes a higher high. To put stop loss, you can look for the previous support for long trades or previous resistance for short trades. However, the stop loss should not be wide. If the support or resistance points are wide, you can see the closing point of the second or third previous candle. You can set up the take profit point at two or three times your stop loss point.
5- Simple Moving Average Crossover Strategy
Moving Average Crossover occurs when two moving averages cross each other. If a shorter period moving average crosses above the longer period moving average, the crossover is called a bullish crossover and indicates a potential change in trend. However, if a longer period moving average crosses above the shorter period moving average, the crossover is called a bearish crossover and indicates an impending downtrend. Though you can use different moving averages, the most commonly used averages for crossover strategies are 50 and 200. Their crossovers are also called the Golden Cross and Death Cross.
Interpreting Price Chart to Use the Strategy
As seen in the price chart below, the 50 SMA (blue line) crosses below the 200 SMA (red line) and the price starts decreasing. In the later part of the chart, the 50 SMA crossed over the 200 SMA line and the trend reversed and moved upward. However, you must remember that moving averages are lagging indicators and they are late in detecting a trend. Still, it can help you determine the change in momentum and trend.
Entry, Exit, Take Profit and Stop Loss points
The moving averages can be used to identify both short and long-term trends. If you want to do short-term trades, you can use shorter moving averages, such as 50 SMA and 20 SMA. Usually, the crossover points buy and sell signals, depending on whether the crossover is a bullish or bearish crossover. In the trade set up above, you can enter a short trade at the point of bearish crossover, putting a stop loss at the swing high of the last candle, and exiting the trade at the next bullish crossover.
The Range trading strategy is easy to follow as you only have to determine the range of the price on the price chart. You can implement the range trading strategy in any time frame. The idea is to buy at the support level and sell at the resistance level if the market is trading in a range. The breakout strategy that we discussed is an extension of the range trading strategy.
Interpreting Price Chart to Use the Strategy
In the price chart below, the market is trading in a range - the area between support and resistance levels -, so you can apply the range trading strategy. The key is to identify the support and resistance levels on the price chart to determine entry and exit points.
Entry, Exit, Take Profit and Stop Loss points
If you want to go long on a trade, you can enter at the support level on a range to ride the price cycle up to the resistance level. Alternatively, you can go short on trade at the resistance level and exit the trade at the support level. You can place your stop loss a few points below the support level for long trades and few points above the resistance level for short trades.
7- Moving Average Envelopes Strategy
The Moving Average Envelopes Strategy uses moving average envelopes, with the middle line of 20 SMA and upper & lower envelopes at 10% above and below the 20 moving average. When the price touches the upper envelope, it signifies overbought levels, and if the price touches the lower envelope, it signifies oversold levels. Often, the envelopes act as support and resistance levels, but the price can pierce the envelopes and remain at oversold or overbought levels for an extended time.
Interpreting Price Chart to Use the Strategy
In the chart below, the price is moving downward outside the lower envelope. Later, the price moves inside the envelopes, crosses the lower and middle lines, and consolidates at the upper band. However, after making a few candles, the price pierces the upper band, going into the overbought territory. Still, the price manages to hold the upward momentum and rises. In the latter half of the chart, the price bounces off the upper band and pulls downward, momentarily piercing the lower band and entering the oversold territory.
Entry, Exit, Take Profit and Stop Loss points
A buy signal is created when price pierces the upper band. However, you should wait for a couple of bullish candles to confirm the potential uptrend. In case of a buy signal, you can put your stop loss below the upper band, preferably at the close of the last bearish candle. You can exit the trade when the price touches the middle 20MA line.
8- Ichimoku Cloud Strategy
Ichimoku Cloud Strategy is a Japanese technical analysis indicator that provides traders with different trading signals. The Ichimoku Cloud Strategy looks complicated but is easy to use. The indicator consists of the following lines:
1. Conversion line
2. Base line
3. Lagging span
4. Leading span 1
5. Leading span 2
Interpreting Price Chart to Use the Strategy
The price increases when the cloud in the chart is green (Lead Span 2 is above Lead Span 1). On the contrary, the price is expected to decrease when the cloud turns red or Lead Span 1 is above the Lead Span 2. In other words, a price below the Cloud signifies a bearish trend whereas a price above the Cloud signifies a bullish trend. Price within or in the middle of the Cloud signifies consolidation.
Entry, Exit, Take Profit and Stop Loss points
Buy signal is created with the price moves outside the red cloud. You can enter the trade after you see a breakout above the cloud and a bullish candle is created. You can put the stop loss below the low of the breakout candle. Take profit point should be placed where the Conversion line crosses below the Base line.
9- ATR EMA Strategy
You can use the ATR-EMA strategy to enter and exit trades and find profitable trading opportunities. ATR helps you determine the Average True Range or the volatility of the price. An average true range (ATR) measures the average range of the last few candles. When you overlay 20 EMA over the ATR, you get a chance to discover the points of higher volatility in the price.
Interpreting Price Chart to Use the Strategy
As can be seen in the chart below, the ATR breaks out from the 20 EMA line and is complemented by the big bullish candle. This is a good indicator that the increase in volatility is reinforced by the increase in price. If the breakout is not complemented by the bullish candle, you should not enter the trade.
Entry, Exit, Take Profit and Stop Loss points
When you see the bullish candle in conjunction with the ATR breakout, it is a good indication of an expected rise in price or the onset of an uptrend. You can enter the trade after you see another bullish candle following the initial bullish candle. Stop loss can be placed at the low of the breakout candle. To set up a Take Profit point, you can use ATR, the average range of the previous 14 candles as determined by the ATR indicator, and place the Take-profit point ATR value away from your entry point. For example, if the ATR value is 10, you can place the take-profit point 10 points up from the entry point.
10- False breakout strategy
The false breakout strategy refers to a breakout of price action from the trading range. However, the breakout is usually fake as the price fails to break support or resistance levels. Expert traders exploit false breakouts as amateur traders fall prey to the trick and start trading them to make profit. However, expert traders reverse the breakout and sweep the amateur traders who mistook the fakeout for a real one.
To differentiate fakeouts from real breakouts, you need to minutely analyze the price action. We provide you with some important points that will help you spot false breakouts so that you can trade them accordingly.
A real breakout is usually supported by strong volume. If you see a breakout without the corresponding rise in volume, chances are that the breakout is fake. You might need further clues to confirm a fakeout.
Sometimes, what you are interpreting as a breakout on a price chart in one time frame turns out to be an ordinary price action in another time-frame. So, you should check price action on various time frames to determine the critical support and resistance levels that are respected by the price action.
Interpreting Price Chart to Use the Strategy
In the price chart below, you can see the price action touching the resistance level thrice, but failed to pierce it. However, on the fourth attempt, the price made a breakout but failed to sustain the momentum and fell afterwards. To confirm that the breakout was not real but fake, we checked it on a 4-hour chart and found no supporting evidence of a breakout being real. Also, we saw no rise in volume, which strengthened our belief that the breakout was not real. After confirming that it is indeed a fakeout, we can go ahead and place our trade and determine critical entry and exit points.
Entry, Exit, Take Profit and Stop Loss points
You can set your entry point at the point where the price pulls back at the resistance level or pushes up at the support level. In our case, you can enter the market on the price pull back at resistance level.
You can put your stop loss at the highest point of the breakout in case of short position while at the lowest point of the breakout in case of long position. You must have a risk-reward ratio of at least 1:2, so you should aim to extract as much profit as you can. Average True Range (ATR) can also give you an idea of the average range of the past candles, which you can use as a reference to set your take profit point.
Conclusion
Every trader should learn different trading strategies and try to improve their strategies to achieve better trading results. Spending time analyzing the price action and coming up with a trading strategy can greatly improve your trading performance. The trading strategies we discussed above work and you can use these strategies to your advantage. We recommend that you test these strategies on a demo account and master them so that when you execute them in the real market, you are able to execute them perfectly without faltering. The trading strategies will allow you to place your trades only when you see the appropriate trading setup as recommended by the trading strategy. By following the best forex trading strategies, you will become a disciplined trader, which can help you become a profitable trader.
Real-time News
