Let’s understand the basics first. Forex trading involves buying and selling currencies in the hopes of making a profit. It’s different from investing. To successfully trade forex, traders need to employ effective trading strategies.
There are four main trading styles that traders can use to make profits in the forex market: scalping, day trading, swing trading, and position trading. In this article, we will introduce each trading style as well as provide a popular trading strategy for each style. In most cases, these forex trading strategies could be implemented to any trading style but work the best as described in the article.
Traders should make sure they have these tools to begin:
- a stable internet connection
- PC, laptop or a smartphone
- open trading account with a forex broker
- downloaded trading platform
1. Scalping
Scalping is a trading style that involves making multiple trades in a short period of time, usually in a matter of minutes or seconds. Scalpers aim to make small profits quickly, but these small profits can add up over time. The key to successful scalping is to have a good understanding of the market and to react quickly to changes in prices.
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It’s important to remember that volatility is crucial for scalpers. One popular scalping strategy is the “Fast Breakout Strategy.” This strategy involves using a one minute chart while looking for opportunities to enter and exit trades quickly.
Scalpers will typically use resistances/support levels to identify entry and exit points. This could actually be the best forex scalping strategy because of its simplicity. Let’s dive in.
Fast Breakout Strategy
Step 1: Identify the trend
It always starts with identifying the trend. This is important to remember. The trader should start by identifying the trend by looking at the price chart of the currency pair they want to trade.
They should look for the general direction that the price is moving in by examining the highs along with lows of the price movements. This strategy doesn’t work when volatility is small and the market moves sideways.
Step 2: Identify key levels of support and resistance
Once the trader has identified the trend, they should look for key levels of support and resistance. These levels are areas where the price has previously reversed or stalled. Traders can identify these levels simply by looking at the chart.
EUR/USD 1-minute chart, Fast Breakout Strategy examples, source: tradingview.com
Step 3: Look for breakouts
The trader should look for breakouts above or below the key levels of support and resistance. Breakouts occur when the price moves beyond a key level of support or resistance, indicating a potential trend reversal or continuation.
When there is strong selling or buying pressure, the market will move below or above a certain level most of the time. Even if it turns out to be a false breakout, a trader should be able to move their stop loss to break even to protect their capital at all costs.
Step 4: Enter the trade
Once the trader has identified a breakout, they should enter the trade by buying or selling the currency pair. They should use a market order to enter the trade quickly without hesitation.
That means they should anticipate the trade to not enter impetuously because these trades usually end up in loss as they are executed emotionally. Here’s an example of where a trader should enter – when there is a breakout happening.
EUR/USD 1-minute chart, Fast Breakout Strategy with entry examples, source: tradingview.com
Step 5: Set a stoploss and takeprofit
To manage their risk, the traders should set a stoploss and take profit level. A stoploss is a predetermined point at which they will exit the trade if the price moves against them, while a take profit level is a predetermined point at which they will exit the trade if the price moves in their favor.
The trader should watch the trade closely and be prepared to exit if the price moves in their direction. Because this is scalping, a stoploss of 5 to 10 pips should be sufficient while trading.
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Overall, the Fast Breakout Strategy involves making multiple trades in a short period of time, so traders need to repeat these steps multiple times to be successful. Additionally, it’s crucial to have a good understanding of the market and to react quickly to changes in prices. With practice along with discipline, traders can become successful scalpers in the forex market.
However, traders should bear in mind that the faster the trading, the harder it is to manage emotions as only a few pips can represent hundreds of dollars. Traders need to make sure they don’t overtrade by, for example, trading only for two or three hours a day.
2. Day Trading
Forex day trading is a trading style that involves buying or selling currencies within a single trading day. Day traders aim to make profits by taking advantage of price movements in the market throughout the day. Successful day traders are typically disciplined and have a good understanding of market trends as well as technical indicators.
One popular forex day trading strategy is the “EMA 50 Day Trading Strategy.” This strategy involves identifying key levels of support and resistance while looking for breakouts above or below these levels. The most used timeframes for this strategy are 5-minute, 15-minute, and 30-minute charts.
EMA 50 Day Trading Strategy
Step 1: Identify the trend
The trader should look at the five-minute chart of the currency pair they want to trade and identify the trend. They should aim to identify the general direction that the price is moving in by looking for higher highs as well as higher lows for an uptrend, or lower highs and lower lows for a downtrend.
Step 2: Find an entry point
Using technical indicators like moving averages or stochastic oscillators, the trader should look for an opportunity to enter the market. For example, they could use the 50-period moving average (EMA50), then wait for the price to cross above or below it to signal a potential entry point. This strategy should be supported by taking supports and resistances into consideration.
Step 3: Enter the trade
Once the trader has identified an entry point, they should enter the trade by buying or selling the currency pair using a market order to enter the trade quickly. Every time a trader sees the currency pair, EUR/USD in this example, they should be looking to sell and vice versa.
Red levels are marked as great potential selling entries and green levels are potential buying opportunities. In the first red line, the currency pair dropped below EMA 50, falling below the support. This is a good time to enter when a downtrend is prevailing.
EUR/USD 5-minute chart, EMA50 Day Trading Strategy examples, source: tradingview.com
Then there was a losing buy trade, but a winning selling trade right after that. After the downtrend ended, EUR/USD formed a level that got broken along with EMA 50, which turned out to be a fantastic buy trade.
Step 4: Set a stoploss and takeprofit
To manage their risk, the trader should set a stop loss and take profit level. Just to reiterate, stop loss is a predetermined point at which they will exit the trade if the price moves against them, while a take profit level is the point at which they will exit the trade if the price moves in their favor.
In this case, traders should always set stoploss above or below the closest resistance/support. In the first example, a trader would enter a sell position where they would need to put a stoploss (approximately 20 pips) above the nearest resistance.
EUR/USD 5m chart, EMA50 Day Trading Strategy examples with stoplosses and takeprofits, source: tradingview.com
When the position moves 20 pips in profit (1:1 risk reward ratio), the stoploss should be moved to break even (BE) – the place of no loss to protect capital. In this case, the trade would end in break even, but the same should be applied on other trades as well, aiming for at least 1:2 RRR. The second trade would be a loss, but the third and fourth trades would deliver the desired profits.
Day trading involves making multiple trades in a single trading day, so traders need to be alert and react quickly to changes in prices. By employing effective trading strategies like this one while maintaining discipline and focus, traders can increase their chances of success in the forex market. It’s important to remember that day trading usually involves making just a few trades a day. It’s not like scalping, where traders may make tens of trades each day.
3. Swing Trading
Swing trading is a trading style that involves holding positions for several days to several weeks. Swing traders aim to profit from larger price movements in the market. Successful swing traders typically have a good understanding of market trends and use technical indicators to help identify entry as well as exit points.
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This trading style is the least stressful out of the first three trading styles in this article. One popular swing trading strategy is the “Trend Rider.” This strategy involves using trend lines, important levels, a 200-day moving average, and an OsMA indicator.
Swing traders will look for opportunities to buy when a trading setup suggests the uptrend would continue and vice versa. It is important to look for at least 3 confirmations out of 4.
Trend Rider Strategy
Step 1: Identify the trend
The trader should start by identifying the trend by looking at the price chart of the currency pair they want to trade, as always.
They should look for the general direction that the price is moving in by examining the highs and lows of the price movements over a longer time frame, such as a few days or weeks. The most used timeframes for this strategy are weekly, daily, or 4-hour.
Step 2: Identify key levels of support and resistance
Once the trader has identified the trend, they should look for key levels of support as well as resistance. These levels are areas where the price has previously reversed or stalled. Traders should also use tools such as the 200-day moving average (EMA200), OsMA, and trend lines to identify the best entry zones.
Step 3: Wait for a pullback
The trader should wait for a pullback to occur after a strong trend has been established. A pullback occurs when the price temporarily moves against the trend, creating a potential buying or selling opportunity. Here’s an example of a strong downtrend, which could be identified with several lower lows, lower highs, and a trend line.
EUR/USD daily chart, Trend Rider entry identifications, source: tradingview.com
Step 4: Enter the trade
Once the trader has confirmed the trend and identified a pullback, they should enter the trade by buying or selling the currency pair. They should use a market order to enter the trade quickly.
In this case, entry zones were marked with red circles as ideal places to enter sell positions. EUR/USD was set up to bounce back, confirmed with the trend line, resistance, EMA200, and overbought OsMA.
Step 5: Set a stoploss and take profit
To manage their risk, the trader should set a stoploss and take profit target. In swing trading, stoploss usually ranges anywhere from 50 to 200 pips depending on a currency pair. Traders should always make sure that stoplosses are big enough so sudden price movements against the position won’t trigger the stoploss. In all the cases of these trades, 100-pip stoploss should be sufficient.
Step 6: Hold and wait
Swing trading involves holding a position for a longer period of time than day trading, so traders need to be patient and disciplined. By employing effective trading strategies like this one while maintaining discipline along with focus, traders can increase their chances of success in the forex market.
Takeprofit could either be 1:2 RRR or traders can decide not to set any takeprofit at all. Traders can also achieve profits by relying on the fact that the trend will continue and move stoploss along with the trend. This means that the stoploss will move a little lower (trailing stoploss) every time the market falls by 50 or 100 pips.
4. Position Trading
Position trading is a trading style that involves holding positions for several months to several years. This is the least popular trading style because it is almost similar to investing. Position traders aim to profit from long-term trends in the market.
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Successful position traders typically have a good understanding of macroeconomic trends along with using fundamental analysis to help identify long-term trends. One popular position trading strategy is the “carry trade.” This strategy involves selling money in a currency with a low interest rate and investing the proceeds in a currency with a higher interest rate.
Position traders will hold these positions for an extended period of time, profiting from the difference in interest rates between the two currencies. This is why the US dollar strengthened so drastically in 2022 as the Fed started to increase interest rates at a fast pace.
Macro Trading Strategy
Step 1: Identify the long-term trend
The trader should start by identifying the long-term trend by looking at the price chart of the currency pair they want to trade. They should look for the direction that the price is moving in over a longer time frame, such as several months or even years. The preferred timeframes are weekly, monthly, and yearly.
Step 2: Determine the entry point
Once the trader has identified the long-term trend, they should look for an entry point. The entry point should be primarily based on fundamental analysis and could be a price level where the currency pair has previously reversed or a break of a key resistance or support level although this is not necessary. This is because position traders rely on the fundamental side of markets.
Step 3: Set up the trade
Once the trader has identified a macro trend, they should enter the trade by buying or selling the currency pair. They do not have to use a market order to enter the trade quickly. Limit orders are very popular in this trading strategy as it takes thorough planning. Limit order should already be set up along with stoploss and takeprofit.
EUR/USD weekly chart, macro trend identification, source: tradingview.com
Step 4: Hold the position
The trader should hold the position for a longer period of time, typically several months or even years. During this time, they should monitor the trade and be prepared to exit if the price moves against them. It’s crucial to consider the swaps from trading forex CFDs because they vary from broker to broker. Moreover, they are influenced by interest rates.
Step 5: Monitor the trade
The trader should monitor the trade closely and be prepared to exit if the price moves against them or is invalidated. If the price moves in their favor for long enough, they can consider taking profits or adjusting their stop loss to protect their gains.
Overall, position trading involves holding a position for a longer period of time than other trading styles, so traders need to have a longer-term view as well as be patient. By employing effective trading strategies like this one and maintaining discipline and focus, traders can increase their chances of success in the forex market.
Unpopular tips for becoming a better trader
- Develop a trading plan and stick to it. This means setting clear goals for your trades, identifying entry along with exit points, and managing your risk.
- Keep a trading journal. This will help you track your progress over time and identify areas where you need to improve.
- Focus on quality over quantity. Don’t feel like you need to make a trade every day. Instead, wait for high-quality opportunities to present themselves.
- Learn from your mistakes. Every trader makes mistakes, but successful traders learn from them and use them as opportunities to improve their trading skills.
- Stay disciplined and patient. Don’t let your emotions get in the way of your trading decisions. Stick to your trading plan and remain focused on your goals.
Final thoughts
Forex trading can be a profitable endeavor if traders employ effective trading strategies, maintain discipline and focus. The four main trading styles, scalping, day trading, swing trading, or position trading, each require a unique approach and set of skills.
By understanding the characteristics of each trading style and employing popular trading strategies, traders can increase their chances of success in the forex market.
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Additionally, following the aforementioned unpopular tips can help traders improve their trading skills while becoming more successful over time. Developing a trading plan, keeping a trading journal, focusing on quality over quantity, learning from mistakes, and staying disciplined can all contribute to a trader’s long-term success in the financial markets.
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