3 Successful Forex Trading Strategies | ThinkMarkets
Three successful strategies
Now you have identified a time frame, the desired position size on a single trade, and the approximate number of trades you want to open over a certain period of time. Below, we share three popular Forex trading strategies that have proven to be effective.
scalping forex is a popular trading strategy that focuses on smaller market moves. This strategy consists of opening a large number of trades with the aim of generating small profits for each one.
As a result, scalpers strive to generate larger profits by generating a large number of smaller wins. This approach is completely opposite to holding a position for hours, days or even weeks.
Scalping is very popular in Forex due to its liquidity and volatility. Investors look for markets where the price action is constantly moving to capitalize on fluctuations in small increments.
This type of trader tends to focus on profits which are around 5 pips per trade. However, they expect a large number of trades to be successful because the profits are constant, stable and easy to make.
An obvious downside to scalping is that you can’t afford to stay in the trade for too long. Moreover, scalping requires a lot of time and attention, as you have to constantly analyze the charts to find new trading opportunities.
Now let’s show how scalping works in practice. Below you see the EUR/USD 15 minute chart. Our scalping trading strategy is based on the idea that we seek to sell any price action attempt to break above the 200 period moving average (MA).
In about 3 hours, we generated four trading opportunities. Each time, the price action moved slightly above the 200-period moving average before turning lower. A stop loss is located 5 pips above the moving average, while price action has never exceeded the MA by more than 3.5 pips.
The take profit is also 5 pips, as we focus on making a large number of successful trades with smaller profits. Therefore, in total 20 pips were collected with a scalping trading strategy.
Trades of the day
Trades of the day refers to the process of exchanging currencies in a trading day. Although applicable in all markets, the day trading strategy is mainly used in Forex. This trading approach advises you to open and close all trades in a single day.
No position should stay open overnight to minimize risk. Unlike scalpers, who seek to stay in the markets for a few minutes, day traders generally remain active throughout the day, monitoring and managing open trades. Day traders mainly use the 30 minute and 1 hour timeframes to generate trading ideas.
Many day traders tend to base their trading strategies on the news. Scheduled events, for example economic statistics, interest rates, GDPs, elections, etc., tend to have a strong impact on the market.
In addition to the limit set on each position, day traders tend to set a daily risk limit. A common decision among traders is to set a daily risk limit of 3%. This will protect your account and your capital.
In the chart above, we see the GBP/USD pair moving on an hourly chart. This trading strategy is based on finding horizontal support and resistance lines on a chart. In this particular case, we are focusing on resistance as the price rises.
The price movement marks the horizontal resistance and immediately turns down. Our stop loss is located above the previous high to allow for a slight breach of the resistance line. Thus, a stop loss order is placed 25 pips above the entry point.
On the downside, we use the horizontal support to place an order for profit. Ultimately, the price action turns lower to net us about 65 pips in profit.
Position negotiation is a long-term strategy. Unlike scalping and day trading, this trading strategy is primarily focused on fundamental factors.
Minor market fluctuations are not considered in this strategy as they do not affect the overall market picture.
Position traders are likely to monitor central bank monetary policies, political developments, and other fundamental factors to identify cyclical trends. Successful traders may only open a few trades throughout the year. However, profit targets in these trades are likely to be at least a few hundred pips per trade.
This trading strategy is only for more patient traders as their position can take weeks, months or even years to materialize. You can observe the dollar index (DXY) reversing its trend direction on a weekly chart below.
A reversal is the result of the huge monetary stimulus provided by the US Federal Reserve and the Trump administration to help the struggling economy. As a result, the amount of active dollars increases, which decreases the value of the dollar. Position traders will likely start selling the dollar on trillion dollar stimulus packages.
Their target may depend on various factors: long-term technical indicators and macroeconomic environment. Once they believe the current downtrend is coming to an end from a technical perspective, they will look to exit the trade. In this example, we see the DXY turn to multi-year highs to trade over 600 pips lower 4 months later (March – July).