Welcome to the foreign-exchange market, the largest financial market in the world! No doubt you’re intrigued by the forex market’s complexity, vitality, and volatility—and, of course, the enormous potential profits.
But in the forex market the risks can be as enormous as the rewards, and successful forex traders don’t get rich overnight.
Making money in the forex market means committing to a forex trading strategy and repeatedly executing that strategy. You’ll win some and lose some, but if you find and stay dedicated to a good forex strategy that suits your strengths, you can become a profitable trader.
The most successful forex trading strategy is the one that you can actually implement, so be realistic about how much time you can dedicate to trading, how technically or mathematically minded you are, what your ideal trading style is, and what will keep you active and engaged in the market.
This intro to forex trading strategies is meant to be a broad overview and a jumping off point for your own research. Use it to narrow down what type of strategies might work for you.
Fundamental vs technical analysis
Before we get started, I quickly want to define the two main forms of analysis when it comes to forex markets (and other markets as well). I use these terms a lot in my descriptions of the various forex trading strategies, so it is important to understand the distinction if you don’t already.
In the forex world, fundamental analysis mainly considers macroeconomic factors when determining a currency’s true value relative to another currency. To do so, you’d look at interest rates, inflation, GDP, unemployment rates, and other economic data as well as the overall health of a country’s economy while also considering political and social factors.
Trading forex means you’re trading currency pairs, so you have to look at the value of one country’s currency in relation to another. For example, if you wish to trade EUR/USD, which is the euro relative to the US dollar, you’d analyze the fundamentals of both the European and the US economies. If you determine that the countries of the eurozone are more economically stable than the US and have better long-term growth prospects than is reflected by the current exchange rate, you’d buy EUR/USD.
Generally speaking, fundamental analysis is used to make long-term predictions on the direction of a currency pair.
Technical analysis involves looking at historical price data and charts to seek patterns and trends. Once you’ve identified these trends, you use them to predict future price movements.
A very simple example of technical analysis would be looking for support and resistance levels. If you’re trading the EUR/USD, you may notice that the euro rarely falls below parity. That means that 1.0000 is its support level. You can therefore predict that whenever EUR/USD begins to close in on 1.0000, the price will stop falling and begin to rise. Resistance is the same, but provides a top limit for price movements. Forex trading platforms offer charting tools that help you determine where the support and resistance levels are.
Your charting tools are essential to successfully using technical analysis. You can identify patterns, find price trends, and use indicators to identify momentum. Even devotees of fundamental analysis look to technical analysis to time the market in order to get the best prices. Having at least a basic knowledge of technical analysis is essential for any forex trader.
The scalping strategy is one of the most popular for beginning forex traders. It involves taking advantage of small price swings by holding positions for only a matter of moments. Over the course of a single trading day, a scalper makes a number of trades hoping to accumulate enough winners to make a decent overall profit at the end of the day.
Scalping works well in the forex market because the market is so liquid, and spreads and commissions are usually quite low. Liquidity is important because you need the market to move in order to take your small profits. That means scalpers typically stick to the major currency pairs because they’re the most liquid.
It is also essential that scalpers find a great forex broker. When you’re taking small profits, a broker with high trading costs can take a huge chunk out of your earnings.
How does a scalper determine which way a market is moving? Of course it’s impossible to be certain, but most scalpers are proficient in charting and use momentum indicators to figure out which direction a currency pair is headed. For experienced traders, old-fashioned feel and intuition are also a big help.
- Less risk—since you’re in the market for only a moment, you’re limiting your exposure, especially if you don’t keep any positions open during and around major news announcements.
- No prolonged commitment—since you’re closing all your positions, there’s no need to closely monitor the market when you’re away from your trading platform. Focus is paramount when you’re trading, but when you’re not you can focus on literally anything else.
- You’ll never hit a home run. Holding a currency pair for less than a minute isn’t going to give you that one big trade that will take you to the Maserati dealership. A scalper looks for slow and steady gains.
- Learning curve—it can take a lot of study before you know the market well enough to win more than you lose. You have to determine which indicators you trust and how to read them.
Scalping might be for you if…
Scalpers think fast on their feet, remain disciplined, but would prefer not to monitor long-term positions. You will need the dedication to stack up lots of small-profit trades in order to make a steady income. You also have to be proficient in technical analysis/charting, but need to worry about fundamental analysis.
Day trading is a term applied mainly to retail traders who could be active in any number of financial markets. It’s a bit of a misnomer as it applies to the forex market because the forex market is open 24 hours a day (5 days a week), so “night trading” could also fit. Day trading isn’t so much a defined strategy as it is a general category that incorporates scalping among other short-term trading strategies.
Day traders typically close out all their positions at the end of their trading session in order to eliminate overnight market exposure, although they may hold them for several hours as opposed to mere moments like scalpers.
Typically, a day trader carefully monitors the forex market using charting tools and indicators to identify and take advantage of short-term price movements. A well-thought-out trading strategy is a must.
- Day trading is a short-term trading strategy that also allows you to let a trade run for a few hours should it prove a winner.
- No stress of overnight positions—when you log out of your trading platform, that’s it for the day (or night).
- Day trading is very time intensive. If you’re not in front of your trading platform, you could very well be missing opportunities.
- Successful day traders know the forex market inside and out. That means they’ve spent a lot of hours on research and trading with demo trading accounts.
Day trading might be for you if…
Day traders use technical analysis and charting so those should be your strengths. You also need to be able to maintain focus over longer periods in order to identify trading opportunities. Day traders don’t like long-term positions, but they want the freedom to let a winning trade run for a bit even though that means increased risk due to more market exposure.
The basic idea of a carry trade is to borrow money at a low interest rate and then invest that money at a higher interest rate. Your profit is the difference between interest rates. If you borrow money at 1% and use it to earn 5%, you make 4%. In the forex market, carry trading is designed to take advantage of the differences in interest rates between countries.
Carry trades work in the forex market because you are always trading currency pairs, and if you keep a position open overnight, you receive the difference in interest rates between the two currencies. If you buy a currency pair in which the base currency (the one listed first) has higher interest rates than the quote currency (the one listed second) you’ll receive the difference in the countries’ interest rates.
For example, interest rates in Switzerland are currently lower than those in the US. So to make a positive carry trade and profit via interest rates, you can buy the US dollar/Swiss franc currency pair (USD/CHF). Every day you keep the position open, you will receive interest based on the difference in interest rates between the two countries.
Sounds like easy money, right? Well, there’s a lot that could undermine a carry trade. For one thing, countries often change their interest rates. For another, even if the interest rates remain the same, the value of the currencies could change and erode your profits from interest. If in the above example the US dollar drops significantly against the Swiss franc, your interest-rate profit would be wiped out and you could lose money.
- Carry trades are low maintenance. Typically, you’d keep a carry trade open for months at a time. Of course you need to monitor your position and always use stop losses, but you won’t be making frequent trades.
- Since you can trade on margin in the forex market, you only have to put up a certain percentage of the trade’s value. Let’s say your broker offers 5% margin (20:1 leverage) for USD/CHF. That means you could buy $20,000 worth of USD/CHF for only $1,000. You’d make interest on the full $20,000, even though you only have $1,000 of your own money invested.
- Carry trading isn’t a viable strategy when there’s a lot of volatility. If the value of the base currency drops too much, the trade could be a net loser no matter how much interest you accrue. A lot of volatility increases the likelihood that this will happen.
- Trading on margin to maximize your interest return means taking on a significant amount of risk. Always make sure you fully understand leverage and how it can compound failures as well as successes before you trade on margin.
Carry trading might be for you if…
Carry trading relies more on fundamental analysis than technical analysis, so you need a good handle on macroeconomics. Considering interest rates are the profit driver, you obviously have to understand them and what political and economic factors affect them. You also need enough trade capital to be able to keep your money in the market long enough to accrue significant interest.
Price-action trading is a technical approach to forex trading (and other financial markets) that focuses solely on price movement. Price-action traders don’t look at the fundamentals of a currency, the politics of the country, or anything else. Prices over time give traders all the information they need.
Price-action trading starts with the charts, as adherents watch how a price changes over time to carefully identify trends and pullbacks. Once they identify a trendline they want to trade, they try to execute quickly in order to take maximum advantage of prolonged price movements.
- There’s a certain simplicity to price-action trading. You don’t need to understand any underlying economic fundamentals or even more complex technical analysis. Price is king.
- Price-action trading is another strategy that makes it very easy to determine the risk/reward ratio and only make trades that are worth it according to your own risk tolerance.
- It can be a long time before charts show a pricing set up that would move a price-action trader to make a trade. That means a lot of trading time that can feel unproductive, but the alternative—making a trade out of boredom—can be a costly mistake.
- Focusing on prices alone can leave you open to fundamental and other risks that you might overlook.
Price-action trading might be for you if…
Price-action traders are extremely patient traders who can stare at charts for hours until identifying a trend they want to trade. They also don’t need a lot of macroeconomic knowledge (a little always helps) and can forget about fundamental analysis.
Position trading is all about fundamental analysis and holding long-term positions. Position traders may use technical analysis to identify opportunities or find entry points, but a position trader principally looks for macroeconomic or political reasons why one currency is mispriced compared to another.
If, for example, you firmly believe that the US economy is fundamentally far more sound than the European economy, but the current exchange rate doesn’t reflect this reality as you see it, you would short the EUR/USD and hold on to that position until proven right (or wrong).
- Position traders aren’t constantly mining the markets to take advantage of small price changes, so the time commitment is quite a bit less than it is for scalpers or other short-term traders.
- If you are proven correct and really let a trade run, you can be in for massive profits.
- There’s quite a bit of risk involved when you’re in the market for so long. No matter how good your fundamental analysis, certain shocks to global economies can be impossible to foresee and can have a dramatic effect on your position. Pandemics would be a good example.
- Like with all longer-term positions, you have to be sure you’re not paying so much in rollover fees that your profit will be completely negated.
Position trading is for you if…
Positions traders understand global economies and what moves currencies over the long term. And since they hold their positions for a matter of years, position traders need patience as well as conviction. You also have to be disciplined enough to ignore short-term volatility, and since you make your money when you are right and the market is wrong, you need a little arrogance too!
Some form of a trend-trading strategy is often used by swing traders or position traders, as it involves using technical analysis to find medium to longer-term trends. The goal of a trend trader is to use technical indicators to identify a trend as early as possible and then to identify the end of the trend and get out before it’s over.
To do so, trend traders have to filter out a lot of noise that comes from everyday market volatility. Which price movements signify the start of a trend and which are just the result of choppy markets? Most trend traders start with using technical indicators, such as moving averages or the Relative Strength Index, to figure that out.
- A trend-trading strategy uses relatively simple technical indicators, making it a good strategy for those just learning technical analysis.
- Longer-term strategies mean fewer transactions, lower transaction costs, and less time in front of your trading platform.
- Successful trend trading requires a fair amount of experience to identify what constitutes a real trend. You’ll need to take some time practicing with a demo account before funding your strategy for real.
- Trend trading can be particularly difficult in highly volatile markets like we’ve had of late. Trends don’t tend to last as long, and they can reverse themselves dramatically.
Trend trading is for you if…
Trend traders make fewer transactions and hold on to positions longer than most other technical traders. So if you prefer technical analysis to fundamental analysis, but like a longer time frame, trend trading might be your perfect strategy.
A lot of forex traders closely monitor the economic calendar to avoid trading around big news releases because any sort of surprise can literally send the market off the charts. News releases like economic data, such as unemployment or inflation statistics, and announcements from a country’s central bank can send the forex market reeling. Technical analysis doesn’t always help in the first moments just after a big announcement, and price changes can be profound and unexpected.
There are some brave souls who live to trade these moments, however. These traders generally fit into two categories: those who try to predict the news and the market’s reaction and those who are just looking to react quickly to take advantage of major price swings in either direction.
Either way, news traders usually have a high risk tolerance and are more prone to seeking large profits than short-term traders like scalpers, who try to accrue a series of smaller gains.
- Volatility means the potential for big gains. If you guess right on the content of the news release or if you take early advantage of dramatic price swings, you can have a considerably profitable trading day.
- Just trading news releases allows you to really narrow your focus to one big announcement at a time. Rather than constantly watching the market, you can look ahead and prepare.
- Volatility also means the potential for big losses. If you’re wrong in your prediction or if you mistime the market, you can lose a small fortune, especially if you’re trading on margin.
- Spreads can go up considerably in the volatile moments following big news releases. That means your trades will be more expensive, which can take a chunk out of any potential profits.
News trading might be for you if…
You have an especially high risk tolerance and some ice in your veins. News trading isn’t for the faint of heart. When prices are moving rapidly, it is very easy to lose sight of your strategy. You need to be the calm amidst the market chaos.
Technical analysis is the backbone of swing trading, but swing traders also can incorporate a little more fundamental analysis into their strategies. Swing traders might stay in a trade for weeks or even months, so they like to know more about the currencies they’re trading than just the price action.
Swing traders use indicators to try and find macro upward or downward price trends among the daily volatility that affects all currency pairs. Once they’ve identified the overall trend, most swing traders then research underlying economies to see if they can find a fundamental reason for the trend to continue.
If they do, they’ll enter a trade with a stop loss and have a set price target in mind. Once they’ve made the trade, they will ride it until they either hit the stop loss, which is set so they don’t lose too much money, or meet their profit target.
With defined entry and exit points, it is easy for swing traders to quantify their risk. The stop loss means they know exactly how much they stand to lose, and the profit target means they know exactly how much they stand to gain.
- Establishing entry and exit points means you can establish a risk/reward ratio and tailor each trade to your specific risk tolerance.
- Swing traders have less screen time than traders employing shorter-term strategies. Establish your trade parameters, and you can let the trade run.
- Although stop losses are firm, in really volatile markets your broker isn’t always able to fulfill your order at your specified price, leading to more losses than you anticipated.
- Holding positions overnight may mean paying rollover fees or “swap” fees depending on your currency pair. These fees can add up if you’re not with the right broker.
Swing trading might be for you if…
If you prefer to hang on to positions longer, make less transactions, and don’t mind staying in the market, swing trading is a good mid- to long-term strategy. You should also like to do a little fundamental research but still analyze charts with the best of them.
Copy trading isn’t so much a trading strategy as it is literally copying someone else’s strategy. Thanks to advances in trading software and social media, it is now quite easy to simply mimic another trader’s every move and reap the rewards (or absorb the losses).
Copy trading can be done in several different ways. The most popular for beginners is probably social trading, in which you follow other traders on social media. They announce their trades and you copy them using your own forex brokerage account, often via a mobile trading app. Some of these “signal sellers” charge subscription fees.
Copy trading can also be automated. There’s a number of software options out there that will automatically copy another account’s trades, meaning you have to do absolutely nothing. Some brokers like eToro have made this process incredibly simple.
Copy trading can seem like a shortcut to forex market riches, but it requires a lot of faith in traders that you don’t know. Their objectives may not be your objectives.
- You can participate in the forex market with very little knowledge or experience.
- Your time commitment is next to nothing.
- You’re not in full control of your account, so if, for example, the trader you’re copying has a much higher risk tolerance than you, you may be unknowingly taking on much more risk that you otherwise would.
- There are a lot of bad actors pitching their trading techniques. Some charge subscription fees or receive commissions based on false promises or inflated returns. Don’t fall victim to a forex scam.
Copy trading might be for you if…
You don’t have time to actively trade in the forex market but want to be involved in the market. You also have to have enough trading capital that you can blindly trust other traders and accept their losses.
Conclusion: The best forex trading strategies for beginners
There’s no one-size-fits-all forex trading strategy that can guarantee profits, and anyone who tells you otherwise may be part of a forex scam. There are, however, many profitable forex strategies that can make you long-term profits if you stick to them.
Your forex trading strategy defines who you are as a trader. Once you’ve narrowed down the strategies to a few that you like, finding out which of those actually works for you is a matter of trial and error.
Open up a demo trading account with a regulated forex broker and see how well you can implement each trading strategy. Be forewarned: Trading currencies is always a risky endeavor, but with a strategy in place, you put yourself in a much better position to succeed.