A Forex trading strategy is a personal system to maximise profits and minimise losses. The goal of a trading strategy is to generate trading signals which will tell us:

  • When to buy and when to sell an asset
  • At what size and frequency
  • For how much return 
  • By risking how much capital

Accuracy of a trading signal is based on the precision of our analysis methodology. Its yield; however, depends on the effectiveness of our trading plan.

Let’s start learning about Forex trading strategies:

Perfecting a trading strategy requires continuous testing and practising. We usually use a demo account to collect data on the strategy’s efficiency. Using the data, we can find patterns and modify the parameters to improve sensitivity. 

  • Too low sensitivity can lead to many missed opportunities
  • Too high sensitivity can give many false alarms

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There are numerous basic and advanced trading strategies published by professional traders. In the beginning, we can employ these to get a better idea about how trading strategies work. Automated trading systems like Expert Advisors (EAs), robots and signal providers are also common.  

However, never forget that all successful traders have their own Forex trading strategies. They build their personal strategies in accordance with their own strengths and weaknesses.

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Key Elements of a Forex Trading Strategy

Forex traders often build a global trading strategy that can apply to all assets in the portfolio. It gives a good overview of how to conduct our trading activities in general.  

However, the risk factors, volatility levels and market conditions vary for each financial asset. Therefore, employing asset-specific trading strategies can also be beneficial when necessary. Such strategies are employed when we add an asset which doesn’t overlap with the portfolio. 

A trading strategy is comprised of the following elements:

  • Asset Focus: which asset(s) this trading strategy applies, what are the risk factors, what are the general volatility and liquidity levels
  • Analysis Parameters: which time-frames to observe, what fundamental and technical indicators to employ, what do they indicate for this asset
  • Trading Style: what will be the trading style, how many positions will be opened at what frequency, in what direction and duration
  • Risk Parameters: what amount of total capital will be allocated for this asset, what are the position sizing limits, and what is the risk/return ratio (RRR), what are the costs (spread, swaps, commissions)
  • Entry Points: what market conditions and analysis conclusions form a buy or a sell signal, what are the secondary references to double-check the accuracy of the signal
  • Exit Points: how to determine Stop Loss (SL) and Take Profit (TP) levels, what market conditions and analysis conclusions will be considered 

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Basic Trading Strategies

Basic trading strategies employ only one or a couple of indicators. These indicators can be technical and/or fundamental. Their goal is to predict an asset’s future movement, and entry and exit points to trade. 

Example 1

  • U.S. Nonfarm Payrolls [a fundamental indicator] is expected to be positive
  • We check the assets in our portfolio, and identify that USD/CAD can increase
  • We use Support & Resistance [a technical indicator] to determine price targets for TP and SL 

Example 2

  • AUD/USD is approaching the upper Bollinger Band [technical indicator 1] 
  • RSI appears overbought above 80 [technical indicator 2]
  • We infer a saturated bull market and expect the trend to reverse soon 

Basic trading strategies can vary according to terms of: 

  1. Their approach to the trends 
  2. Trading direction
  3. Take profit strategy

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Financial markets are defined by alternating price trends. Trends in asset prices usually begin following a fundamental market event.

When the market gets saturated or reaches a psychological price target, they cease. There are two different approaches to trading with trends: trend surfing and recovery hunting.

Trend Surfing

Traders who surf the trends aim to get a position before a trend starts. They follow the economic news and assess the technical conditions to determine price targets. Trend surfing is usually a high risk & high potential approach to Forex trading. 

If our prediction is correct, we are taking advantage of a large-scale movement. If we were wrong, the risk of being on the wrong side of the market is very high.

Uptrend market movement, trend surfing forex trading strategy chart example
Trend Surfing

Recovery Hunting

Almost every price trend ends with a recovery movement during which the asset price retraces. Recovery movements can range anywhere from 10% to 60% of the initial movement.

Recovery hunters follow a trend as it starts and they determine the possible price targets with S&R. Then, they use technical indicators like RSI to observe the progress of the volume levels. When the market is saturated, they open opposite-direction positions.

Forex trading strategy, recovery hunting and downward market movements chart example
Recovery Hunting

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Trading Direction

The best advantage of Forex trading over others is its two-way nature. We can open both long and short positions to benefit from rising and falling prices alike. 

However, some traders choose to participate only in the bull markets or in the bear markets. There is no right or wrong to this; our trading strategy will be based on what works best for us.

Single-Direction Trading

Single-Direction Trading is to open positions always in one direction: Buy (long) or Sell (short). There are no borrowing requirements because Forex trading is based on CFD instruments. 

Single-direction trading can be done as a trend surfer or a recovery hunter, or both. In one hand, we would be ignoring half of the movements in the market. On the other hand, we can dedicate more attention to identifying opportunities in one direction. 

Double-Direction Trading

Double-Direction Trading is to open Buy or Sell positions, depending on the market conditions. 

However, we will need to divide your attention to spot trading opportunities in both directions. Thus, we need to decrease the level of complexity by limiting other dimensions of the strategy.

For example, we can reduce the number of assets or adopt only one approach to trends. 

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Take Profit Strategies

Fundamental market events can initiate market-wide price actions. There are several profit-taking strategies which a Forex trader can employ to capitalise on them.

Depending on the trend generalisability, we can trade a single asset or several assets. Our take profit strategies are based on our trading plan, asset choices and risk/return ratio.  

Single Asset, Large Profits 

During trend formation, we assess the action potential to estimate how many pips we can profit. 

The more the price moves, the more pips we can take advantage of. If our position size is balanced, we can manage our risk and consolidate profits at the same time.

Multiple Assets, Small Profits

Another approach to take profit strategies involve opening small positions in multiple assets. These assets are chosen from those that are bound to be affected by the same trend. Let’s say there is a strong fundamental event like CPI that can add value to USD.

We can distribute our capital to open positions in 3-4 different USD pairs. In each position, we would set our take profit at a lower level than we would in a single position. 

This way, we would be able to accumulate small profits across several positions. On the flipside, there is a high risk of having negative positions if the market turns around.

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Advanced Trading Strategies

Advanced trading strategies are based on the basic trading strategies. However, they are more specialised in one or more dimensions of the trading process. 

These dimensions can be: 

  • Direction
  • Duration
  • Frequency
  • Size
  • Profit target
  • Generalisability

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Scalping 

Scalping is the most popular advanced trading strategy among short-term traders. It’s a fast-paced action-packed strategy which aims to open and close positions very frequently. 

  • Position Direction: can be either Buy or Sell or both. 
  • Position Duration: 1 second to 1 minute.
  • Position Size: usually large. Depends on the trading plan.
  • Analysis Strategy: tick, 1-min or 5-min charts.
  • Trading Style: high frequency. Profit target of 1-5 pips. TP and SL often not used.
  • Asset Generalisability: volatile assets preferred. Usually focusing on one asset.
  • Attention Demand: high. The trader must always be present.

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Trend Climbing

Trend Climbing is based on the basic trend trading strategy. It aims to make the most out of the price movement by setting gradual consolidation targets. We establish a trend, open a regular trend-trading position, but with a small profit target. 

As the trend continues, we open a new position after every specific amount of pip movement. It’s a high risk – high return strategy which requires thorough technical analysis of price targets.

  • Position Direction: trend-congruent, only Buy or only Sell.
  • Position Duration: depending on the profit target.
  • Position Size. usually small. Depending on the trading plan.
  • Analysis Strategy: any time chart; support and resistance levels are highly important; TP targets of the trading style is based on the trend and time chart.
  • Trading Style: medium frequency. If the trend forecast is 100 pips increase, opening a Buy position with 10 pips TP in every 8 pips movement. TP and SL levels must be established very carefully.
  • Asset Generalisability: high-liquidity assets are preferred. Assets with high liquidity usually have solid trend patterns. Usually focusing on one asset when trading.
  • Attention Demand: high. The trader must always be present.

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Martingale Strategy

Martingale strategy is a common casino strategy which can be applied to the financial markets. It’s a high-risk strategy which requires enduring floating losses for a relatively long duration. 

Martingale is like Trend Climbing strategy, but in the opposite direction. As a trend forms, we open multiple trend-incongruent positions in every specific amount of pips. The expectation is that the movement will recover, and the price will return to its original levels.

  • Position Direction: trend-incongruent, only Buy or only Sell.
  • Position Duration: long, until the price recovers.
  • Position Size: usually small. Depending on the trading plan.
  • Analysis Strategy: long-term trend should be confirmed in long time charts; trend extent should be confirmed in the trend chart; support and resistance levels and volume indicators are highly important to understand where the trend will end and whether it will recover or not.
  • Trading Style: medium frequency. Positions are opened usually at important price levels. TP and SL levels can be gradual (next price target in recovery) or global (original price) 
  • Asset Generalisability: any asset can be used. Well-studied assets must be preferred.
  • Attention Demand: medium. The trader must carry the positions and therefore doesn’t need to attend too much after the position is opened.

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Position Trading

Position trading involves holding a position for a long time. It’s based on finding the long-term trends in an asset using mostly technical analysis. 

Since the positions are kept for a long duration, the risk arises both from the rollover/swap fees. Furthermore, the expected price movement might occur a lot later than expected.

  • Position Direction: either Buy or Sell, or both.
  • Position Duration: long, until the target price is reached.
  • Position Size: usually medium. Depending on the trading plan.
  • Analysis Strategy: long-term and medium-term price charts are used to determine a price target and potential movements to understand the fluctuations until the price is reached.
  • Trading Style: low frequency. A position is opened and kept, meaning the margin usage will be high for a long duration.
  • Asset Generalisability: any asset can be used.
  • Attention Demand: low. The position is kept for long-term, therefore market monitoring requirements isn’t very demanding.

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Expert Advisors (EA), Trading Robots and Technical Signal Generators

Automated trading systems (ATS) are becoming increasingly prevalent in the Forex markets. They are usually categorised as Expert Advisors (EA), trading robots and signal generators.

There are many companies and individuals who offer their own ATSs to the traders. It’s also common to convert their trading strategy into custom trading algorithms. These algorithms notify the trader about the signals or even automatically execute the trade.

Advantages of Automated Trading Systems

  • Eliminate emotion from analysis and trading processes
  • Detect the trading signals automatically based on your parameters
  • Can work indefinitely even when you’re sleeping or away from platform
  • Improvements can involve machine-learning tools for the ATS to self-correct

Disadvantages of Automated Trading Systems

  • Not as good as human mind when it comes to spotting, analysing and using details
  • Can make errors or malfunction without your awareness
  • Usually expensive to create, especially if you are not a coder
  • Have limited scope and can consider only the quantifiable information