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Top 11 Forex Trading Strategies in 2023

TABLE OF CONTENTS

Top 11 Forex Trading Strategies in 2023

Top 11 Forex Trading Strategies in 2023

Vantage Updated Updated Mon, 2023 December 18 05:22

Swing Trading [1,2]

Key features:

  • Lesser trades required; less time intensive
  • Positions must be held open overnight, or for several days
  • Must be able to deal with uncertainty and stay the course throughout the trade

The idea behind Swing Trading is to identify an imminent “swing” within a trend, and then entering into a trade before the swing occurs to capture the ensuing profits. 

This strategy is often practised as a medium-term strategy that lasts from two days to several weeks – depending on how long the trend goes on. 

To succeed in this forex trading strategy, traders must be comfortable holding their trades for a relatively longer period; closing trades too early will cause the trader to miss out on further gains in the future. 

Swing Trading can be challenging as it means having to deal with short-term volatility. You will also need a larger capital to absorb price changes that can occur throughout the trend. 

News Trading [3,4,5]

Key features:

  • Simple strategy that is easy to understand
  • Popular, used by traders of all levels
  • Opportunities inspired by news events may be short-lived, necessitating quick action

A beginner-friendly forex strategy, News Trading revolves around tracking news and headlines that have a high likelihood of causing a currency pair to spike or plunge, and taking up trade positions accordingly. 

Some of these events include elections, monetary policy changes, interest rates announcements, inflation, retail sales, unemployment rates, consumer confidence surveys, etc.

Bear in mind that important news or developments tend to increase volatility in the forex market, and you should not neglect proper risk management when trading on the news.

Day Trading [6,7]

Key features:

  • Trades are made throughout the trading day, with no overnight positions
  • Can benefit from daily volatility, while avoiding longer-term risks 
  • Relatively small price movements within the day necessitates higher-risks approach to maximise results

In Day Trading, a forex trader opens and closes their trades within the same day. No positions are held overnight, and any attempts to capture market returns are made within the trading day itself. 

This is done for several reasons. Day Trading allows forex traders to potentially benefit from the inherent volatility of the market, which creates opportunities for profits due to the potential for sharp price action to take place throughout the day.

At the same time, it allows traders to avoid risks that can arise from larger price movements on a macro level, or price gapping overnight. The latter can occur when the markets are closed, leaving traders with no way to react. 

Day Trading is an advanced forex strategy. Success requires in-depth knowledge of the market and world events, the discipline to stick to an established trading routine, while being able to flexibly respond to changes. 

Position Trading [8]

Key features:

  • Suitable for long-term strategies; essentially a buy-and-hold approach
  • Requires high degree of discipline and determination not to be swayed by short-term occurrences
  • Needs to be well-capitalised to absorb shocks along the way
  • If trade goes against you, losses can add up to a large amount 

Position Trading is an advanced forex strategy you would use if you’re looking to make a long-term trade. It is made to ignore short-term price movements in favour of identifying and profiting from longer-term trends. 

This strategy simply entails holding a forex position over a long term, often for months or even years. While this may sound simple, seeing it through may be the opposite. 

Before attempting a Position Trading strategy, you have to be well-capitalised in order to cope with short-terms swings and avoid margin calls. 

There are also overnight funding fees in spot markets that will further eat into your trading account balance.

This is also a high-risk strategy, as your losses can stack up over time. However, if the trade goes in your favour, you can potentially enjoy high returns as well. 

Range Trading [9,10]

Key features:

  • Useful when market is showing no clear signs of upward or downward trend
  • Requires understanding of long and short positions, and how to use them properly
  • May require a large capital, due to high number of trades involved

In a Range Trading strategy, the idea is to make several trades while the currency pair moves in a sideways pattern, bouncing between the level of support and the level of resistance over a protracted period of time.

You may recall that when the market moves sideways, it is said to be in a consolidation phase. This is also known as a “range-bound market” among forex traders using Range Trading. 

Range Trading is slightly more complex as it involves using both long and short positions. A trader buys as the price moves downwards towards the support level, and sells as the price moves upwards towards the resistance level. 

Carry Trade [11,12]

Key features:

  • Works well with several popular currency pairs (AUD/JPY, NZD/JPY, etc.)
  • Highly vulnerable to exchange rate fluctuations, which can wipe out gains or cause losses
  • Not suitable when markets are uncertain or fearful

A Carry Trade strategy revolves around deriving a profit from the difference in yield between two currencies.

To make this strategy work, you have to pair a currency with a high interest rate (the “base currency”) with another currency with a low interest rate (the “quote currency”). 

However, as this strategy is highly sensitive to market sentiments, this strategy should be limited when there is a high level of fear or uncertainty. 

Price Breakout [13]

Key features:

  • Easy chart pattern to spot; breakouts occur at the end of consolidations
  • Suited to both long-term and short-term strategies
  • Breakouts may not always go on to form a trend, hence caution should take precedence over haste

A popular, beginner-friendly forex trading strategy, the Price Breakout strategy revolves around spotting price breakouts, which can signal the start of a new trend, informing you of a potential entry point. 

It’s important to understand that forex pairs sometimes spend a period of time ranging between levels of support (the “floor”) and resistance (the “ceiling”). This is known as consolidation. 

A breakout occurs when the price moves beyond the consolidation range. It can go in two directions: beyond the support level (“breaks to the downside”) or beyond the resistance level (“breaks to the upside”).

Why we should pay attention to breakouts is because they can signal the start of a new trend which you can trade, but this is not guaranteed.

The proper use of stop-loss is necessary to make up for the shortcomings of this strategy.

Trend Trading [14,15]

Key features:

  • Focuses on identifying, and trading with, the trend
  • Incorporates elements of momentum trading, moving average strategy and price breakout strategy
  • Ability to clearly read trends is essential 

Trend trading is an overarching forex trading strategy that attempts to identify an emerging trend, and trade along with it. 

It is a dynamic and fluid strategy that requires traders to be able to keenly discern trends, and deploy the right trades as trends shift and evolve over time. 

Trend trading has overlaps with several distinct forex trading strategies, such as momentum trading, moving average strategy and price breakout strategy. However, these strategies share a similar idea, and may be utilised together in holistic fashion. 

Price Action Trading [16,17]

Key features:

  • A popular and effective trading strategy that purely focuses on price action
  • Suitable for those who prefer not to be bogged down by other aspects of technical analysis
  • Results dependant on chart reading skills, which can be subjective and vary from trader to trader

Price action trading focuses purely on the price action of currency pairs as the basis for making trading decisions. Traders deploying this method would only look at candlestick patterns and drawing tools, eschewing most other technical analysis tools or indicators.

Interestingly, purists of Price Action trading maintain that even fundamental analysis and macroeconomic data can be ignored, as all price-moving events will be reflected on a chart. 

Despite this seemingly pared-down approach, price action strategies have been proven to be effective, making the strategy a popular one among traders.

Grid Trading [18]

Key features:

  • Can generate potential profits in any direction using buy and sell stop orders
  • Once set up, lesser involvement required from the trader
  • Trades automatically executed via trading bots or software

In Grid Trading, a forex trader places multiple buy and sell orders at fixed intervals or price levels to profit from market volatility within a defined range. 

This strategy works by taking advantage of the fact that during a ranging phase, price tends to move back and forth between defined support and resistance levels. 

Furthermore, once the appropriate buy or sell orders have been set up at fixed price intervals (aka, setting up the grid), the actual trades can be automated via the use of trading software. This relieves traders of the stress of having to make multiple trades themselves. 

However, this does not mean a grid strategy should be left to run on its own over a prolonged period. Traders must constantly monitor the trade and be prepared to make changes in tandem with market turns.

Retracement Trading [19,20]

Key features:

  • Leverages the appearance of price retracements as a confirmation of trend continuation 
  • Can improve risk/reward ratio of a trade
  • Waiting for retracements may cause you to miss out on trading opportunities 

Retracement Trading in forex attempts to use the appearance of a price retracement as a signal to enter a trade. This strategy is a variation of price action strategy (see above). 

A retracement is a temporary reversal of price action within a larger trend. So, for instance, if the price has been going up for several days in a row, goes down for one day, starts going up again immediately after, a retracement has just taken place. 

The core idea behind Retracement Trading is that when a retracement appears, the price action tends to resume moving in the initial direction – this makes a retracement confirmation of a trend continuation. Thus, in the scenario above, it is likely that the price action will continue to trend upwards. 

Learning to properly spot retracements on a price chart can be valuable in improving the quality of your trades. However, being overly reliant on retracements can backfire – you may miss out on other trading opportunities while waiting for a retracement to show up. 

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References

  1. “What Is Swing Trading? – Investopedia”. https://www.investopedia.com/terms/s/swingtrading.asp. Accessed 6 June 2023.
  2. “Swing Trading: What It Is & How It Works – Seeking Alpha”. https://seekingalpha.com/article/4452707-swing-trading. Accessed 6 June 2023.
  3. “How to Trade the News – Investopedia”. https://www.investopedia.com/articles/active-trading/111313/how-trade-news.asp. Accessed 6 June 2023.
  4. “How to Trade Forex on News Releases – Investopedia”.  https://www.investopedia.com/articles/forex/05/tradingonnews.asp. Accessed 6 June 2023.
  5. “News Trading Strategies: A Comprehensive Guide – Quantified Strategies”. https://www.quantifiedstrategies.com/news-trading-strategies/. Accessed 6 June 2023.
  6. “Day Trading: The Basics and How to Get Started – Investopedia”. https://www.investopedia.com/articles/trading/05/011705.asp#toc-day-trading-strategies. Accessed 6 June 2023.
  7. “10 Day Trading Tips for Beginners – Investopedia”. https://www.investopedia.com/articles/trading/06/daytradingretail.asp. Accessed 6 June 2023.
  8. “Position Trader Definition, Strategies, Pros and Cons – Investopedia”. https://www.investopedia.com/terms/p/positiontrader.asp. Accessed 6 June 2023.
  9. “What Is Range-Bound Trading? Definition and How Strategy Works – Investopedia”. https://www.investopedia.com/terms/r/rangeboundtrading.asp#:~:text=A%20range%2Dbound%20trading%20strategy,losses%20from%20high%2Dvolume%20breakouts. Accessed 6 June 2023.
  10. “What is a Range-Bound Market? – BabyPips”. https://www.babypips.com/learn/forex/what-is-a-ranging-market#:~:text=The%20basic%20idea%20of%20a,profit%20around%20the%20low%20price. Accessed 6 June 2023.
  11. “Carry Trade – WallStreetMojo”. https://www.wallstreetmojo.com/carry-trade/. Accessed 6 June 2023.
  12. “Currency Carry Trades 101 – Investopedia”. https://www.investopedia.com/articles/forex/07/carry_trade.asp. Accessed 6 June 2023.
  13. “The Anatomy of Trading Breakouts  – Investopedia”. https://www.investopedia.com/articles/trading/08/trading-breakouts.asp. Accessed 6 June 2023.
  14. “Trend Trading – WallStreetMojo”. https://www.wallstreetmojo.com/trend-trading/. Accessed 6 June 2023.
  15. “Trend Trading: Definition and How Strategy Aims For Profit – Investopedia”. https://www.investopedia.com/terms/t/trendtrading.asp. Accessed 6 June 2023.
  16. “An Introduction to Price Action Trading Strategies – Investopedia”. https://www.investopedia.com/articles/active-trading/110714/introduction-price-action-trading-strategies.asp. Accessed 6 June 2023.
  17. “Price Action: What It Is and How Stock Traders Use It – Investopedia”. https://www.investopedia.com/terms/p/price-action.asp. Accessed 6 June 2023.
  18. “Grid Trading – Investopedia”. https://www.investopedia.com/terms/g/grid-trading.asp. Accessed 6 June 2023.
  19. “All you should know about retracement – FBS”. https://fbs.com/analytics/tips/all-you-should-know-about-retracement-27587. Accessed 6 June 2023.
  20. “Retracement: Definition, Use in Investing, Vs. Reversal – Investopedia”. https://www.investopedia.com/terms/r/retracement.asp. Accessed 6 June 2023.
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