6 Forex Trading Strategies That Are Still Working
Trend trading aims to capture gains by analyzing overall market direction and entering trades in alignment with the prevailing trend. Traders identify upward trends when prices are making higher highs and higher lows, signaling periods of sustained buying pressure. Downward trends occur when prices make lower lows and lower highs as bears take control.
Once the trend direction is determined using swing highs/lows, moving averages(MA) or trendlines, traders can enter long positions in uptrends when price pulls back to key support levels. In downtrends, they enter short positions when price rallies to resistance zones. Stops are placed below support in uptrends and above resistance in downtrends to limit downside.
Taking trades in the direction of the trend significantly improves win rates as trends can persist for weeks or months. Profit booking depends on trailing stops based on swing points or targets based on chart patterns. Indicators like the ADX help assess trend strength. Strong trends lead to outsized risk/reward ratios.
The key is having the patience to wait for low-risk entries in the trend direction on pullbacks or dips. Traders must avoid trying to pick tops and bottoms. Disciplined trend trading works on all time frames and remains one of the most widely used strategies by retail and institutional traders alike.
Support and Resistance Trading
This strategy involves identifying key support and resistance levels derived from previous swing highs and lows on the chart. Support levels represent price zones where demand is strong enough to prevent lower prices. Resistance shows where selling pressure is sufficient to halt rallies.
In uptrends, traders buy near support as it indicates market strength. In downtrends, traders sell at resistance as it signals bears are still in control. If support breaks, new short positions are initiated. If resistance breaks, fresh long entries are taken.
Stops are placed below support in longs and above resistance in shorts to limit risk. Profit targets can be set using a risk/reward ratio like 1:2 or based on moving average slopes. Support and resistance levels tend to work until definitively broken.
This simple strategy benefits from entering trades at value zones identified by pooled liquidity on the chart. Trading near key S/R levels backed by solid risk management helps traders profit from short to medium-term swings.
Breakout trading aims to capitalize on strong directional moves when price breaks out of well-defined chart patterns or previous resistance/support zones. Common patterns are triangles, rectangles, flags, double tops/bottoms.
Breakouts occur with forceful momentum when buyers overpower sellers above resistance or sellers overwhelm buyers below support. Large players must absorb all pending orders at breakout points. This kicks off an accelerated move as new traders rush in.
Long positions are initiated when price breaks above resistance decisively on expanding volume. Shorts are taken when price breaks below support convincingly. Initial stops are placed just outside the breakout point. Risk/reward ratios of 1:2 or higher target next key levels.
Breakouts frequently lead to extended runs as they represent a shift in market psychology from rangebound to directional. Traders use the ATR indicator to confirm volatility expansion on breakouts. By capturing breakouts, traders profit from the most significant market moves.
Momentum traders buy currencies that are rising and sell currencies that are falling. They wait for a currency to establish a directional move supported by increasing trading volume and volatility.
Oversold/overbought readings on the RSI and Stochastic oscillators help identify emerging momentum plays. Long trades are initiated when RSI rises from below 30 or Stochastics rises from below 20, signaling an end to selling pressure. Shorts are taken when RSI declines from above 70 or Stochastics falls from above 80, indicating buying exhaustion.
Initial stops are placed just outside recent swing highs or lows. The profit target is set at a minimum of 2 times risk to capture extended moves. Momentum trades capture the accelerating part of directional swings as new traders amplify the existing trend. This fast-paced strategy works well across all timeframes.
This longer term strategy involves buying high interest rate currencies and selling low interest rate currencies to collect the rate differential over time. Popular carry pairs are AUD/JPY, NZD/JPY and EUR/JPY.
Carry traders buy the high yield Aussie, Kiwi and Euro versus the low yield Japanese Yen. Positions are held for weeks to months to maximize yield capture. Stops of 50-100 pips are used to protect against short term volatility. Profit targets are determined based on annualized yield spreads.
The key is choosing pairs with wide and stable interest rate differentials that also demonstrate favorable technical setups. Carry trades do not need strong directional moves to profit. The interest rate yield compounds over time for patient traders.
Range trading involves selling at resistance when price nears the upper end of the range and buying at support when price approaches the lower end. Key levels are identified through chart analysis.
Range bound pairs like EUR/GBP and AUD/NZD frequently oscillate between horizontal support and resistance zones. Orders to sell are placed at resistance with stops just above it. Buy orders are placed at support with stops just below it.
Profit targets are set near the opposite end of the range. Take profits are hit as price swings from one end of the range to the other. Range trading requires discipline to sell strength and buy at areas of weakness.
This strategy generates profits from rangebound price action. Finding pairs with balanced buying and selling interest that lack a clear directional bias offers ideal conditions for range trading.