Essential Forex Strategies for Every Trader

Forex trading is the mother of all trading opportunities. It involves the buying and selling of fiat currencies on the global market, influencing the strength and weakness of economies worldwide. Given its global participants, a well-considered forex strategy is key to navigating market volatility and risk management to capitalize on potential opportunities.

Key Forex Trading Strategies Every Trader Should Know

Think of a forex trading strategy as a recipe for success in the forex markets. It’s a battle-tested roadmap, guiding entries and exits in the currency market. Without a structured approach to opening and closing your forex trades, you’re swimming against the tide, with no control over your potential losses and gains.

There are several types of analysis used to inform the best forex trading strategies:

• Fundamental analysis – deducing the strength or weakness of a currency based on economic data or geopolitical events.
• Technical analysis – use price charts and real-time indicators to anticipate future market movements.
• Sentiment analysis – gauge the sentiment of the market to understand the bullish or bearish nature of a forex pair.

Mastering Forex Strategies: Trading Like a Pro

If you’re starting out on your forex trading journey, we’ve put together some of the most popular forex strategies and grouped them into four categories based on their varied purposes.

Trend-Following Strategies

• Moving Average Convergence Divergence (MACD)
• If you decide to trade forex pairs by spotting the strength (or weakness) of a currency’s market momentum, MACD is a useful trading indicator to abide by. Coined by Gerald Appel in the 1970s, MACD demonstrates the relationship between two moving averages of a forex pair’s price.
• Typically, a forex trader will go long (buy) a forex pair if the MACD line moves higher than the signal line and go short (sell) if it moves beneath the signal line.
• Moving Averages (MA)
• Moving average indicators determine the average of a forex pair’s movement over a set timeframe. This could be a period of days, weeks, or even months.
• The single MA cross pattern is one of the most used forex trading indicators. With one moving average line set over a predetermined timeframe, whenever the market price bounces strongly above or below the MA line, it’s often a telltale sign to buy or sell.
• Average True Range (ATR)
• ATR is one of the most effective gauges for market volatility. Experienced forex traders use ATR to pinpoint gaps or spikes in the price movement of a forex pair. The ATR is usually set over 14 time periods – either hourly, daily, weekly, or monthly.
• Spiking ATR graphs demonstrate heightened volatility. It can spike upwards and downwards, so it can be used to highlight selling pressure as well as buying pressure.

Range Trading Strategies

• Support and Resistance Levels
• Some forex traders prefer to trade within “price ranges”. This helps them to form clear entry and exit points in the market. This is achieved using support and resistance levels.
• A “support level” is a price point in the market where a wave of buyers enter the market and outweigh the level of selling activity, forcing the price upwards. It may be considered a support position if a forex pair returns to this price multiple times and attracts similar buying activity on each occasion.
• It's a similar story for a “resistance level”, where the number of sellers far outweighs the number of buyers. With supply exceeding demand, the price naturally contracts in the market. Forex traders typically look to go long (buy) at support levels and short (sell) at resistance levels.
• Relative Strength Index (RSI)
• RSI is known as a momentum oscillator that’s often used to detect the pace and strength of an asset’s price movements in the market.
• The RSCI oscillates between a real-time reading of 0 and 100. Forex traders will be attracted to short (sell) a forex pair if the reading is 70+ and go long (buy) if the reading is 0-30.
• When a forex pair is over 70, it’s considered “overbought”, meaning it could be priced above its natural value and is awaiting a market correction. Similarly, if one is below 30, it’s deemed “oversold”, meaning it may be priced below its natural value, potentially triggering a different kind of market correction.

Breakout Strategies

• Breakout from Consolidation Patterns
• Some forex traders will develop forex strategies based on the “breakout” of a forex pair’s price. A breakout is when a currency’s value moves above a previous resistance point or below a previous support point, suggesting fresh strength or weakness in the market.
• Forex traders will look to confirm this with increased trading volume, suggesting the breakout is due to genuine activity rather than low liquidity causing price volatility. Failure to confirm with heightened trading volumes could indicate a “false” breakout.
• Price Action Trading
• You may prefer to watch the real-time price action and observe any patterns like pin bars or engulfing candles. Both of which can be beneficial in spotting possible breakouts within a forex pair’s current trading range.
• Many forex traders like this strategy as it focuses exclusively on the raw movement of a forex pair’s price, giving an uncluttered – yet one-dimensional – perspective of the market.

Scalping Strategies

• High-Frequency Trading
• Some forex traders prefer to minimize their exposure in the markets by ‘scalping’ tiny price movements at high frequency. Scalpers get in and out of the market quickly by buying and selling a forex pair with exceptionally tight stop-loss orders – often breakeven stop-loss orders.
• High-frequency scalpers will often use state-of-the-art algorithms and trading software to determine the perfect time to enter and exit the markets, with positions sometimes held open for no more than a second or two.
• Tick Charts and Time Frames
• One of the most popular forex strategies for scalpers is to lean on tick charts and time frames to identify rapid trading opportunities. Tick charts display real-time price action, demonstrating greater market depth i.e. how many buyers and sellers active on each side of the market.
• Time frames will usually use charts of no more than five minutes to plot rapid changes in market direction.

Finding Your Best Forex Strategy

Ultimately, the success of a forex strategy depends on a wealth of factors. That’s why it can take time to hone the best forex strategy around your trading style and risk tolerance.

There is a trading strategy for every type of forex market. That doesn’t mean it’s the same one. Risk tolerance and trading style is a major factor. For instance, forex traders normally scalp the markets because they prefer to minimize their exposure to the market and take small but frequent profits where they can. At the other end of the spectrum, those who are happy to ‘swing trade’ and take advantage of bigger price moves based on technical or fundamental analysis will be happier to take more risks.

Position sizing is also a big factor. Scalpers will usually take a bigger position in the market, knowing they will only be holding it for a matter of seconds. Swing traders will take a smaller position, since their trading opportunities are more volatile.

Some of the most effective forex strategies used by retail traders included the breakout and retest strategy and the trend reversal strategy. With the former, traders seek price breakouts from a forex pair’s existing trading range, followed by a retest of the breakout level. If it breaks out further, this is a green light to enter the trade and follow the trend. With the latter, traders use technical indicators and chart patterns to anticipate likely trend reversals when the momentum of a breakout dies.

Forex Trading Tips to Enhance Your Strategy

Looking to switch up the efficiency of your forex trading? Or perhaps you’re a total novice looking to avoid the most common rookie errors? We’ve got some practical tips to get you started:

• Define your trading plan. If the market doesn’t fit your trading plan, there’s no need to trade. Overtrading is a common pitfall of beginner traders who think they have to be active in the market to be trading. Overtrading leads to unexpected losses and emotional trading to try and win it back.
• Manage your risk. Stop-loss and take-profit orders remove the emotion from your trading by defining your risk-reward ratio.
• Set adequate position sizes. Consider your account size and risk tolerance and only risk proportionate amounts to maintain a balanced portfolio.
• Diversification is key. Spread your trades across multiple currency pairs to reduce your exposure to any single currency or economy.
• Maximize your profit by registering your trading account with STIC Cashback and receiving cashback based on your trading volume.

Forex Trading Landscape in South Africa

The landscape for forex trading in South Africa is determined by the strength (or weakness) of the native currency, the South African rand (ZAR). When trading the ZAR – known as an ‘exotic’ forex currency – typical strategies for forex pairs involving the ZAR include:

• Waiting for signals from the South African Reserve Bank (SARB). Announcement of higher or lower interest rates can strengthen and weaken ZAR against other currencies.
• Traders will also use fundamental analysis such as inflation rates, GDP growth and precious commodity prices to determine the next likely ZAR price movements.

Forex trading in South Africa is regulated by the Financial Sector Conduct Authority (FSCA), which gives protection and assurances over the fair practice of licensed forex brokers. As for market conditions, these tend to be influenced by broader economic trends overseas, making it necessary for South African forex traders to keep abreast of global and local economics.

Additional Beginner-Friendly Forex Resources

Looking for more guidance on defining the right approach to forex trading for you? Check out these related articles to improve your understanding of the forex markets:

• Beginner’s Guide to Forex Trading
• How to Analyse Forex Charts
• Trading Major Forex Pairs

In Summary

Hopefully this article has demonstrated that there are multiple ways to attack the forex markets. Take some time to understand the different strategies. Consider opening a demo account with your preferred forex broker and start testing the water to find a trading style you’re comfortable with.

Forex Strategies FAQs

Is risk management important for the best forex trading strategies?

Yes, absolutely. Managing your risk per trade is one of the most important forex trading tips for anyone to remain viable long term. Set a risk-reward ratio for every trade you place. A good starting point is the 1:1 risk-reward ratio. This means risking 1% of your trading bank to win 1% of profit. This is a good starting point, since you only need to get 50% of your trades right to break even at worst.

Should I rely on technical analysis or fundamental analysis to inform my forex strategy?

There’s no “right” or “wrong” way to trade the forex markets. However, it’s best if you can trade with a blended approach, fusing technical and fundamental analysis. If you usually focus on technical analysis, you may not anticipate heightened volatility due to economic or geopolitical news in a country. By adding fundamental analysis into your trading mix, it creates a bigger picture for your trades.

What are the best forex pairs to use for forex trading strategies?

If your forex strategy is heavily reliant on high trading volumes and liquidity, major forex pairs involving the U.S. dollar will work best. If your trading plan is based on high volatility and price swings, you may prefer to look to minor or exotic forex pairs. Alternatively, you could look to trade major forex pairs when you’re aware of economic or geopolitical factors which may cause uncertainty in the markets.

Is it wrong to go against my forex strategy?

In most cases, it’s never a good idea to go against your forex trading plan. A trading plan will usually define clear entry and exit points in the market. If you dive headfirst into the forex markets without planning your entries and exits, how will you know when to take a loss or lock in a profit? Without adequate planning and risk management, you’re swimming against the tide of the forex markets.