5 of the Most Popular Trading Strategies and How to Implement Them
What is a Forex Trading Strategy?
A Forex strategy is a clearly defined, well-tested strategy to help you decide where and when to enter and exit the Forex market. Your approach will always be rule-based, working from technical analysis or fundamental analysis, or a combination of both. Your pre-defined Forex strategy gives you the exact parameters before you take a trade.
There are a plethora of Forex strategies available. Some are easy to understand and implement. Some are more challenging for a novice Forex trader. In this guide, you will learn five of the most popular Forex strategies that are easy to understand and implement.
There is no need to reinvent the wheel for a Forex strategy. Whilst you may tweak a strategy with experience, the strategies in this guide part are simple, and they work. There is no reason to struggle with complex strategies and have dozens of indicators on your charts.
How do I Know Which Forex Strategy is Best for Me?
When you first start learning Forex, you will have no idea what type of trader you are or what strategy will suit you. But it won't take long before you know what aspects you like and don't like.
Choosing the right strategy for your Forex trading will depend on several factors-
- The level of your experience and understanding of Forex trading
- Your mental and psychological approach. For example, you may be a quick-thinking trader, preferring to enter and exit multiple Forex trades for fast profits. Or you may enjoy following large market moves with just a few trades open each week
- Your ability to adhere to a strategy and how that fits with your preferred risk to reward ratio
- How much time you have available to work with Forex
- What your Forex goals are
Five Popular Forex Trading Strategies
The five popular Forex trading strategies are in no particular order.
One trader may find a specific strategy simple, whereas another Forex trader may not get along with it. We suggest testing the five Forex strategies in a demo trading account until you know which you prefer. Then, practice every trading day until you understand the process inside out. You may discover you like more than one strategy, and that's fine. Trade with whichever is most appropriate to the price action on the charts at the time.
With each strategy, you want to add Forex confirmation tools. We will outline a selection of confirmation tools to increase probability. In fact, in some cases, a combination of strategies serves as confirmation.
- Support & Resistance
- Pullback Strategy
- Scalping Strategy
- Trend Trading Strategy
- Fibonacci Strategy
Support & Resistance
Whatever strategy you eventually decide upon, having a clear understanding of support and resistance levels will make it far easier to implement your strategy. Support and resistance are levels on the charts where price has acted as a barrier to momentum. Quite often, the price approaches these levels and stops, reverses or moves into a range. Once you know how to look for support and resistance, you will find it as easy on the five-minute chart as you will on the daily chart.
Support is when the price is falling and hits a price level below. This zone often becomes a barrier to further downward movement. The price may eventually break through support and continue down. Or it may bounce off support once or several times and then change direction to form a potential uptrend.
Resistance is when the price is rising, and it hits the price barrier above. It then comes to a halt or reverses back down, temporarily, or potentially it could carry on until it becomes a new downtrend.
How are Support and Resistance levels determined?
We can best explain by showing two examples on a chart.
The above image is GBDJPY Daily Chart demonstrating resistance.
The price zone is 149.45 – 149.50. In 2017, the GBPJPY had been in a strong uptrend for a year. The price pushed past this resistance in December 2017 and rose to 155.00. It came back and dropped below this price zone in February 2018.
As you can see, in May 2018, the resistance level held fast, and the price dropped. It retested the area in July 2018, having tried and failed once before.
Between the middle of September to mid-October, the price ranged at this resistance zone. It dropped and then tried again in November 2018. At that point, it gave up for a while and went into a down-trend. Between then and March 2021, the price returned to this zone a further three times. At the time of writing (March 2021), the price has just broken through this resistance zone.
For this currency pair, it is crucial to be aware of this zone. Yes, it has served as a resistance level for several years, but at some point, it could well become a support level. It's a significant price level for market sentiment.
As a support and resistance strategy, this tells you that if the GBPJPY price were at a lower level and showed signs of an upward trend, you would set your target profit level before or at this price.
Each week for your support and resistance strategy, you check the charts for critical levels. Thousands of Forex traders have their beady eyes on these price zones. There will almost always be a reaction of some kind at these price levels. The price may create a false breakout, it may slot into a range, or the price may push through and continue in the direction it was going before the price zone.
This knowledge gives you the ability to anticipate future price movement. Never underestimate the power of support and resistance levels. They are crucial to your Forex education.
Below is an example of support on the USDCHF chart.
On the above chart, to the left, we see three touches of support on USDCHF between August and November 2020. The price became stuck in a range (of about 200 pips) before it broke through support. The price doesn't go very far before it tries to get back to the support zone, which has now become a resistance zone. The price fails twice, but on the third attempt, the price breaks through resistance and then briefly fails. After that, the price broke through and took off. The period beneath the support level was two months.
Once you master support and resistance, you are well on your way to having a powerful strategy for identifying areas to trade – and not to trade – on the Forex charts.
A pullback strategy is dependent on knowing the areas of support and resistance. Open up any chart, and you will notice that the price does not go in a straight line. Typically, you see a zig-zag pattern upwards or downwards. The price often pauses for a breath when it will pull back to a previous zone, then carry on in the original direction.
The above example is the 4-hour chart for USDCHF. The price tested the resistance level a few times, then pushed through. After it moved upwards through the resistance level, the price slowed and drifted downwards. The price touched the level of the last high. Then it continued upwards. This scenario is a pullback. It can work equally well in an uptrend or downtrend.
Look for the best examples of a pullback before taking a trade.
Often, once the price has left a support or resistance zone, it will pull back to the level to retest it and then move away. Be patient and wait for the (near) perfect moment to execute your strategy. Look for a break of a trendline or other signal.
You can see a 50EMA (the pale blue line is an Experiential Moving Average) on this chart. In a definite uptrend or downtrend, the 50EMA can be a useful tool for confirmation of a pullback. On a daily chart, some traders use the 200 EMA or SMA (Simple Moving Average).
The 100EMA is also a useful moving average to use. On the MT4 platform, you can choose which timeframe to display the EMA. You could show the 200EMA on the daily chart and the 50EMA on the hourly chart.
When trading a pullback strategy, many traders analyse a higher timeframe, like the daily chart. When a trade is looking possible, they check a lower timeframe like the one-hour, thirty-minute or fifteen-minute chart to look for an entry.
Deciding upon a scalping strategy is dependent on a disciplined mental approach to the Forex markets. It is not for every trader and, in many ways, is a specialist area. That said, with experience and the right mindset, scalping can be a successful foray into the Forex market.
What is Scalping?
Scalping is a strategy whereby a Forex trader takes profits from small movements in the market. For instance, a trader may scalp 5-10 pips profit and close the trade. A scalping strategy requires multiple trades a day to make sufficient profits. Scalping requires concentration and masterful discipline to become successful with this strategy.
The objective for scalping is to have a large number of wins and not allow trades to run. The concept is that scalping lowers your risk because of less time spent in the market, and it may be easier to capitalise on small moves rather than holding on for larger movements. You may be holding a trade for one-minute or up to thirty-minutes on average.
Scalping strategies require strict entry and exit values, and basic trading principles apply. You need to know whether the currency pair is in an uptrend or a downtrend and near or approaching a support or resistance level.
You will be working on the lower timeframes, such as five-minute or fifteen-minute. Some traders scalp the one-minute timeframe. This super-fast timeframe requires enormous concentration and mental discipline simply because price moves so fast on a one-minute chart.
If you are considering developing a scalping strategy, the following points are crucial in formulating your plan of action -
1. Identify the trend
Check the higher timeframes for the bigger picture. Without awareness of the current trend, you could end up fighting against momentum. For instance, taking sell trades in an uptrend is like swimming upstream. Trade with the flow of the market
2. Identify support and resistance
The last thing you want is to take a trade at a barrier zone. Even though you are taking quick trades, optimising probability will increase potential profitability
3. Set up confirmation tools
On the lower timeframes, you can add an EMA suitable for that period. Although moving averages are a lagging indicator, they can help you identify when the price is on the move because price action will cross over or under the EMA depending.
You can also explore adding an oscillator such as the RSI (Relative Strength Index), stochastic or MACD (Moving Average Convergence Divergence). These indicators show areas of whether the price has been overbought or oversold. They can serve as an extra confirmation
4. Be disciplined and patient
Scalping is taxing on the brain because you have to be so focused on the charts, and you are taking multiple trades. If you are naturally impulsive, scalping may not be for you until you can teach yourself the mental discipline to wait for the best trades.
5. Know when to stop
Have a set target for the day. You may set a monetary target or a goal for the number of pips. Also, have a set target for losses. At which point, you close the charts and walk away. This attitude is crucial to avoid burnout and overtrading.
If you consider scalping as a Forex strategy, spend a considerable amount of time practising in a demo account. It's vital to know you can manage the pressure of multiple trades.
Trend Trading Strategy
As a trend trader, you aim to take advantage of the directional flow of the market. You identify whether the current price is in an uptrend or a downtrend. When the price is moving in one direction, we can define the trend. In an uptrend, you can identify higher highs and higher lows. In a downtrend, you can see lower highs and lower lows.
You can also confirm a trend by drawing a trendline on the chart and adding a moving average or other technical indicators. We will feature moving averages and trendlines below.
In a downtrend, price action will be below the moving average. In an uptrend, price action will be above the moving average.
The chart below is the daily chart for GBPJPY
On the chart above, the red line is the 200EMA, and the blue line is the 50EMA. It's easy to identify when the price is above or below the EMAs.
Starting from the bottom left corner (March 2020) to the top right (March 2021), the price has been steadily rising. There have been some big dips, but it's clear that the GBPJPY is in an overall uptrend, with one or two periods of a downtrend.
Notice how, as price moves away from the EMAs, price action often returns to the EMAs before pulling away. Often this can be at support or resistance areas too.
The above image is from the daily chart. If you wanted to trade this pair, you could take the overview from the daily chart. Or you could check the weekly chart. Then, move to the lower timeframes like the four-hour or one-hour charts to look for trades.
Trendlines serve as further confirmation of a trend. Below is the same GBPJPY chart, but we have added a trendline in the form of a channel.
Focus on the black line at the bottom of the price action. Observe the lower trendline where price has touched this line. Just before GBPJPY made the epic surge upwards, the price tapped the 200EMA and the lower trendline. Combining the EMAs with the trendline gave excellent confirmation of the upward trend. That move was 1300 pips, and the price action didn't look back from that point. Price continued upwards for some considerable time.
As a novice trader, it's easy to feel confused by Fibonacci retracement. In the middle ages, Leonardo Fibonacci, an Italian mathematician, introduced the sequential figures known as Fibonacci. The Fibonacci sequence appears throughout nature and architecture. It's used widely by Forex traders to identify support and resistance zones in Forex. The Fibonacci tool works best when the market is trending. It cannot work in a ranging market when the price is consolidating.
To use the Fibonacci retracement tool, it isn't necessary to get bogged down in mathematics. The Fibonacci retracement tool shows a set of horizontal lines. In short, it's not that different from drawing support and resistance levels on your chart. With the Fibonacci tool, however, you can identify the mathematic levels, noting the sequence of where you might expect price action to move next.
Notably, the three levels used on Forex charts are
In an uptrend, attach the Fibonacci tool at the bottom of the chart, at the last major low. Then, you drag it up to the current price. You then check where the support levels are with price action. If the price has retraced to a Fibonacci level, you may wish to look for a potential buy trade. The objective is to wait for the price to retrace to the level below in an uptrend. At which point, you can look for an opportunity to buy from this level.
CADCHF 4-hour chart. Note the bounce from the 1.618% line
In a downtrend, attach the Fibonacci tool at the top at the last significant high. Drag it to the current price at the bottom. In a downtrend, you wait for the price to pull back to a higher retracement level and then look for an entry signal to sell from the price action.
As with all strategies, it's essential to set up confirmation tools. The Fibonacci retracement tool isn't the magical, holy grail for trading. Like most strategies, the efficacy relies on market sentiment. Thousands of Forex traders add the Fibonacci retracement tool to their charts, watching and waiting for a retracement, at which point they buy or sell. The Fibonacci tool is a confirmation indicator to be aligned with a further confirmation.
Don't rely on Fibonacci as a stand-alone strategy. Combine it with support and resistance, moving averages or stochastics, or whatever confirmation tools you prefer. When all the ducks are in a row, it increases the probability of success.
Key Points from this Guide Part
- Your chosen strategy will depend on your trading personality, whether you prefer the short buzz of scalping or prefer to trade the long game with the higher timeframes.
- It’s vital to have a strategy you are comfortable with before you trade live Forex.
- Most strategies need a trader to know trend direction and support and resistance zones.
- You won't know which strategy you like until you have tested multiple strategies – ideally with a demo account first.
- Always set up confirmation tools rather than relying on one price indicator.
No one strategy suits all Forex traders. But having one brings clarity and confidence. The more you work with your process, the greater your chance of success. Don't give up if it fails a few times. Forex is not guaranteed. Sometimes price action doesn't perform in the way we wish. Working your Forex strategy exposes you to the charts where you gain experience and become familiar with how price action works.
The objective of a Forex trader is to identify probabilities. With a solid strategy or a sequence of indicator strategies, you increase the trade's likelihood of working out in your favour. If the trade fails, you lose knowing you did everything possible to assess the trade before entry. After your trade opens, it's down to the market to decide what happens next.