Forex is one of the most attractive places for traders thanks to dizzying daily turnover (around $6.6 trillion), high liquidity, and numerous instruments for successful capitalization. At the same time, it can be quite tricky, especially for those who are just starting their career in this industry.
Regardless of whether you are a cautious or a risky taker, you need to choose a strategy and stick to it. Exactly thanks to this approach, Bill Lipschutz and George Soros became on the list of the best forex traders in the world. Below, you can learn about the basic 5 Forex trading strategies that can be useful, especially if you don’t know where to start.
Trend-Based Approach
If you have a basic understanding of Forex, you should start with this method. It is quite simple since your aim is to track the current trend and follow it with your trading instrument. In fact, there are only 2 options available:
- Downward trend (prices are steadily falling);
- Upward trend (prices are steadily increasing).
You may use tools like Moving Averages and MA crossovers to make your life easier. In the first case, the trader monitors whether the price has risen (or fallen) by the predetermined average value.
Here, 200 DMA is probably the most popular one. In the case of MA crossovers, you need to use a slow and fast MA that will give you entry signals. So, for example, if the 200 DMA crosses the 50 DMA, then this is a downward signal.
Range Trading Tactics
This is another method that beginners often use. However, this approach requires specific conditions, including a stable market movement between two price values. Once traders decide on this range, they must establish its internal trends. As in other approaches, they can be either top-down or bottom-up. In addition, there are only two options in terms of timing:
- Long-term: if you have recorded an upward trend;
- Short-term: if you experience a downward trend.
You can use both limit orders and set stop losses depending on your skills. You may consider the Moving Average or Average Direction Index (ADX) among available instruments.
Breaking Out Approach
Before describing this strategy, it is worth highlighting 2 main concepts that are important for understanding:
- Support level: these are zones on the chart where prices remain at the same level for a long time and cannot fall below because buyers support them;
- Resistance level: these are areas on the chart where prices cannot rise above a certain value (experience resistance).
In this approach, you need to enter the trade after the price rises quickly. For this purpose, you may use different instruments that can signal that the price has exceeded a pre-set level. This powerful impulse can bring profit, but it also requires extreme attention in terms of dynamics. Using this approach, you can place either buy-stop or sell-stop orders.
Carry Trade Tactics
Another fairly simple strategy is when you get profit from the difference in interest between the average currency pairs. For this purpose, you need to buy a currency with a high-interest rate and try to sell it at a high price. A clear example is the AUD/JPY currency pair.
The fact is that record-high rates are constantly observed in Australia, while in Japan, the situation is diametrically opposite. In this way, you can profit significantly just by carrying a position.
However, it is necessary to monitor the market environment very carefully. For example, such an approach will not bring you any profit in the conditions of a significant downtrend. But in the case of an upward trend, it can work because market participants often look for high risk.
Though this approach is considered an easy one, it would be very helpful to understand the specifics of the currency being traded.
MACD Strategy
MACD is an abbreviation for a Moving Average Convergence Divergence. This strategy is perfect for those market players who are well-versed in indicators. To start using this approach, it is necessary to define its 3 main parts:
- Signal line: this is a nine-period MA;
- MACD line: formed as a result of subtraction of 26-period MA from 12-period MA;
- Histogram: graphical representation for ease of understanding.
All you need is to fix the moment when the blue line (MACD) crosses the red (signal line). This is a clear buy signal.