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Forex trading strategies
Like any other market, you can trade forex using a number of different strategies. Here, we discuss how to choose an FX trading strategy to suit you – plus a few others to try out.
Choosing a forex trading strategy
The main strategies of forex trading are the same as for other markets: scalping, day trading, swing trading and position trading.
Scalping and day trading
Forex is popular among scalpers and day traders due to the high levels of volatility and liquidity you often find with FX markets. An intense trading strategy can work well on the currency markets, where the high number of traders means new opportunities are constantly arising.
Most scalpers and day traders will stick to the major pairs, where the liquidity is highest.
Swing trading
You don't have to stick to short-term strategies with FX, though. Many swing traders like to focus on one or two currency markets, hunting for medium-term price oscillations they can turn into profitable opportunities.
Remember, though, that forex trading is leveraged. And keep in mind that increased leverage increases risk.
Position trading
Position trading is also popular amongst forex traders, who take a long-term view on currency pairs. For example, if you think that sterling might make significant gains versus the euro and US dollar over several months, you might go long GBP/USD and short EUR/GBP over the long term.
Like with swing trading, though, you'll want to watch out for financing costs.
Carry trades
The carry trade is a popular strategy in the forex market for position traders, using interest rates to target long-term returns.
The first step in putting together a carry trade is to find a currency that offers a high interest-rate and another that offers a lower interest-rate return. You then sell the low-rate currency while buying the high-rate currency – taking advantage of the difference in rates to make a profit.
For example, say the US Fed has set a rate of 1.25%, while the ECB has set a rate of 0.00%. So, if you sell EUR/USD, you should (in theory) profit from the 1.25% difference in rates.
Of course, you'll need to earn enough profit to offset the costs of borrowing EUR and be wary of fluctuations in the EUR/USD exchange rate itself, which could offset any gains from the interest rate differentials.
Creating a custom FX strategy with indicators
You don't necessarily need a forex-specific trading strategy – the strategies covered in our Strategies and risk and Advanced trading strategies courses will almost all work for FX.
However, one way of building custom forex trading plans is by combining multiple technical indicators. This works especially well with trend trading.
The combination selected should indicate a trend, confirm a trend, suggest potential entry points, tell you whether your market is oversold or overbought and provide a prompt to exit the market.
You can experiment with a four-indicator strategy by choosing an indicator from each of the four main types: trend following, trend confirmation, overbought/oversold, and profit-taking. You'll find a range of indicators listed on the FOREX.com trading platform – so log in to your demo or live account and you can start looking at what might work.
