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14 Feb 2024

An Introduction to Forex Trading Strategies

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This article is not intended to be financial, investment or trading advice. This article is for information and solely for education purposes. It does not protect against any financial loss, risk or fraud.

Trading in the forex market, a dynamic and complex world of currency exchange, requires a well-thought-out forex trading strategy.

A forex trading strategy is a methodical plan based on analytical techniques to decide the best time to buy or sell a currency pair. These strategies can stem from diverse sources such as technical analysis, fundamental data, or real-time news events.

While the internet is full of pre-packaged forex trading strategies for beginners, it’s essential for traders, especially those just starting out, to analyse them with a critical eye.

Due diligence is important because many of these strategies lack a verifiable track record. Often, the most profitable forex strategies are jealously guarded secrets.

In this article, we’ll delve into the intricacies of creating the best forex trading strategies.

different currencies

Mastering the basics of a forex trading strategy

To create the best forex trading strategies, you should consider the following components:

1. Selecting the market: It’s crucial for traders to pinpoint which currency pairs they wish to trade and learn how to interpret the behaviour of those currency pairs.

2. Position sizing: This involves deciding the size of each position, i.e., how much you’re willing to invest or put on the line for a particular trade. It’s all about balancing potential rewards with the risk associated with each trade.

trader on their phone or laptop

3. Entry points: Traders need clear rules that specify when to enter a long or short position for a specific currency pair.

4. Exit points: Similarly, it’s vital to know when to bow out – whether from a profitable position or to cut losses.

5. Trading tactics: This encompasses the rules for buying and selling currency pairs and includes decisions like choosing the appropriate platforms or tools for executing trades.

Forex trading strategies for beginners and beyond

When navigating the world of forex trading, it’s good to be familiar with some of the more common strategies, such as:

1. Breakout trading: One of the more straightforward strategies, breakout trading is often recommended for beginner forex trading.

In simple terms, a “breakout” is when the price makes a big move either up or down beyond its usual range. This can happen outside a set support or resistance parameter, which are like invisible barriers where the price usually bounces back.

Such price shifts can be “bullish” – when prices soar above resistance zones – or “bearish” – when prices plunge below support zones.

The essence of breakout trading lies in capitalising on increased market volatility, which can potentially allow traders to ride the wave of a new trend.

2. Moving average crossover: This is a staple in the toolkit of many traders. It offers a way to smooth out price fluctuations by continually updating an average price over a specified time frame.

Whether you’re examining data over 20 minutes or spanning 30 weeks, moving average strategies remain a favourite among both long-term and short-term traders.

The primary goal here is to pinpoint trend directions and identify potential support or resistance levels.

A significant aspect to note is that when asset prices traverse their moving averages (averages calculated over a specific timeframe that adjust with new price data) it often sends a potent trading signal.

For instance, selling might be the order of the day if a price leaps above and then closes below the moving average.

3. Carry trade: This is a forex trading strategy that capitalises on the interest rate differentials between nations. At its core, the idea is to earn profit from the interest rate differences of two currencies.

When currencies are bought and held overnight, a trader receives the interbank interest rate from the nation of the bought currency. Essentially, a trader “borrows ” from a currency with a low interest rate to fund the purchase of a currency with a higher rate. The aim here is to gain from the difference in these rates.

It ’s a strategy that has made its mark as one of the best forex trading strategies out there. However, a point of caution – these trades can be highly leveraged, which increases the risk, and the strategy can sometimes attract a lot of traders, making it overcrowded. So while the strategy is popular, it can be a double -edged sword due to the inherent risks involved.

4. Fundamental analysis: A deep dive into a nation’s economic state can aid traders in gauging if a currency is undervalued or overvalued.

This strategy requires traders to consider a variety of economic data to predict future trade and investment movements. To make this less daunting, traders often focus on key indicators, including:

  • Retail sales
  • GDP
  • Industrial production
  • CPI and inflation
  • Purchasing managers index data
  • Housing data
  • And more

5. Trend trading: Valuable for forex trading beginners, this technique focuses on identifying upward and downward currency price trends.

The main task is to determine when to enter and exit trades based on the currency’s position within the identified trend and the trend’s strength. Various tools, such as moving averages, relative strength indicators, and volume measurements, are used to assess trends.

6. Range trading: This forex trading method is grounded on the belief that prices generally stabilise within a predictable range over a certain timeframe. It works best in stable economic environments where currency prices aren’t jolted by unexpected news.

The goal for range traders is to buy at predictable lows and sell at predictable highs, sometimes repeatedly in a single session. Trading indicators such as the relative strength index and stochastics come in handy to spot trade entry and exit points.

7. Momentum trading: The rationale here is simple: strong and consistent price movements in one direction often indicate that the trend will persist. On the flip side, weakening movements hint at a potential reversal.

Momentum traders usually rely on both price and volume data, and tools like oscillators and candlestick charts are commonly employed.

trader studying price charts

It’s paramount to approach trading with caution and responsibility. Forex trading comes with opportunities, but it also comes with risks.

It’s essential to educate yourself, set clear financial limits, and avoid impulsive decisions. Remember, sustainable success in forex trading doesn’t come from chasing quick wins but from informed decisions and consistent, responsible strategies.

We’ve considered various forex trading strategies and how they work. Whether you’re embarking on forex trading for beginners or seeking a more profitable forex strategy, it’s pivotal to remember that the practical side of trading – managing your funds – is equally critical.

If you’re thinking of starting out in trading, think carefully about how you will handle deposits and withdrawals at brokers. Here’s how Skrill can help you to transfer your trading funds:

  • Speed: With Skrill, you’re not left waiting around. You can promptly transfer funds to and from any broker that accepts Skrill.

    Made some profits? Withdrawing them back to your bank account from your Skrill wallet is quick and easy, taking just a few taps.
  • Your trading account: By keeping your trading funds separate from your regular bank balance, it’s easier than ever to monitor profits and losses. This separation ensures you have a clear picture of your trading finances, allowing you to make more informed decisions.
  • Widely accepted: Skrill’s acceptance among most top brokers is a testament to its reliability.
someone holding their phone open to the Skrill splash screen

To fully integrate Skrill into your trading routine, create a Skrill account here.

Remember, in the world of forex trading, seamless transactions can be as crucial as the trading strategy itself. Skrill ensures that moving money to and from brokers is smooth and hassle-free.

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