What is a Forex Trading Strategy?

Forex trading strategies refer to a set of rules and regulations that help traders determine when to enter a trade, how to manage it carefully, and when to exit the trade. These strategies are formed on technical analysis chart patterns ensuring that traders make informed decisions. A forex trading strategy can be simple or complex depending on the traders.  In this blog, we will explore forex trading strategies for beginners, how to choose them, and will mention some suitable forex exchange trading strategies. 

Example of a Basic Forex Trading Strategy

For forex trading the trader's decisions are influenced by technical analysis or important market news, that triggers the buy or sell signals. The most successful forex traders develop a strategy over time to navigate market volatility effectively. 

Here is an example of a basic forex trading strategy that shows how forex trading is affected by international market changes. 

Let’s assume a trader expects the value of the Indian Rupee (INR) to rise. The current exchange rate between EUR/INR is 90. This means it takes INR 90 to buy EUR 1.00. 

Now, let’s assume the trader's prediction was correct, and the European Central Bank announced a policy change. This action will lower the Euro. The new exchange rate for EUR/INR drops to 85, meaning it now only takes INR 85 to buy EUR 1.00. If the trader had gone long on INR and short on EUR, they could profit from this change in the exchange rate, capitalising on the strengthening of the Indian rupee.

How to Choose the Best Forex Strategy?

Before stating some good forex exchange trading strategies, it’s important to understand how to choose Forex strategies based on your preferences. Here are three main components that should be taken into consideration.  

Time Commitment

Time frame plays an important role as it decides the amount of time you are ready to spend to trading. It also influences the type of strategy you should select. A short-term strategy can be suitable if you want to monitor the market closely and react fast to price movements.  On the other hand, if you have limited time to trade, longer-term strategies like swing trading or position trading allow you to hold positions over several days or even weeks, requiring less frequent market checks. 

Number of Trading Opportunities

The number of trading opportunities varies depending on the strategy used. Scalping or day trading strategies assume several trades in one day. They provide a trader with much more frequent chances to cash in on profits and losses. By contrast, fewer infrequent trading possibilities characterise position trading or swing trading strategies. The possibilities of increasing gains are much bigger over an extended time frame. Traders who prefer market activity all the time tend to favour strategies that produce more signals.

Position Size

The position size is the size of every trade. This is important in determining risk and potential reward. When it is a small position size, it would allow the traders to manage their risk, which would be very appropriate for strategies such as scalping or day trading, where multiple trades are constantly placed. In position trading, which holds for a long time and trades from that position, the position size is relatively greater because there is higher movement expectation in the market.

Some Suitable Forex Exchange Trading Strategies

The following is a list of some good Forex exchange trading strategies.

Range Trading Strategy

Traders look for currency pairs in range trading that can move within a well-defined range. In this strategy, sometimes price action can be used together with oscillators. When the price reaches the support level, traders buy, and when it reaches the resistance level, they sell. This strategy can be appropriate for markets that lack a clear trend and move sideways.

Trend Trading Strategy

In this strategy, the trader follows the trend direction of a currency's price. Whether the market is trending up or down, a trader seeks to gain as long as the price movement is in his or her favor until there is an indication of a reversal. It has been known to be an effective strategy in highly momentum-based markets and can be utilised over both short and long-term frames.

News Trading Strategy

Major economic announcements include decisions on interest rates by central banks, inflation reports, or employment data that capitalise on the volatility in news trading. News trading is very fast because it relies on the market reaction, depending on buying and selling currency pairs. This trading, though profitable, is quite risky because of the uncertainty in the market reaction.

Retracement Trading Strategy

This strategy involves short-term reversals within a trend. They get into the market when the price temporarily retrades before continuing its major trend. In this regard, the aim is to capture opportunities in a retracement area set at an optimum price for either buying or selling.

One-Hour Trading Strategy

This one-hour strategy suits traders who prefer short-term trades, opening and closing them within a one-hour time frame. Traders will rely on technical indicators and price action analysis to find what are often quick opportunities in the market-and generally best for those who cannot afford to hold overnight.

Carry Trades Strategy

A carry trade strategy involves borrowing funds in a currency with a low interest rate and investing them in a currency with a higher interest rate. Traders profit from the difference between the two interest rates, as well as any appreciation in the value of the higher-yielding currency. This strategy is suitable when the interest rate differentials between countries are significant. 

Grid Trading Strategy

In grid trading, buy and sell orders are placed at a predetermined interval above and below the actual spot price. When the market moves and hits these orders, the trader will capitalise on the ongoing trend of the market. This kind of trading is more effective for volatile markets where prices oscillate frequently.

Conclusion
Forex trading strategies are essential for trading forex markets. You would select a strategy depending on your time commitment, the number of trading opportunities you would want, and the size of your position. Some popular strategies, such as trend trading and grid trading, are easy to customise according to the style of the trader. The right approach chosen by the trader with strict adherence increases the winning chances in the forex market. Additionally, to start building your forex strategy you can download an online trading app to get access to tools for proper risk management.