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Forex Trading Strategies

Understanding strategies for forex trading
and the most commonly used forex indicators

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What is a trading strategy?

Types of trades?

Forex trading strategies

Simulated forex trading

Forex indicators

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What is a trading strategy?

Plan your trade and trade your plan

Your gut feeling is no expert when it comes to trading stocks, currencies, etc. But you can trade like a pro by learning & experimenting with different trading strategies.

How to use trading strategies

Expert traders are well-versed in the art of carrying out extensive technical analysis. They may have a working knowledge of different trading strategies, but they usually settle on a few strategies that they have found to be successful on a consistent basis.

You should approach trading the same way. Having well-laid out rules that govern when you enter and exit trades keeps you from making emotional decisions. Remember, gut decisions bring the highest losses as trading is never a sure game. Even after using trading strategies, the outcomes may at times go against you.

Put your strategy to the test in a risk-free environment

You’ll have varying levels of success when you implement any new strategy. If you put real money on the line with an untested strategy, it can result in losses. That’s why the best approach is testing out strategies in a demo environment.

Trading with a demo account may be devoid of the emotional highs or lows that come with losing or making real cash. However, it’s still the best way to know if strategies might work in a real-life scenario.

Some strategies are advanced and require some practice. Another advantage of trading in a demo environment is that you have access to historical market movements. You can apply a strategy and see what the outcome would have been.

Strategies and Demo Trading

Types of Trades

Different forex trading styles

Day trading is the practice of making short-term trades on the same day. Typically, positions last for a few hours and are not left open overnight. The premise of day trading involves taking advantage of a volatile market where prices are constantly changing.

Your concentration will be tested, as this high-intensity trading style requires you to constantly monitor the market. Making quick decision such as whether to close or leave a position open, will be important.

Scalping may be classified as a day trading method. However, the time duration is narrowed to less than five minute. That means that you’ll have the one minute or five-minute chart in view, and on average positions are held for a few minutes or seconds.

Scalpers favour strong market movements as they are less risky. This may entail monitoring the market for the entire day. If you choose this strategy, you have to minimise risky trades, as sizable profits are made from many small profitable orders. One loss has the potential of eroding your entire progress.

If you’re a position trader, you don’t take a short-term approach like scalpers. Price movements take place over days. It’s therefore a strategy that doesn’t require you to monitor the markets all day long.

The expectation in position trading is that the prices will rise in a strong uptrend. Position traders need perseverance and resilience to cope with minor dips. In this style of trading, carrying out comprehensive fundamental analysis is not enough. Traders must also use technical analysis techniques.

Swing trading is not a short-term trading strategy, but it shares similarities with position trading & day trading. It’s suitable in more volatile markets than position trading, and it’s said to be “intermediate.” You don’t actually require a strong uptrend to find a possible advantage.

With swing trading, the emphasis is on looking for strong price swings over a period of one day or up to several days. It would be necessary for the swing trader to leave positions open overnight, but you must watch out for unexpected occurrences such as major news updates.

Forex Trading Strategies

Common trading strategies

The Bladerunner trade uses the 20-period Exponential Moving Average (EMA) line. It’s applied in all time periods, but many traders apply it for shorter time frames such as the 5-minute charts. The line appears inside the main chart and not in an off-chart.

What is the Bladerunner trading strategy?

The strategy involves waiting to see if the 20-period EMA line cuts through the price action line, which can happen in two ways. After the EMA line cuts through the price line, it should stay below it even after retesting. This means that the market will trend downwards. If the EMA cuts through the price line and stays above it even after retesting, the market should continue trending upwards.

This trade relies on using pivot points and Fibonacci retracements together to find entry points. You can also use it to accurately determine strong support and resistance areas.

What is the Daily Fibonacci Pivot trading strategy?

The strategy involves looking for a confluence or ‘coming together’ between the Fibonacci retracement lines (32 %, 50% or 62% lines) with the pivot support line. For instance, if you want to enter a long position during an uptrend, you may look for a confluence before entering the market. For a strong signal, it’s better to wait for a bullish confirmation candlestick. The Fibonacci gives the highest indication, and it’s supported by the pivot point.

The Bolly Band Bounce Trade

The thinking behind this well-known strategy is that prices will return to their mean average. It requires the use of the Bollinger Bands and is applied in stable markets moving at a steady range.

What is the Bolly Band Bounce trading strategy?

The Bolly Band Bounce strategy is executed by considering the upper, middle, and lower Bollinger Bands. You assume that the asset in question will stay within the support (lower band) and resistance levels (upper band). The middle band is usually the simple 20-day moving average. You then check if the price moves towards the resistance or the support, then bounces back to the middle.

The strategy is to buy when the prices are trending near the lower band with the expectation that they will rise towards the middle. Selling is recommended when prices hit the upper band with the expectation that they will fall. The trade may lead to a loss if the prices choose to “walk the band” without bouncing to the middle.

The Forex Overlapping Fibonacci Trade

If you have a good working knowledge of the Fibonacci retracement lines, this will be a less challenging strategy to implement.

Traders who use this elaborate strategy often swear by it and use it exclusively. When combined with other indicators, such as pivot lines, it provides a stronger signal.

What is the Overlapping Fibonacci trading strategy?

You can implement this strategy during any strong market movement, be it a bullish or bearish. Let’s assume the market is trending upwards. In this case, the idea is to map two Fibonacci retracement lines. You start out by identifying three waves; an upward trend (first wave) that’s followed by a retracement (second wave) and finally the appearance of an upward trend (third wave).

You draw the one Fibonacci from the low of the uptrend to the high of the trend (the lowest wick up to the line of resistance or top of the third wave). You then draw the second Fibonacci from the low of the second wave to the highest high. The next step is to identify confluences or overlaps between the lines of the two separate Fibonaccis. During an uptrend, the level of confluence indicates a strong line of support. In a downtrend, the confluence confirms the presence of a strong line of resistance.

London Hammer Trade

This is quite simple to execute, as it revolves around volatile price movements during the open of the London market or as it draws to a close.

The market volatility increases based on more traders becoming active. Many traders use it whilst trading the gold market.

What is the London Hammer trading strategy?

When the London market opens, you start looking for a hammer. It’s a Japanese candlestick pattern characterised by a long lower wick (twice the length of the body), short real body, and little or no upper wick. That’s because sellers drove the prices lower during the first half of the duration, only for buyers to reject the low prices driving the price past the open by only a small margin. It might reflect how the market will behave in a given day. You have a stronger signal by combining it with support and resistance.

Trading the Forex Fractal

You use fractals to identify a reversal and confirm its existence in very volatile or chaotic markets. Fractals appear at swing highs or swing lows.

What is the Forex Fractal trading strategy?

The fractal pattern consists of a middle candlestick or bar that is surrounded by two other candles. If it’s a bearish fractal, the middle candle is the highest high and it’s flanked by two lower high points. Think of it like one high mountain with two smaller hills on its side that are higher than all other hills in the surrounding area.

For a bullish fractal, the middle candle is the lowest low and this forms a trough as it’s flanked by two higher low points. You can use the ‘Alligator indicator’ alongside fractals to confirm the existence of a reversal.

Forex Dual Stochastic Trade

This strategy is mostly applied to trading the major currency pairs but can be applied to other assets. Its purpose is to reveal when the trend is most likely to reverse. With the early tip-off, you prepare to change your position.

What is the Forex Dual Stochastic Trade?

This strategy is mostly applied to hourly charts, but will also work with daily charts. All you need to do is configure one fast stochastic oscillator and a slower stochastic oscillator. Then, you compare the two stochastics and enter into positions when one chart is showing an overbought market (over 80) while the other shows an oversold market (under 20). This signals that a reversal may be coming up. It’s important to use the strategy in conjunction with other technical indicators.

The Pop ‘n’ Stop Trade

The Pop ‘n’ Stop Trade allows you to take advantage of a sudden price breakout from a tight range. There is the danger of missing the breakout and entering the trade too late. The price breakout may be prompted by a news release, rising volumes, or at the opening of the market.

What is the Pop ‘n’ Stop trading strategy?

With the Pop ‘n’ Stop strategy, you look for the price breaking above its price range by a big margin, “popping out.” It is followed by a small stop and then a stronger uptrend may continue. “It pops then stops.” After the brief pause, it is not guaranteed that the price will keep rising, so it’s vital that you look out for other signals that confirm the bearish trend. Also, watch out for rejection bar candle patterns like a pin bar formation. You place tight limit orders and profit take levels, as it’s easy for the price level to get exhausted quickly.

The Drop ‘n’ Stop Trade

The Drop ‘n’ Stop Trade is the reverse of the Pop ‘n’ Stop trade. It’s applied when the price breaks below a range, in what is referred to as a bearish breakout.

Forex Simulator

Test different trading strategies with our free demo account

FXTM gives clients the opportunity to test strategies in a risk-free environment. With our Forex simulator, you don’t have to risk your capital until you’re confident in your ability to make successful trades.

Although the FXTM demo account utilises a simulator, you’ll be trading under normal market conditions. The price movements are real and the indicators you have learned above are applicable. You’ll be trading with simulated money, but under genuine market conditions.

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Forex Indicator

Important indicators for forex trading

MACD indicator

Moving Average Convergence Divergence.

It’s one of the most used indicators because it’s easy to understand, and gives the trader information on whether the price movement is bearish or bullish, and the strength of this movement. The MACD also provides information about the duration and momentum.

How to use the MACD indicator

The MACD indicator consists of two lines and a histogram plotted against a time axis. First, we have the MACD line that’s obtained by finding the difference between the 12-day exponential moving average (fast) and the 26-day EMA (slow). The signal line is a 9-day simple moving average of the MACD. It’s usually colored red and appears above the MACD. The histogram represents the distance between the two lines.

More forex indicators

Crossovers

When the MACD line crosses above the signal line, traders deduce that an upward trend is likely to form, and the action to take is buying the asset. If the signal line crosses under the MACD line, the indication is that a downward direction may form, and therefore you should sell.

The MACD may also go under the base-line to a negative value, and this points to the likelihood of a downtrend forming.

Divergence

The price line may diverge from the MACD, suggesting that a trend may reverse.

All about Parabolic SAR

Parabolic Stop and Reverse

The parabolic SAR is a “trend-following indicator.” It can help you decide when to buy or sell. The indicator appears as a series of dots above the price bars. Day traders use it to uncover short-term momentum.

How to use Parabolic SAR

Using the parabolic SAR is quite easy, even for beginners. However, note that like other indicators it may produce fake signals. When the dots are above the price line, look out for an uptrend as it may be likely to form. The dots just make the price movement clear. Dots swap from the top of the price to the bottom of the line to reveal potential entries and exits.

The Stochastic Oscillator Indicator

The stochastic oscillator indicator is a must-have tool in your trader’s toolbox

This is a momentum indicator obtained by comparing an asset’s close price and its price range over a given period. It produces better results with higher time frames such as the daily chart.

How to use the Stochastic Oscillator

Its chart has two lines, the slow %D and the fast %K. The default look-back period is 14 days, but you can vary this parameter to increase or decrease the indicator’s sensitivity. The stochastic oscillator tells you when to enter into a trade. While it was developed to track momentum and velocity, it now indicates if the market is overbought or oversold.

You look at the 80-line and 20-line. If the %D and %K lines cross the 80-mark, the asset has been overbought. Some buyers may start selling and take profits, which causes the trend to reverse. Now if both lines fall below the 20-mark, the asset is oversold, and more traders will choose to buy, driving the prices up.

Relative Strength Index

The RSI shares the same function with the stochastic oscillator as it can help you identify an overbought or oversold market. It’s a range-bound momentum oscillator obtained by comparing the average gain prices with the average losses over a given period. It also tracks the rate of price change.

The RSI shares the same function with the stochastic oscillator as it can help you identify an overbought or oversold market

There is only one line to track, and it produces an overbought signal when it crosses the 70-line or an oversold signal when it goes under 30. The RSI may show the formation of an uptrend if its RSI value moves from a low position, crosses the centerline (50) and moves to the 70-mark.

If it moves from a higher position past the 50 centerline towards the 30-mark, it may confirm a bearish trajectory. During an upward trend, the RSI value may stay above the 60 range with the 40-50 zone acting as the support. In a bearish market, the RSI value remains within the 10-60 range, and the 50-60 zone serves as the resistance.

Ichimoku Hyo Indicator

The indicator was developed by a Japanese newspaper writer, and it’s a combination of several indicators meant to give traders all the information they need in one glance. It’s no surprise that it consists of up to 5 lines. Since it’s made up of multiple lines, it can be hard for novice traders to read it.

How to use Ichimoku Kinko Hyo

Without getting into the technicalities, this indicator helps traders determine resistance and support levels. It may reveal the price momentum, possible reversals and help traders place a stop loss.

Some of its lines include the kijun-sen and tenkan-sen that are derived by averaging the highest prices and lowest prices of different lookback periods. For instance, the tenkan-sen line has a lookback period of 26. The senkou span A, another line, is the average of the kijun-sen and tenkan-sen.

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