Forex Trading Strategies – Different Approaches and Strategies for Every Trader
People are different, and so traders are different too. What I find suitable for me, as a trader, another one might find it too risky or less risky for their taste.
There is no crystal clear rule for success in financial markets. Some traders enter the market and let their trades go no matter what until the target is reached. Even if it means months or years, they stick to the trade. It means they have a strategy, believe they did their math correctly, and follow the plan.
Some other traders like quick action. They often enter and exit the market during the trading day, using high volume and leverage. These traders have a strategy, too, but it differs from the one mentioned previously.
These are just two examples of how each trader has a different approach to the market and how they work with forex brokers to execute their trades. If we are to group all the ways traders approach financial markets, we could develop some of the most common trading strategies to be presented in this article.
What Is a Trading Strategy?
To its core, a trading strategy is a plan. Having a plan in life and in trading as well brings you a step closer to success.
Planning your entries and exits in the market means that you already apply risk management to your trades. Plan to trade and trade your plan is a big saying among financial market participants.
Therefore, the strategy is a plan that is laid out before highlighting the trading rules if you want. From the timeframe to use to the risk-reward ratio, everything is included.
How Do You Develop a Strategy?
The starting point of any trading strategy is the available time needed to execute it. If one can only trade a couple of hours per day, the basics of the strategy should start from here.
It should continue with the desired results and time horizon to obtain those results. The trader may want to target one thousand pips moves in 24 hours, but such moves are extremely rare, judging by past market movements. Therefore, the trading strategy should calibrate all the constraints and incorporate the trader's risk appetite. It must have a well-defined risk management system, entry and exit levels, etc.
Below are the best trading strategies, some of which are most common among forex market participants:
- End-of-day trading
- Swing trading
- Day trading
- Trend trading
- Scalping
- Position trading
- Trading the news
End-of-Day Trading
As the name suggests, end-of-day trading means the opening (and sometimes the closing) of trades occurs at the end of the trading day. If you wonder why this is the case, there are at least two reasons why traders choose such a strategy.
First, lack of time to trade. Most retail traders in the forex market have a day job and other obligations during the trading day. As such, waiting for the end of the trading day to open and/or close new positions is convenient.
Second, such a strategy is likely based on setups on the daily timeframe. Having said so, it means that trades want to filter the noise in the markets during the day and ignore everything. They just decide at the end of the day when the daily candlestick closes.
This way, they keep their eye on the bigger picture and do not let temporary emotions interfere with the logic of their trades. Risk management is in place, with both stop-loss and take-profit levels being used.
Not all daily candlesticks end at the same time. It depends on where the broker's server is located. Also, it depends on the setups used on the trading platform.
For example, let's assume that your trading location is CET (Central European Time). If the setup on your platform is for the daily candlestick to close at GMT +1, then the trading day ends, not at the end of the CET day. Sometimes, you can change that in the settings, but sometimes, like in the case of MT4 brokers, you cannot. There, the daily candlestick closes at the time when the server is located.
In other words, make sure you know when the trading day ends before choosing the right broker for your end-of-day trading strategy.
Pros:
- Disciplined approach
- No need to pay negative swaps
Cons:
- Frequent trading leads to paying more commissions to brokers
Swing Trading
As a trading strategy, swing trading appeals to many traders. Perhaps because it is simple to implement or because it gives traders the freedom to do something else during the time it takes for a trade to develop.
Swing trading involves positions in the market kept open for more than a few hours. It sometimes means days or even weeks.
But why would someone use such a strategy? The reasons may vary.
In some cases, keeping a position open for longer periods makes sense, even if your analysis points to no market movement. Take, for instance, the example of the USD/JPY currency pair.
Due to the interest rate differential between the United States and Japan, the currency pair paid a positive swap for every day a USD/JPY long position was kept open. As such, many traders got involved in the so-called carry trade through swing trading.
Therefore, swing traders buy or sell a currency mostly based on fundamentals or technical analysis made on bigger timeframes. When fundamentals change, a swing trade is typically closed.
Try to avoid swing trading positions that pay a negative swap. Most of the time, the negative swaps aren't a problem, as they do not consist of a big chunk of profits or losses.
Only sometimes they do.
To continue with the same USD/JPY example, imagine that you shorted the currency pair in the last 12 months or so. During 2023 and 2024, being short, the currency pair at a time when the interest rates in the US far outpaced the ones in Japan was a costly position. On top of the losses generated by such a position (i.e., the USD/JPY pair rallied to over 160 from below 120), the negative swaps added to the losses of any swing trading short position.
Pros:
- The trader ends up paying less commissions compared to other strategies
- Allows riding strong trends
- Ideal when positive swaps are paid
Cons:
- It requires strong trading discipline because most traders aren't able to pull the plug and close losing positions.
Day Trading
As the name suggests, it refers to trading during the day. Put simply, all positions are open and closed during the trading day.
Sometimes, it may be the case that a trade is open for hours, sometimes for merely seconds. However, as a rule of thumb, day trading means all positions are closed at the end of the trading day, no matter what.
It brings self-enforced risk management and discipline, which is always good in any trading.
Make sure to know the economic calendar well in advance. Market positioning ahead of important economic releases often leads to no trends or opportunities in many currency pairs.
Also, make sure you trade during hours when the market typically moves. For example, the Asian session is known for its lower volatility levels than the European or North American session.
Pros:
- Enhanced risk management
Cons:
- Many days have reduced volatility
Trend Trading
Trend trading is one of the favorite forex trading strategies by anyone involved in financial markets. The problem with it, however, is that trends do not form that often.
For a market to trend, it must continuously make higher highs and higher lows (in a bullish trend) or lower lows and lower highs (in a bearish trend). While it sounds quite simple, the reality shows that it is difficult for such conditions to appear on a chart.
However, when they do, trend trading means riding the trend as long as you can. Therefore, in a bullish trend, the strategy involves buying dips above the main trendline, hoping for a new higher high. The stop loss is usually placed just below the previous higher low. Naturally, the opposite is true in a bearish market.
Try to avoid placing the stop-loss order right at the previous higher low. Instead, move it to the next one to give the market more room to correct and avoid being kicked out of a trade on just a spike.
Pros:
- Simple strategy
- Enables compounding
Cons:
- Trending conditions do not form so often
Scalping
Scalping is a very short market trading strategy. It suits traders used to going in and out of a market several times a day. Sometimes, tens of times a day or even more.
Some traders use scalping to book even one pip in profit. Some others look for five or ten pips. In general, scalpers invest more in a position to profit from short market moves. As such, they trade a much bigger volume than swing traders do.
Pay attention to the trading costs and conditions offered by the broker. Depending on the broker's type, one can have bigger costs triggered by spread increases during crucial economic data releases.
Pros:
- No need to worry about negative swap positions since all trades have a short-duration
- Small trends often form on lower timeframes
Cons:
- Increased volatility might hurt a trading strategy
- Sometimes, markets move faster than the trader can execute a trade
Position Trading
Position trading goes beyond swing trading and comes closer to what is known as investing. Investing in the currency market in the long run is called position trading.
In this case, positions are held for extended periods, such as weeks, months, and even years. Typically, traders look to capitalize on interest rate differentials or some fundamental positioning that might take years to reverse.
Such an example is the USD/JPY currency pair. In March 2022, it broke above 115 and did not look back all the way until trading above 150 and then 160. All this time, some couple of years later, position trading on the long side brought both profits from the long trade and positive swaps given by the positive carry.
Sometimes, negative swaps may hurt position trading. Try to avoid getting trapped in ranges, even if the trade comes from a bigger timeframe than swing trading.
Pros:
- This may lead to huge profits when riding trends on big timeframes
- Removes the daily market noise
Cons:
- It can be costly when caught on the wrong side of the market
Trading the News
Another way of trading the market is to focus on its fundamental side. News moves financial markets, and there is no secret about that. Whenever there is movement, there is an opportunity to speculate on it.
Sometimes, the market waits for the release of important economic releases. It means it consolidates until the report comes out. Therefore, one can say that such a consolidation before the news release might also be considered as part of trading the news.
Trading the news is as tricky as tricky can be. Very often, the market movements are reversed as false breakouts frequently occur. Also, the market's volatility increases significantly, making it difficult to apply a proper risk management strategy.
Make sure you are updated with the economic calendar and what comes out next. Focus on the events market in red, as they are paramount. Central bankers' speeches, in particular, move the forex market.
Pros:
- Quick profits can be made
- Increased volatility leads to opportunities
Cons:
- Very often, the initial market move proves to be a false one
- Difficult to implement a risk management strategy
Why Do I Need a Trading Strategy?
Trading is difficult enough, even with trading strategies. However, your chances of succeeding as a trader increase significantly with one.
A trading strategy helps you overcome behavioral biases. It means you already have a plan one step forward to success.
Moreover, a strategy implies a well-defined risk strategy, too. Knowing when to enter and exit the market well in advance positively impacts your way of controlling emotions during trading. Financial markets can trigger an emotional rollercoaster, which may lead to losses if one does not know in advance what the plan is to face every possible situation that might appear in the market.
To sum up, a trading strategy is a must-have. The more time you dedicate to improving it, the higher the chances are to succeed in financial markets.