Forex Long Term Trading Strategy

Reviewed by Nick Cawley on December sixteen, 2021

Primary talking points:

• What is a Forex Trading Strategy?
• Forex Strategies: A Top-level Overview
• Price Action Trading
• Range Trading Strategy
• Tendency Trading Strategy
• Position Trading
• Day Trading Strategy
• Forex Scalping Strategy
• Swing Trading
• Carry Trade Strategy

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What is a Forex Trading Strategy?

A forex trading strategy defines a system that a forex trader uses to make up one's mind when to buy or sell a currency pair. There are diverse forex strategies that traders can use including technical analysis or key assay. A practiced forex trading strategy allows for a trader to analyse the market and confidently execute trades with sound gamble management techniques.

Forex Strategies: A Elevation-level Overview

Forex strategies can be divided into a singled-out organisational structure which tin can aid traders in locating the well-nigh applicable strategy. The diagram below illustrates how each strategy falls into the overall construction and the relationship between the forex strategies.

Forex Trading Strategies That Work

Forex trading requires putting together multiple factors to formulate a trading strategy that works for y'all. There are endless strategies that can be followed, however, agreement and being comfortable with the strategy is essential. Every trader has unique goals and resource, which must be taken into consideration when selecting the suitable strategy.

There are three criteria traders can use to compare dissimilar strategies on their suitability:

1. Fourth dimension resource required
2. Frequency of trading opportunities
3. Typical altitude to target

To easily compare the forex strategies on the three criteria, we've laid them out in a chimera chart. On the vertical axis is 'Risk-Advantage Ratio' with strategies at the elevation of the graph having higher reward for the adventure taken on each trade. Position trading typically is the strategy with the highest take a chance reward ratio. On the horizontal centrality is fourth dimension investment that represents how much time is required to actively monitor the trades. The strategy that demands the nigh in terms of your time resource is scalp trading due to the high frequency of trades being placed on a regular footing.

1. Price Action Trading

Cost action trading involves the study of historical prices to formulate technical trading strategies. Price activity tin exist used equally a stand-alone technique or in conjunction with an indicator. Fundamentals are seldom used; however, it is not unheard of to comprise economic events as a substantiating factor. At that place are several other strategies that autumn within the price action bracket as outlined in a higher place.

Length of merchandise:

Price action trading can be utilised over varying time periods (long, medium and short-term). The ability to apply multiple time frames for analysis makes price activeness trading valued by many traders.

Entry/Exit points:

There are many methods to determine support/resistance levels which are generally used equally entry/exit points:

• Fibonacci retracement
• Using candle wicks
• Trend identification
• Indicators
• Oscillators

Within price action, there is range, trend, day, scalping, swing and position trading. These strategies attach to unlike forms of trading requirements which will be outlined in detail below. The examples show varying techniques to trade these strategies to testify just how diverse trading can be, along with a variety of bespoke options for traders to choose from.

2. Range Trading Strategy

Range trading includes identifying back up and resistance points whereby traders will place trades around these key levels. This strategy works well in market without significant volatility and no discernible trend. Technical analysis is the primary tool used with this strategy.

Length of trade:

There is no set length per merchandise as range bound strategies can work for any time frame. Managing risk is an integral part of this method every bit breakouts can occur. Consequently, a range trader would similar to close whatsoever electric current range leap positions.

Entry/Exit points:

Oscillators are most commonly used as timing tools. Relative Force Index (RSI ), Commodity Channel Index (CCI) and stochastics are a few of the more popular oscillators. Price activity is sometimes used in conjunction with oscillators to further validate range leap signals or breakouts.

Example 1: USD/JPY Range Trading

USD/JPY has been exhibiting a prolonged range bound price level over the by few years. The chart above illustrates a clear support and resistance band which traders apply as entry/go out points. The RSI oscillator demonstrates timing of entry/exit points every bit highlighted by the shaded bluish and crimson boxes – blueish: overbought and ruby: oversold.

Range trading tin consequence in fruitful hazard-reward ratios however, this comes along with lengthy fourth dimension investment per trade. Employ the pros and cons below to align your goals as a trader and how much resources you lot have.

Pros:

• Substantial number of trading opportunities
• Favourable risk-to reward ratio

Cons:

• Requires lengthy periods of time investment
• Entails strong appreciation of technical analysis

three. Trend Trading Strategy

Trend trading is a simple forex strategy used by many traders of all experience levels. Trend trading attempts to yield positive returns by exploiting a markets directional momentum.

Length of trade:

Trend trading generally takes identify over the medium to long-term time horizon as trends themselves fluctuate in length. As with cost action, multiple fourth dimension frame assay can exist adopted in trend trading.

Entry/Leave points:

Entry points are usually designated by an oscillator (RSI, CCI etc) and exit points are calculated based on a positive run a risk-reward ratio. Using stop level distances, traders can either equal that altitude or exceed it to maintain a positive risk-reward ratio eastward.thousand. If the cease level was placed 50 pips away, the have turn a profit level wold exist set at l pips or more away from the entry signal.

Example two: Identifying the Tendency

In the simple example above, EUR/USD exhibits an upwards tendency validated past higher highs and higher lows. The opposite would exist true for a downward trend.

EUR/USD Trading the Trend

When you lot see a strong trend in the marketplace, trade it in the direction of the trend. For example, the strong uptrend in EUR/USD above.

Using the (CCI) as a tool to time entries, discover how each time CCI dipped below -100 (highlighted in blueish), prices responded with a rally. Non all trades will work out this fashion, merely considering the trend is being followed, each dip caused more buyers to come into the market and push prices higher. In decision, identifying a potent trend is important for a fruitful trend trading strategy.

Trend trading tin can be reasonably labour intensive with many variables to consider. The list of pros and cons may assist you in identifying if trend trading is for yous.

Pros:

• Substantial number of trading opportunities
• Favourable risk-to reward ratio

Cons:

• Requires lengthy periods of time investment
• Entails potent appreciation of technical analysis

4. Position Trading

Position trading is a long-term strategy primarily focused on fundamental factors however, technical methods can exist used such equally Elliot Wave Theory. Smaller more modest market fluctuations are non considered in this strategy as they practise not bear upon the broader market picture. This strategy can exist employed on all markets from stocks to forex.

Length of trade:

Equally mentioned above, position trades have a long-term outlook (weeks, months or fifty-fifty years!) reserved for the more than persevering trader. Understanding how economic factors affect markets or thorough technical predispositions, is essential in forecasting trade ideas.

Entry/Exit points:

Key levels on longer fourth dimension frame charts (weekly/monthly) hold valuable data for position traders due to the comprehensive view of the market. Entry and get out points can exist judged using technical assay as per the other strategies.

Example three: Germany 30 (DAX) Position Trading

The Federal republic of germany thirty chart in a higher place depicts an approximate two year head and shoulders design, which aligns with a probable fall below the neckline (horizontal red line) subsequent to the right-hand shoulder. In this selected example, the downwards autumn of the Germany 30 played out equally planned technically as well as fundamentally. Towards the end of 2018, Germany went through a technical recession along with the US/China trade war pain the automotive industry. Brexit negotiations did not help matters as the possibility of the UK leaving the EU would about likely negatively impact the German economic system as well. In this instance, understanding technical patterns equally well every bit having stiff key foundations allowed for combining technical and fundamental analysis to structure a strong merchandise idea.

List of Pros and Cons based on your goals as a trader and how much resources you have.

Pros:

• Requires minimal time investment
• Highly positive risk-to reward ratio

Cons:

• Very few trading opportunities
• Entails strong appreciation of technical and fundamental analysis

5. Day Trading Strategy

Day trading is a strategy designed to merchandise financial instruments within the aforementioned trading day. That is, all positions are closed before market close. This tin can be a single trade or multiple trades throughout the day.

Length of trade:

Trade times range from very short-term (matter of minutes) or curt-term (hours), equally long equally the trade is opened and closed inside the trading day.

Entry/Exit points:

Traders in the example below volition look to enter positions at the when the price breaks through the 8 menses EMA in the direction of the tendency (blue circumvolve) and exit using a 1:1 risk-reward ratio.

Example 4: EUR/USD Solar day Trading

The chart above shows a representative solar day trading setup using moving averages to identify the trend which is long in this case equally the price is to a higher place the MA lines (red and blackness). Entry positions are highlighted in blue with finish levels placed at the previous price intermission. Have profit levels volition equate to the stop altitude in the direction of the trend.

The pros and cons listed below should be considered before pursuing this strategy. Solar day trading involves much time and effort for little reward, equally seen from the EUR/USD case above.

Pros:

• Substantial number of trading opportunities
• Median risk-to reward ratio

Cons:

• Requires lengthy periods of time investment
• Entails potent appreciation of technical analysis

6. Forex Scalping Strategy

Scalping in forex is a common term used to describe the process of taking small profits on a frequent basis. This is accomplished by opening and endmost multiple positions throughout the solar day. This can exist done manually or via an algorithm which uses predefined guidelines equally to when/where to enter and go out positions. The most liquid forex pairs are preferred as spreads are generally tighter, making the curt-term nature of the strategy fitting.

Length of trade:

Scalping entails curt-term trades with minimal return, usually operating on smaller time frame charts (xxx min – 1min).

Entry/Exit points:

Similar nearly technical strategies, identifying the tendency is step 1. Many scalpers use indicators such as the moving average to verify the tendency. Using these cardinal levels of the trend on longer time frames allows the trader to meet the bigger picture. These levels will create back up and resistance bands. Scalping within this band can then be attempted on smaller time frames using oscillators such every bit the RSI. Stops are placed a few pips away to avoid big movements against the merchandise. The MACD indicator is another useful tool that can be exercised by the trader to enter/exit trades.

Case 5: EUR/USD Scalping Strategy

The EUR/USD 10 infinitesimal in a higher place shows a typical example of a scalping strategy. The long-term trend is confirmed past the moving average (price above 200 MA). The smaller time frame is and then used to target entry/exit points. Timing of entry points are featured by the red rectangle in the bias of the trader (long). Traders tin can also close long positions using the MACD when the MACD (blue line) crosses over the bespeak line (red line) highlighted by the blue rectangles.

Traders use the same theory to set up their algorithms however, without the transmission execution of the trader.

With this practical scalp trading example above, apply the list of pros and cons below to select an appropriate trading strategy that best suits you.

Pros:

• Greatest number of trading opportunities from all forex strategies

Cons:

• Requires lengthy periods of fourth dimension investment
• Entails strong appreciation of technical assay
• Lowest gamble-to advantage ratio

vii. Swing Trading

Swing trading is a speculative strategy whereby traders look to accept advantage of rang leap as well equally trending markets. By picking 'tops' and 'bottoms', traders can enter long and brusk positions accordingly.

Length of trade:

Swing trades are considered medium-term equally positions are more often than not held anywhere between a few hours to a few days. Longer-term trends are favoured every bit traders can capitalise on the tendency at multiple points along the trend.

Entry/Exit points:

Much like the range bound strategy, oscillators and indicators can be used to select optimal entry/exit positions and times. The simply difference being that swing trading applies to both trending and range jump markets.

Example 6: GBP/USD Swing Trading Strategy

A combination of the stochastic oscillator, ATR indicator and the moving boilerplate was used in the example higher up to illustrate a typical swing trading strategy. The upwardly trend was initially identified using the 50-day moving average (price above MA line). In the example of an uptrend, traders will look to enter long positions with the old adage of 'buy depression, sell loftier'.

Stochastics are then used to identify entry points past looking for oversold signals highlighted by the blue rectangles on the stochastic and nautical chart. Run a risk management is the final footstep whereby the ATR gives an indication of terminate levels. The ATR figure is highlighted by the red circles. This figure represents the approximate number of pips away the stop level should be fix. For example, if the ATR reads 41.8 (reflected in the last ATR reading) the trader would look to place the stop 41.8 pips away from entry. At DailyFX, nosotros recommend trading with a positive take chances-advantage ratio at a minimum of 1:two. This would mean setting a take profit level (limit) at least 83.6 (41.8 x 2) pips away or further.

Afterward seeing an instance of swing trading in action, consider the following list of pros and cons to determine if this strategy would suit your trading manner.

Pros:

• Substantial number of trading opportunities
• Median risk-to reward ratio

Cons:

• Entails potent appreciation of technical analysis
• All the same requires extensive fourth dimension investment

viii. Carry Merchandise Strategy

Conduct trades include borrowing one currency at lower rate, followed by investing in another currency at a higher yielding rate. This will ultimately result in a positive comport of the trade. This strategy is primarily used in the forex market.

Length of merchandise:

Comport trades are dependent on interest charge per unit fluctuations between the associated currencies therefore, length of trade supports the medium to long-term (weeks, months and maybe years).

Entry/Exit points:

Stiff trending markets work all-time for carry trades as the strategy involves a lengthier fourth dimension horizon. Confirmation of the trend should be the first footstep prior to placing the trade (higher highs and higher lows and vice versa) – refer to Example ane above. In that location are 2 aspects to a behave trade namely, exchange rate risk and interest rate gamble. Accordingly, the best fourth dimension to open the positions is at the first of a tendency to capitalise fully on the exchange charge per unit fluctuation. Regarding the involvement rate component, this will remain the same regardless of the tendency as the trader will still receive the interest rate differential if the first named currency has a higher interest charge per unit confronting the second named currency e.1000. AUD/JPY.

Could carry trading work for y'all? Consider the following pros and cons and see if it is a forex strategy that suits your trading style.

Pros:

• Little fourth dimension investment needed
• Median risk-to reward ratio

Cons:

• Entails potent appreciation of forex market
• Infrequent trading opportunities

Forex Strategies: A Summary

This article outlines viii types of forex strategies with practical trading examples. When considering a trading strategy to pursue, it can be useful to compare how much time investment is required backside the monitor, the risk-reward ratio and regularity of full trading opportunities. Each trading strategy will entreatment to different traders depending on personal attributes. Matching trading personality with the appropriate strategy will ultimately allow traders to take the start footstep in the correct direction.

Enhance your forex trading

• If you're new to forex trading, download our Forex for Beginners Trading guide.
• Annals for free to view our live trading webinars which encompass various topics related to the Forex market like cardinal banking company movements, currency news, and technical chart patterns.
• Stay up to engagement with major news events and economic releases by viewing our economic calendar.
• Successful trading requires audio risk management and cocky-discipline. Find out how much uppercase yous should risk on your open trades.
• We also recommend viewing our Traits of Successful Traders guide to discover the secrets of successful forex traders.

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Source: https://www.dailyfx.com/education/find-your-trading-style/top-forex-trading-strategies.html

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