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Success in the global currency arena is typically dependent on the trader’s chosen strategy and the knowledge to execute it accurately. Strategies help traders determine the best time to enter a trade, when to hold and for how long, and when to exit.
Generally, a forex trading strategy takes guesswork off the table, enhancing the probability of success. There are over a dozen working forex trading strategies out there.
In this piece, we will discuss the top four profitable strategies in the foreign exchange market.
Let’s dive right in.
Top Five (Commonly Used) Profitable Forex Trading Strategies
Here are the most profitable forex trading strategies commonly used in the FX market. Note, however, not all systems can work for you. So, you should choose one that aligns with your requirements and preferences and master it before trying to integrate it with others.
If you can work under pressure and maintain a high level of focus throughout trading sessions, scalping may be your best strategy. Scalping involves quick or short-term trades, often held for a few seconds or minutes.
The strategy demands taking advantage of small price movements - seizing small profits cumulatively. Here, you need knowledge of using various technical analysis tools, including moving averages and Bollinger Bands, among others. In addition, you should have strict risk management rules and utilize risk management tools such as stop loss.
Scalping requires total focus on the market, rapid decision-making, and quick reaction time. Traders must also be disciplined and have complete control of emotions to avoid impulsive decisions.
Although scalping strategy can be highly effective, it is worth noting that it is not suitable for highly volatile markets.
Forex Day Trading
This is another profitable short-term forex trading strategy. It also involves taking advantage of short price movements. However, unlike scalping, day traders focus on a specific market session entirely. They can hold a position for as long as the market is open; they do not hold a position overnight, though. Often, day traders have a predetermined profit target and usually exit the market when it is achieved.
Typically, traders integrate day trading with other more advanced strategies and technical analysis tools to identify the optimal entry and exit points. Risk management tools also come in handy when implementing this strategy.
As in the scalping strategy, day traders also require focus and emotional discipline to avoid impulsive decisions.
Trend Trading Strategy
Trend trading strategy involves speculation on a prevailing trend. It requires the trader to identify a trend and speculate on the continuation of that trend. Here, you can hold a position for a short, middle, or long term.
The idea is to keep the position for as long as the trend continues and exit when your goal is achieved, or the trend starts reversing.
Trend traders usually utilize technical analysis indicators, such as moving averages and relative strength index, to identify trends and confirm their validity. They may also use trailing stop loss for risk management in case the trend reverses unexpectedly.
All you need to use this strategy is analysis and trading knowledge and defined risk tolerance. Also, you should keep up with economics, geopolitics, forex regulations, and other related news and events that can cause sudden trend reversal.
Position trading strategy suits investors and long-term traders. With this strategy, traders target high-value profits by holding positions for the long term; they tend to identify and speculate on long-term trends. Here, traders can hold positions for weeks, months, or years.
This strategy demands extreme discipline, patience, and emotional control. You must also be able to ignore unfavorable short-term price fluctuations.
As for market analysis, position traders require microeconomic and fundamental analysis knowledge as the strategy relies heavily on external indicators. They may also utilize technical analysis to find the optimal entry points and risk management positions.
Forex trading is generally risky and relatively challenging to begin. However, finding a working strategy and forex signals that suit your preferences minimizes risks and makes the trading process easier to grasp. Typically, strategies act as guides to help you through the trading process.
Note, however, that there is no FX trading strategy that is 100% risk-free. Also, different approaches suit specific types of traders. As such, when choosing a system, you should understand the kind of trader you are and, most importantly, define your risk tolerance.