Currency trading strategies allows traders to remain focused amid the massive inflow of news and economic data that can seriously distract your analytical process. It also allows you to measure and improve your own performance.
Choose your quick section of our proven currency strategies review below.
A Quick Overview of Proven Currency Trading Strategies Review:
- ✔️Overview of trading strategies
- ✔️Transition trading
- ✔️Counter trend trading
- Pair trading
- Multiple time frame analysis
- Volume trading strategy
- Support and resistance trading strategy
- Trading using price action
- Pivot trading strategy
- Momentum trading
Let’s address proven currency trading strategies on this list in a bit more detail. In this article, we explore the best currency trading strategies as tried and tested by experts, so that you can take your trading to the next level.
Overview of trading strategies
In the volatile world of Forex trading, remaining in line with a suitable trading strategy is an invaluable part of successful and profitable trading.
A trading strategy allows traders to remain focused amid the massive inflow of news and economic data that can seriously distract your analytical process.
It also allows you to measure and improve your own performance.
Using a trading system for a prolonged period of time allows you to build up a statistical database that will help you gauge its performance and once the assessment is complete, you can begin working on improving it.
Importantly, a successful trading strategy will also allow you to curb any emotional trading, especially with regards to understanding your losing trades.
In general, there is no golden strategy, simply because the financial markets are rapidly changing. Unwritten rules which have been in force before, no longer work and if you want to keep riding the wave, you will need to evolve just like the market is.
However, a successful and tested strategy will typically generate more winning than losing positions, and the average win will be greater than the average loss.
Transition trading
The transition trading strategy is the result of expert traders using their knowledge to come up with new trading strategies to keep up with the ever-changing market conditions.
In transition trading, a trader will enter any trade of his choosing on the lower time-frame. The key is to dash and stop your loss on the higher timeframe or increase your profit.
What you do entirely depends on the market conditions. If the market trend is in your favour then try to make as much profit as you can.
If the market is not in your favour then stop your loss and cut loose. Experienced traders plan their exit strategies to counter a negative trend and cut their losses immediately.
Counter trend trading
Countertrend trading strategies are complex and therefore typically only used by advanced traders. They may be used for diversification and risk management or forward-looking predictions.
Countertrend trading is a type of swing trading strategy that assumes a current trading trend will reverse and attempts to profit from that reversal.
Countertrend trading is generally a medium-term strategy in which positions are held between several days and several weeks.
Pair trading
Pairs trading is a strategy that involves using two positions, one long and one short, on two markets with high correlation. It can be used across equities, indices, FX or commodities, or any combination of markets.
Pairs trading is non-directional and seeks to use two markets where prices are currently trading in a relationship that is outside their historical trading range.
The idea is to buy the market that is undervalued relative to the other, while selling the one that is overvalued. It seeks to maintain neutrality by keeping the exposure on each trade identical.
The successful pairs trader will look to make money on the inequality between the two markets and close out the trade when the inequality has been reversed.
Multiple time frame analysis
Multiple time frame analysis (or MTF) in Forex trading involves monitoring the same currency pair across various frequencies, also known as time compressions.
MTF trading is a process of looking into different time frames and aligning both trend, momentum, and direction.
Since there is no real maximum as to how many of the frequencies can be monitored, or which particular ones to choose, there are instead general guidelines that the majority of traders follow.
Volume trading strategy
Trading volume is a measure of how much of a given financial asset has traded in a period of time. For stocks, volume is measured in the number of shares traded and, for futures and options, it is based on how many contracts have changed hands.
The numbers, and other indicators that use volume data, are often provided with online charts.
Basic guidelines can be used to assess market strength or weakness, as well as to check if volume is confirming a price move or signalling that a reversal might be at hand.
Indicators based on volume are sometimes used to help in the decision process. In short, while volume is not a precise tool, entry and exit signals can sometimes be identified by looking at price action volume, and a volume indicator.
Support and resistance trading strategy
Support is a price level where a downtrend can be expected to pause due to a concentration of demand or buying interest.
As the price of assets or securities drops, demand for the shares increases, thus forming the support line. Meanwhile, resistance zones arise due to selling interest when prices have increased.
Technical analysts use support and resistance levels to identify price points on a chart where the probabilities favour a pause or reversal of a prevailing trend.
Support occurs where a downtrend is expected to pause due to a concentration of demand.
Resistance occurs where an uptrend is expected to pause temporarily, due to a concentration of supply.
Market psychology plays a major role as traders and investors remember the past and react to changing conditions to anticipate future market movement.
Trading using price action
Price actions describes the characteristics of a security’s price movements. This movement is quite often analysed with respect to price changes in the recent past. In simple terms, price action is a trading technique that allows a trader to read the market and make subjective trading decisions based on the recent and actual price movements, rather than relying solely on technical indicators.
Since it ignores the fundamental analysis factors and focuses more on recent and past price movement, the price action trading strategy is dependent on technical analysis tools.
The tools and patterns observed by the trader can be simple price bars, price bands, break-outs, trend-lines, or complex combinations involving candlesticks, volatility, channels, etc.
Psychological and behavioural interpretations and subsequent actions, as decided by the trader, also make up an important aspect of price action trades.
Pivot trading strategy
A pivot point is a technical indicator used by forex traders as a price level gauge for potential future market movements.
The pivot point indicator is used to determine trend bias as well as levels of support and resistance, which in turn can be used as profit targets, stop losses, entries and exits.
Pivot points have been a go-to for traders for decades. The basis of pivot points is such that price will often move relative to a previous limit, and unless an outside force causes the price to do so, price should stop near a prior extreme.
Pivot point trading strategies vary which makes it a versatile tool for forex traders.
Momentum trading
Momentum trading is the practice of buying and selling assets according to the recent strength of price trends. It is based on the idea that if there is enough force behind a price move, it will continue to move in the same direction.
When an asset reaches a higher price, it usually attracts more attention from traders and investors, which pushes the market price even higher.
This continues until a large number of sellers enter the market – for example, when an unforeseen event causes them to rethink the asset’s price. Once enough sellers are in the market, the momentum changes direction and will force an asset’s price lower.
Momentum traders will seek to identify how strong the trend is in a given direction, then open a position to take advantage of the expected price change and close the position when the trend starts to lose its strength.
A momentum trader doesn’t necessarily attempt to find the top and bottom of a trend, but instead focuses on the main body of the price move. They aim to exploit market sentiment and herding – the tendency for traders to follow the majority.
Carry trade strategy
A carry trade is a trading strategy that involves borrowing at a low-interest rate and investing in an asset that provides a higher rate of return.
A carry trade is typically based on borrowing in a low-interest rate currency and converting the borrowed amount into another currency. Generally, the proceeds would be deposited in the second currency if it offers a higher interest rate.
The proceeds also could be deployed into assets such as stocks, commodities, bonds, or real estate that are denominated in the second currency.
Hedging
Hedging is a financial strategy that should be understood and used by traders because of the advantages it offers. As an investment, it protects an individual’s finances from being exposed to a risky situation that may lead to loss of value.
However, hedging doesn’t necessarily mean that the investments won’t lose value at all. Rather, in the event that happens, the losses will be mitigated by gains in another investment.
There are various hedging strategies, and each one is unique. Investors are encouraged to use not just one strategy, but different ones for the best results.
Trading the Pinocchio bar
The Pinocchio Bar or Pin Bar is a popular price pattern among traders who use technical analysis. The Pin Bar is easy to spot, and you can trade it effectively within the market’s support and resistance structure.
The strategy consists of buying a Put if the wick is up and buying a Call if the wick is down. One way of using the strategy is by combining the Pinocchio with price action and technical indicators.
Support and Resistance, trend lines, overbought and oversold levels, divergence, confluence and more will come together to give you the results you are looking for.
Double red strategy
The Double Red trading strategy aims to perform on a short-term bearish price action movement of an underlying asset. The trade period for this strategy is usually executed in a matter of minutes.
This type of strategy is also known as option scalping. Because of the very short-term nature of the trade it carries great amounts risk without proper analysis. But when performed carefully by properly observing the right configuration of candles, it can be very rewarding.
Alternatively, the Double Red strategy can be used to trade the Rises or Highs of a trade, making them Double Greens. The Double Red strategy is performed with a very short expiry that should not exceed 15 minutes.
For experienced binary options traders, it is easy to spot and execute as it is easy to understand. However, it is important to reiterate the high risks involved with using such a short term strategy, especially for new users.
Making contrarian investments
Contrarian investing is a trading strategy in which investors purposefully go against prevailing market trends by selling when others are buying, and buying when most investors are selling.
Contrarian investors believe that people who say the market is going up do so only when they are fully invested and have no further purchasing power. At this point, the market is at a peak. So, when people predict a downturn, they have already sold out, and the market can only go up at this point.
Contrarian investing is, as the name implies, a strategy that involves going against the grain of investor sentiment at a given time. The principles behind contrarian investing can be applied to individual stocks, an industry as a whole or even entire markets.
A contrarian investor enters the market when others are feeling negative about it. The contrarian believes the value of the market or stock is below its intrinsic value and thus represents an opportunity.
In essence, an abundance of pessimism among other investors has pushed the price of the stock below what it should be, and the contrarian investor will buy that before the broader sentiment returns and the share prices rebounds.
Breakout trading
A breakout is a currency price moving outside a defined support or resistance level with increased volume. A breakout trader enters a long position after the stock price breaks above resistance or enters a short position after the stock breaks below support.
Once the stock trades beyond the price barrier, volatility tends to increase and prices usually trend in the breakout’s direction.
The reason breakouts are such an important trading strategy is because these setups are the starting point for future volatility increases, large price swings and, in many circumstances, major price trends.
Range trading
Range trading is one technique currency traders can use in an effort to meet their investment objectives. Some traders use this approach in an attempt to identify ranges, predict how a currency or currency pair will behave, and profit from such expectations.
Many capital markets, including forex markets, exhibit price ranges. More simply put, asset values sometimes fluctuate within specific limits, which are created by support. They then serve as the floor and resistance, which provides the ceiling.
Some traders attempt to profit from the range by setting up certain trades. However, it is important to keep in mind that in many cases, securities will only fluctuate between specific highs and lows for so long.
In other cases, these securities might display rather strong trends, moving upward and gaining value over a long period or alternatively trending lower for some time.
For example, if a currency is in a bull market, a trader might be able to take advantage of this general upward trend. However, a situation like this may not provide the best backdrop for range trading.
Mean reversion
Mean reversion is a theory used in finance that suggests that asset prices and historical returns eventually will revert to the long-run mean or average level of the entire dataset.
This mean can pertain to another relevant average, such as economic growth or the average return of an industry.
A reversion to the mean involves retracing any condition back to a previous state. In cases of mean reversion, the thought is that any price that strays far from the long-term norm will again return, reverting to its understood state.
The theory is focused on the reversion of only relatively extreme changes, as normal growth or other fluctuations are an expected part of the paradigm.
The mean reversion theory is used as part of a statistical analysis of market conditions and can be part of an overall trading strategy.
It applies well to the ideas of buying low and selling high, by hoping to identify abnormal activity that will, theoretically, revert to a normal pattern.
FAQ
What is currency trading?
Currency trading is the most liquid and robust market in the world. In fact, no other market can compare to the sheer value of this massively traded market. Traders speculate on the price changes between two currency pairs.
Why is a strategy important when currency trading?
A trading strategy allows traders to remain focused amid the massive inflow of news and economic data that can seriously distract your analytical process.
It also allows you to measure and improve your own performance.
Which are the best currency trading strategies?
See our comprehensive list of the 27 best currency trading strategies directly from the SA Shares website
Top 4 Brokers
