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Choosing a strategy can be difficult when you first start trading forex. That’s because forex markets are open 24/5. During each time of the day, different strategies apply.
This guide outlines three trading strategies to consider if you’re new to forex, as well as risk management techniques to help limit your losses. But first, let’s see how market conditions affect these strategies.
Unlike stocks, which trade only when the stock market is open, forex is traded 24 hours a day. Because of that, each currency has different liquidity during different times of the day. It also has a different spread. Liquidity and spread affect most forex trading strategies.
Note: The spread fluctuates every second, and it can be wide or narrow depending on liquidity, news and other market conditions.
Based on liquidity and market activity, the forex day can be divided into three major trading sessions:
Note: It’s important to keep an eye on trading sessions because they can determine which strategy to use and which currency pair to trade.
This is one of the simplest forex trading strategies you can use. First, you need to find a trend. You can do this by looking at the closing prices each day over a period. If the market you’ve chosen has made higher highs and higher lows, it’s on an uptrend. If it’s made lower highs and lower lows, it’s on a downtrend.
For this example, I’m using a EUR/USD weekly chart. I have drawn two parallel trendlines, which form a downward channel. You can easily do this with a line tool in most trading platforms and connect two or more lows and two or more highs.
In our EUR/USD example, once you connect the two lowest lows and two lowest highs, you would wait for the price to touch a line to enter a position. Every time the price touches the upper trendline, you would enter a sell position. Every time the price touches the lower trendline, you would close your sell position and enter a buy position.
Similar to trend trading, you need to establish where the price goes. In this case, the currency must not trade higher or lower. Instead, the price has to be stuck in a rectangle and move sideways. When a currency pair isn’t in a trend — whether it be an uptrend or a downtrend — it’s called “stuck in a price range.” This is one of the most profitable forex strategies because it comes with potentially low risk and a high reward.
For this example, I’m using an AUD/USD daily chart. We can see that the price has been stuck in a price range of 0.76 to 0.78 for half a year. After the second price bounces off the lower line, you can enter a buy order. Once the price touches the higher line, you close your buy order and enter a sell order.
You repeat the process until the price breaks out of the range. Because the price can break out at any time, we set stop-loss orders slightly below the lowest low when entering buy order and above the highest high when entering sell order.
This is an intra-day trading strategy where the trader enters a position, holds it for a few seconds or a few minutes and then closes it. This can be both a buy and sell position, and you can combine it with other strategies, such as trend and range trading.
Risk management is key to all forex trading strategies. Here are some techniques you can follow.
Compare multiple forex platforms to find one that meets your trading level and needs. Sort by available asset types, maximum leverage or annual fee, or select the Go to site button for more information about a particular platform.
If you’re interested in trading forex, take the time to become familiar with different trading and charting methods to learn what best fits your financial goals, trading style and risk tolerance.
And if we’ve managed to scare you away from forex trading, you’ve got many other options. Learn more in our guide to investing — from stocks and bonds to commodities and more.
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