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.
Forex spread explained
- Forex spread is the difference between the sell price and buy price of any currency pair. For example, the euro (EUR)/US dollar (USD) exchange rate is 1.19002.
- To enter a buy (long) position in EUR/USD, you would pay more 1.90004.
- To enter a sell (short) position in EUR/USD, you would pay less 1.90000.
Note: The spread fluctuates every second, and it can be wide or narrow depending on liquidity, news and other market conditions.
Three major trading sessions
Based on liquidity and market activity, the forex day can be divided into three major trading sessions:
- European session starts at 3:00 a.m. to 12:00 noon EST. This is a highly liquid session with high volatility. The most active pairs during this session are EUR/USD and GBP/USD, and these pairs are often best traded during this session.
- US session starts at 8:00 a.m. to 5:00 p.m. EST. The overlap between the European and the US session is the most liquid one and most currency pairs come with the lowest spread. This means you can enter your position “cheaper.”
- Asian session starts at 7:00 p.m. to 4:00 a.m. EST. This is often a calm session with low volatility for major pairs like EUR/USD and GBP/USD, but with high liquidity on Asian pairs like USD/JPY and AUD/NZD.
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. 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.
- Difficulty level: beginner to advanced. Since this is mostly a long-term strategy, it can be ideal for beginners who don’t have enough time to day trade.
- Best trading session: all sessions. It doesn’t matter which trading session you use — unless you want to catch the biggest moves or enter with the lowest spreads. In that case, consider trading during the European or the US sessions.
- Best trading pairs: all pairs. Use this strategy on all pairs as long as they have a trend. If they’re stuck moving sideways, trend trading won’t be of much use.
- Chart time frame: 4 hours to 1 day. Trend trading is best executed on charts with a longer time frame.
Trend trading example
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.
- Difficulty level: beginner to advanced. The currency pair can be stuck in a price range in any time frame. This makes it an excellent strategy in addition to scalping or as a long-term trade.
- Best trading session: all sessions. Currency pairs are typically stuck in a range during the Asian session because the trading activity of large banks, institutions and companies is low. But this is a short-term range. A currency pair can be stuck in a range for days, weeks or even months.
- Best trading pairs: all pairs. You can use range trading on all pairs.
- Chart time frame: Five minutes to one day. Any time frame works for range trading. Scalpers would use the smaller time frames, while long-term traders would use the daily charts.
Range trading example
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.
- Difficulty level: beginner to advanced. For beginners, this can be a highly educational strategy because trades happen fast. This way a trader can quickly gain experience and learn how each currency pair behaves.
- Best trading session: Asian session. The Asian session is often the best choice for beginners because of the low volatility.
- Best trading pairs: EUR/USD, GBP/USD, GBP/JPY. The first two are often traded during the European and US sessions, while the third is the better choice for trading during the Asian session. All three have relatively low spreads during this session.
- Chart time frame: One minute to 15 minutes The one-minute chart is the most chaotic, thus mostly used by advanced traders. The five-, 10- and 15-minute charts are often the best choice for beginners.
Risk management is key to all forex trading strategies. Here are some techniques you can follow.
- Set stop loss on all trades. The forex market is highly volatile. That’s why you must always set stop loss to make sure you never lose more than you are willing to risk. As a rule of thumb, never risk more than 2% of your account in any trade.
- Watch your lot size. Forex is traded in lot sizes where 1 full lot equals 100,000 units of the base currency. Accounts with $10,000 or less should never trade full lots.
- Keep an eye on news. Important news such as a central bank meeting, interest rate changes or even a speech of an important central bank figure could move the forex market. Unless you’re trading for the long term, avoid scalping during news events.
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Disclaimer: The value of any investment can go up or down depending on news, trends and market conditions. We are not investment advisers, so do your own due diligence to understand the risks before you invest.
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.