Best Forex Trading Strategies for 2022
The forex market is no less than a modern colosseum. Large players with deep pockets operate in the arena along with retail traders who are vying to create wealth.
On paper, this might seem like a mismatch. Large players not only have deep pockets but also the power of information through networks. What must a retail forex trader do, then?
Turns out, the only way to wiggle through is to have a solid currency trading strategy. Currency trading strategies are as important to forex traders as currency pairs themselves because
- A well-thought and tested trading strategy can help you determine the entry and exit points for every trade
- You can get a better understanding of the potential profit or loss based on your trading strategy
With that in mind, let’s jump right into the best forex trading strategies.
1. Price Action Strategy
A price action strategy involves trading forex online by studying price movement alone. The logic is that everything you need to know is understood through price action (movement).
There could be multiple factors that affect a currency, all of which are ultimately reflected in the price movement. This means price movement may provide enough signals to set up your trades.
“Signals” refer to patterns or triggers that can be used to forecast a forex pair’s future price movement. A couple of indicators on top of this can help determine the resistance and support.
The term price action is a broad one though. It includes multiple sub-strategies like:
- Price action trend trading: analyzing price trends to take positions
- Trend following retracement entry: using consistent highs and lows to create long or short positions
- Trend following breakout entry: assuming that a correction will follow a price spike to take long or short positions
Who’s this for: Price action strategies and their variations are used in day trading and swing trading the currency market.
2. Scalping Strategy
Forex scalping is a strategy that involves buying and selling currency pairs within a few seconds or minutes. Pips are one of the most important terms to understand here.
A pip is the smallest movement that a forex rate can make. It is generally located in the fourth decimal place. We’ve covered pips in detail here: What a Pip in Forex Means
Scalp traders look to earn a few pips from each trade, often in the range of 5-10 pips, and move on to the next one. They repeat this process across the day with the help of leverage in forex trading.
Scalping, much like price action trading, involves the study of price movements using technical analysis. A typical forex scalp trader would use indicators like:
- Bollinger Bands
- Keltner channels
- Moving Averages
- Relative strength index (RSI)
- Stochastic Oscillators
Who’s this for: Full-time traders or those who can afford to look at screens throughout the forex market hours.
3. Swing Strategy
Swing trading is a forex strategy that involves holding an overnight position on a forex pair for a few days, weeks, or months. The goal of forex swing trading is to ride short-term price swings for profits.
Unlike scalping and price action, swing trading strategies may employ technical and fundamental analysis techniques to identify entry and exit positions.
Here again, the term swing trading refers to a broad collection of currency trading strategies that include:
- Reversal: entering trades assuming the reversal of existing price trends is imminent
- Retracement: making trades with the goal of benefitting from a momentary change/correction in larger trends
- Breakout: swinging into a trade at the initial stages of an uptrend
- Breakdown: entering into a trade at the initial stages of a downtrend
Who’s this for: Full-time forex traders and working professionals who may not have much time to look at charts.
P.S: We’ve covered the difference between swing trading and long-term investing here: Swing Trading vs Long Term Investing
4. Trend Reversal Strategy
A reversal strategy involves trading forex based on the assumption that an existing price trend will change direction. Traders generally use price and volume as the main indicators to spot a reversal.
The thing about a reversal strategy is that it can be used for intraday trading and swing trading. Furthermore, many consider it to be a subset of the price action strategy we spoke about earlier.
The reason? You’re only looking at price action or price trend reversals. Either way, the goal is to churn out profits by betting against the most recent trend.
Who’s this for: Full-time forex traders who have the time to look at charts to spot reversals.
5. Order Block Strategy
In the introduction, we spoke about the presence of large players with deep pockets in the forex market. These players have the potential to price out retail players. But…
There is one of the best forex trading strategies which involves turning to the trades made by these large players for direction. This is known as an order block strategy.
Order blocks are special orders that big players like central banks make. The volume that these players transact on has the capacity to derail markets. That’s why big players split orders into blocks.
Preempting what these big players are going to do may help you forecast price movements. Analyzing order patterns is one way to find out if there’s an order block on the way.
However, big players keep their cards close to their chests. That’s why the order block strategies aren’t known to be independent. They are used as a part of a broader forex trading plan and other best forex trading strategies.
Who’s this for: Full-time forex traders and those who have the time to analyze orders, patterns, and signals in the forex market.
6. Range Trading
The forex market may not always be trending upwards or downwards. At times, it will float within a range, a trendless state that’s typified by a sideways market.
This is the time when you range trade forex pairs. You must be wondering how a trader can buy or sell when there are no clear trading signals.
A typical range trader will turn to overbought areas for resistance and oversold areas for support. This means that range traders will buy when everybody’s selling and sell when everybody’s buying.
The best indicators that you could use to trade in a range-bound market are as follows:
Who’s this for: Any full-time trader who has the knowledge and time to monitor pairs during forex market hours.
Is Forex Trading Profitable?
The forex market is an arena that’s home to professionals, semi-pros, and amateurs. Whether or not you can stand out in this arena depends on various factors.
We’ve spoken about the impact of deep pockets and transaction volumes. What could dictate your profitability is your trading psychology. Just because you can make a trade doesn’t mean you should.
After all, a bigger player can influence the forex market at any time. Remaining on the fence and never making a move may also be detrimental to your wealth creation needs.
This is where the best forex trading strategies can help in combination with a thorough understanding of your mindset, risk profile, and financial goals.
Top Forex Trading Strategies with Indicators
| Forex Strategy | Technical Indicator |
|---|---|
| Price Action | – |
| Scalping | Bollinger Bands Keltner channels Moving Averages RSI Stochastic Oscillators |
| Swing Trading | Bollinger Bands Keltner channels Moving Averages RSI Stochastic Oscillators Anchored VWAP |
| Trend Reversal | Bollinger Bands Keltner channels Moving Averages RSI Stochastic Oscillators Fibonacci Retracement Levels |
| Order Block | Order Block Indicator |
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