Finding the best forex strategy for consistent profits
Finding the most profitable forex trading strategy can involve a lot of trial and error. Want to reduce that risk? Get the full guide from TradeZella here.
Author - TradeZella Team
Finding the most profitable forex strategy can involve a lot of trial and error. While no strategy will be perfect 100% of the time, having a plan means you’re more likely to make consistent profits.
Like any type of trading, Forex can be conducted as a day trade, swing trade, or long-term strategy.
Finding the right strategy depends on how much time and knowledge you have, as well as your own style.
Whether you’re just starting out in the exciting world of foreign currency trading, or have been doing it for a while but want to improve, we’ve got some strategy tips to help you boost your profits.
Let’s start with the basics: what is forex trading?
If you’re brand new to this type of trading, here’s a quick introduction.
Forex is, at its most basic, foreign currency (for) exchange (ex). It involves trading different currencies against each other.
If you’ve ever swapped USD into GBP for a trip to London, you’ve taken part in forex – probably without realizing it.
So, how can trading forex be profitable? Well, the value of currency dips and rises in the same way other assets – like stocks and crypto – do.
For example, you might have heard people talk about a ‘weak dollar’ or ‘weak Euro’. At time like this, the value of the currency drops in comparison to others.
If you trade your money into weaker currencies, there’s a chance to make a profit when the value rises again.
Unlike the stock market, which is centered on Wall Street, the forex market doesn’t have a central marketplace.
All transactions take place globally among traders, not at a central exchange. This type of trading is called OTC – over the counter.
Another way it differs from stock trading is that markets are open 24 hours a day, 5.5 days a week.
This gives traders more time to play with, as they’re not tied to the business hours of the stock exchange.
That said, there are some peak hours for successful forex trading: but more on that later.
In the past, trading the forex market was reserved for multinational corporations, hedge funds and high-net-worth individuals.
But, thanks to the internet and the popularity of trading apps, these days anyone can trade forex.
Why you need a strategy to profit in forex
It doesn’t matter what kind of asset you’re trading. If you want to do it well, and make consistent profits, you need a strategy.
A trading strategy is a set of rules you follow regarding your risk tolerance, plans for exit and entry, and your trading time horizon.
It’s not about ‘buying high and selling low’ – that’s basically gambling. This type of trading is impulsive.
As it’s based on feelings instead of facts, it isn’t a sustainable way of making profits.
Sure, you might make a few successful trades, but without a strategy it’s just a fluke.
However, with a forex trading strategy, you can make good decisions without making common mistakes and letting your emotions take over.
To stick to your strategy, you should log every trade – and the factors surrounding it – in a trade journal.
The best forex indicators for consistent profits
When you’re developing your trading strategy, it’s important to think about indicators that you want to track.
These show you what the market is doing and your strategy will involve monitoring them to decide when to enter and exit.
Support and resistance
Looking at ‘support and resistance’ indicators can help you to figure out what the market is likely to do. These tools can be super powerful in the right hands.
The idea is that markets go ‘bear’ at the ‘resistance’ level, and ‘bull’ at the ‘support’ level. So, when it hits resistance, you sell and when it hits support you buy.
There are different ways to find your support and resistance levels. Some popular ones are:
- Bollinger Bands: developed by technical trader John Bollinger, these trendlines have a moving average band in the middle plus a high and low band. They indicate when signals are overbought and oversold, based on how close the price gets to the high and low.
- Pivot points: using the previous days Open, High and Low points, Pivot Points are used to calculate intraday support and resistance levels.
- Fibonacci ratios: these retracements take two extreme points on the stock chart (e.g. high and low) and divide the vertical distance by the Fibonacci rations (23.6%, 38.2%, 50%, 61.% and 100%).
There are some other methods, too. As with anything, it’s best to do in-depth research to find the one that suits you best. You’ll need good charting software to set them up, and from there you can start using them within your strategy.
Relative strength index (RSI)
This indicator is based on market oscillations.
When the RSI sits higher than 70%, the market can be considered overbought.
As this means the market is being stretched, it can be seen as a signal to sell before the trend starts to reverse.
Similarly, oversold is when the market drops below 30%. At this point, traders will expect the weakness to start reversing soon. This is a strong ‘buy’ signal.
5 different types of forex strategies
Sorry to burst your bubble, but there’s no 100% winning strategy for forex.
But, even if you don’t win every time, the right strategy will help you to improve your win rate. And the right strategy will depend on your own style.
Choosing the most successful forex strategy depends on how you prefer to do things. What works for you might not work for your friends.
Most strategies fall into these categories:
Forex trading strategy #1: scalping
Scalping is super-fast moving. It takes day-trading to a whole new level, as you check micro-market movements and react within a matter of minutes.
Scalpers usually target around 10 or fewer pips, and aim to move them in 15 minutes or less.
So maybe you’re watching the USD vs. EUR and it starts to trend upwards.
If you’re a scalper, you’ll buy it quickly; and then sell it just as quickly to make a small, but speedy, profit.
While the forex market is open 24 hours, this type of strategy will only bring you consistent profits if you can dedicate time to the high-volume trading hours:
- 8am –12 noon EST, when London and New York are both open
- 2am—4am EST, when Sydney and Tokyo are both open.
The best opportunities tend to come from the London and New York hours, as these are more volatile. But, if you’re just starting out and trying to juggle forex trading with your day job, you can find some opportunities in that late night time slot too.
Forex trading strategy #2: day trading
If you like moving fast – but not quite as fast as a scalper – you can day trade forex instead.
This can be as little as one trade per day, with intraday price changes determining your profit vs. loss.
Unlike scalping, this type of strategy requires some research into the pair you’re trading.
You also need a good understanding of the current economic conditions – if any major financial news breaks, it could affect your trade.
Forex trading strategy #3: following trends
This type of strategy offers a slightly more relaxing pace.
Traders who follow these strategies are aiming to make money over the course of days or weeks, not minutes.
It involves looking at patterns in the market, identifying trends, and working out whether things will keep going that way.
Traders who follow trends will notice a currency heading upwards, buy in to it, and hold until it starts to go down.
This type of trade is best for major pairs – currencies like USD, EUR and GBP – where things are less volatile and more predictable.
This is where a strong trading mindset comes into play. Following trends requires some patience and discipline, as you need to stick with your strategy even as things start to look a little choppy.
Forex trading strategy #4: range trading
This is all about catching the top or bottom of a move to make a profit.
It works bests in forex pairs with a narrow range. You buy when it’s at the bottom, observe the market and hold until it reaches the top.
This is a great approach for range-bound markets, but does involve a lot of insight and analysis to figure out the best time to enter and exit trades.
Forex trading strategy #5: position trading
If you’re planning to trade forex in your free time, this type of long term strategy will be the least demanding.
It’s not as time-intensive as scalping, and doesn’t require as close an eye on the market as range trading.
Instead of looking at short-term changes in currency values, these type of traders play the long game.
You hold your currency for months – or even years – to get the most profit. The goal is to choose a pair where you believe the value will get higher in the long term.
For this type of strategy you don’t just need patience (although it is super important).
You also need to understand the fundamentals of the foreign exchange market.
Being able to identify patterns, and understand how wider economic events, might impact your trade will help you to make the most informed decisions on holding and exiting.
Profitable forex strategy examples
So, those are the types of forex strategy that you can use. Let’s look at some specific examples in the wild to help you get started.
Highly effective, and very technical, the Bollinger Bounce has been a successful forex trading strategy for years. You’ll need good charting software for this one.
First, set up your Bollinger Bands.
To work this strategy, you buy once a bullish candle closes.
Your stop loss should be a few pips below the lowest band, and your target for exit is the upper band.
Another strategy for fans of Bollinger Bands, the Bollinger Breakout is one of the best ways to jump on a new trend right at the beginning.
The key is looking for a squeeze between the high and low bands – this tends to happen just before a trend begins. As the bands start to separate, it’s go time.
To execute an entry at breakout, place your stop loss limit either above or below the candles in the squeeze.
A fixed profit target will help you to stay focused and not get carried away.
This strategy is based on the idea that, when the London session starts at 8am local time (3am EST), the direction is set for the day’s trading pairs.
Start by looking at the 1-hour chart between the opening of Asia until the opening of London. Choose your pair, and mark the high and low for the previous day.
Set your stop loss limit at that low for a ‘buy’ trade, and at the high for a ‘sell’ trade. Your ‘Take Profit’ level should be at least double this to make consistent profits.
These are just a few simple strategies to help you get started.
Remember that the best forex strategy for you will depend on the type of trade you’re going for, as well as the type of pairs you’re planning to trade.
How to develop a forex strategy for consistent profits
Now that you know some of the best forex strategies, you can follow them religiously or develop your own. The keys to developing a good strategy:
Understand your own trading style
You can’t fit a square peg in a round hole. Knowing – and accepting – what type of trader you are can help you to define a strategy based around your own strengths and weaknesses.
For example, if you don’t have quick reflexes you’re unlikely to make it as a scalper.
Keep it simple
Don’t get into the long grass just yet. Leave the in-depth technical analysis to the side, for now, and focus on fundamentals – like supply and demand – to start with.
For example daily highs and lows, interest rate decisions and Major Fibonacci levels.
Choose whether you’re going to trade major, minor or exotic pairs
To develop a strategy that’s going to win you consistent profits, you need to choose a pair type to base it around.
Exotic pairs can often be more volatile so your strategy will need to be built for this.
Keep an eye on position size
Monitor positions carefully, and check for any trends or breakouts that would benefit from a strategy change.
Use – and track – a few different forex strategies to boost your chances at profit
You don’t need to stick to one strategy forever. Different days call for different actions, and the strategy that worked yesterday might not be as effective today.
Play around with a few different strategies to find the ones that work best.
Once you start to understand the forex market more, you’ll be in a better position to decide which strategy to implement on which day.
It’s always worth spending some time before your trading day begins to decide what the market looks like and where your focus should be.
With TradeZella, you can keep track of lots of different strategies in your playbook.
Then, once you have a good idea of what the day might look like, you can look at your playbook and find the strategy that is most likely to work.
The most important thing is to categorize your trades as you log them in your journal. This way you can see, over time, which strategies are most and least effective.
If there are any sticking points with a strategy, these will quickly become visible in your dashboard.
By tracking all of your trades, you can easily troubleshoot issue with your strategies as soon as they become obvious.
Even better, when you log with TradeZella, our platform will offer tips and suggestions to help you improve strategies that aren’t quite working.
Improve your strategy by tracking with TradeZella
Using a strategy is the best way to consistently profit in forex, or any other type of trading.
Having the discipline to stay the course, even when you feel like things aren’t going your way, can be tough.
That’s why it’s important to use a trading journal.
This helps you to hold yourself accountable, figure out your own trigger points that cause you to stray, and also identify which strategies are the most successful.
To start tracking your best forex trades, sign up for TradeZella.