Exchanging one foreign currency for another on the spot or through the forex market for financial advantage is all about forex trading. It’s a market run by a global network of financial institutions where the most commonly traded currency pairs are the EUR-USD and GBP-USD.
The trading of currencies for profit is done in a global online market. The trading is based on fixed rates, and for some, it can present itself as an excellent opportunity to make extra money on the side.
Learning the secrets of forex trading requires diving deep into its essence. You will find that many expert traders use several forex trading strategies. Naturally, not all are built the same and work the same for all investors.
And, of course, each asks for a certain level of analysis and knowledge. To help you learn more about this buying and selling, we curated a list of the top 5 forex trading strategies for 2022.
What is a Forex Trading Strategy?
The secret to forex trading is to understand it as a game of probability that requires having a strategy and following strict rules. Self-control is an essential part because forex trading is essentially a mind game. Due to this, experts advise wisely choosing the forex trading strategy that fits you at best.
The foreign currency market is continuously fluctuating, so traders use tricks and strategies to help them determine how to trade. The important thing is knowing when to pull out and leave.
Whatever the strategy, there are a few rules that all professional traders swear by:
- Mistakes are there to learn from them;
- Set a stop loss and abide by it;
- Risks should be managed according to the account size;
- Trading is based on the chart’s logical levels.
To start thinking like a professional trader, starting small is vital. Use a practice account, or even better, a trading simulator that will help you determine who you are as a trader and what strategy will fit you best.
You can also read trading news online at Fazzaco or other news outlets to keep track of the market’s fluctuations to choose the most appropriate forex trading strategy.
5 Advanced Forex Trading Strategies
Choosing the right strategy can make you or break you in forex trading. Below are some of the most popular advanced forex trading strategies many professional traders use.
Ichimoku Cloud Trading Strategy
The Ichimoku Kinko Hyo technique is a complete candlestick trading strategy that may be found on almost all trading platforms and dates back to 1969. What may seem like a complex strategy can become a relatively straightforward tool with practice and dedication.
The strategy uses several averages and technical indicators, trends, and other data. The chart is comprised of 6 main components:
- Tenkan-Sen line – better known as the conversion line, the midpoint of the last nine candlesticks;
- Kijun-Sen line – called the baseline, the midpoint of the previous 26 candlesticks;
- Chiou span – the lagging span, plotted 26 periods back;
- Senkou span A – leading span A, the midpoint between the conversion and baselines, plotted 26 periods into the future;
- Senkou span B – leading span B, the midpoint of the last 52 price bars, plotted 52 periods into the future;
- Chikou span – closing price, plotted 26 days back.
Attempting to identify the probable price direction assists the trader with a trend direction by determining the most suitable entry and exit time. Some basic interpretations of the Ichimoku charts suggest that when the price is below the cloud, it is a bearish trend, and if it’s above the cloud, it’s a bullish trend.
The trading signal strength is assessed based on the distances of the price movement, the Chiou Span, and the Cross-over concerning the Cloud. It looks complex at first, but it’s, in fact, a simple strategy that requires practice and can give advanced results.
Price Action Trading Strategy
Mainly used by professional and intermediate traders, this strategy is not dependent on a timeframe and technical indicators. Price action is a technique traders use to read the market and make decisions on actual price movements. They use this strategy to generate fast profit in a short period.
Investors may apply tools like trend lines, price bars, and bands or volatility and candlesticks. Each trader will have their interpretation of price action by using their choice of rules. This strategy allows traders to be free to make their own decisions with the help of recent price history and tools for technical analysis.
It includes a two-step process:
- Scenario identification where the stock price goes through a breakout, bull or bear phase, and more;
- Identification of trading opportunities within the scenarios where the choice depends on the trader. Even if there is the same scenario where the stock is in a bull phase, there are two possibilities – retreat or overshoot.
This strategy is not recommended for long-term investments but rather for limited, shorter, or medium profit trades. It is an excellent strategy for a trending market where price action is monitored for a breakout, a continuation, or a reversal of the trend.
Hedging Trading Strategy
This risk-management strategy can apply to several business aspects, and it combines both sides of a trade at once. Hedging in investment and forex trading is a way to protect the portfolio. The use of hedging to reduce the risk usually results in reduced profits.
In short, hedging uses market strategies and financial instruments to neutralize the risk of extreme price movements. Reduced risk means reduced profits, so it is used to reduce the potential loss and not maximize the gain
The hedging trading strategy uses financial instruments called derivatives. Options and futures contracts are two of the most common derivatives. With them, one can use trading strategies where a derivative neutralizes a loss in one investment.
Investors may use many options and futures contracts for hedging against stocks, currencies, interest rates, or commodities. But keep in mind that hedging is not a money-making strategy but rather one that protects from losses.
Scalping Trading Strategy
If you are into profiting from small price changes and making a quick profit from reselling, then the scalping trading strategy is yours. Usually, seasoned traders who want to generate fast profits within a day choose this method. Using the small price movements, the trader makes several small wins and allows the profits to accumulate.
This strategy requires traders to have a strict trading plan. A direct-access broker, a live feed, and patience for placing trades are needed for this trading strategy.
The strategy considers that most stocks complete the first movement stages, but the other process is uncertain. Some stocks advance, others fall. To achieve results in the scalping trade strategy, the focus should be on increasing the number of winners and not the size of wins. The basic rules of scalping include:
- Brief market exposure limits the risk;
- Sticking to smaller moves that are easier to obtain;
- A trader can always exploit more minor, more frequent activities than the bigger ones.
Sometimes, it takes seconds for a trader to enter and exit a trade. Hundreds of transactions like these can bring big profits from winning trades within a trading day.
Swing Trading Strategy
A popular strategy among professional forex traders is the swing trading strategy. Swing traders try to capture short- to medium-term gains of any financial instrument from a few days to several weeks. Fundamental and technical analyses follow trading opportunities and profit from an anticipated price move.
The goal of holding a position for more than one trading session is to profit from a potential price move. It is crucial to identify the next price movement, enter a position and capture the profit, should that move materialize.
Trades are assessed based on risk and reward, so swing traders seek opportunities by watching 15-minute, 1-hour, or daily charts to identify entry levels, stop loss, and profit. However, this trading strategy is subject to weekend and overnight market risk when abrupt market reveals can cause significant losses.
A magic formula for forex trading has not yet been invented. There are numerous trading strategies that forex traders use that suit their trading style and personality. The strategy selection will change with experience and with the realization of which one is the easiest to implement.
But as mentioned, regardless of how good a strategy is, none of them works 100%.
The Forex trading market is a fluctuating global market with lots of uncertainties. Trying one of those above top 5 advanced forex trading strategies in 2022 should not present a challenge for you.
It is crucial to start small, so practice with a demo account instead of going straight to the live markets and exposing your capital to risk. Try several strategies and techniques to see which one fits you most and could help you succeed.