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Three top forex trading strategies

This article contains three top trading strategies for those seeking to trade the forex market.

GBP/USD
Source: Bloomberg

Forex (FX) traders use a whole plethora of strategies and techniques, with the aim of capitalizing on the markets. The element that separates the FX markets from the likes of commodities, bonds and indices is that FX trades in pairs. The fact that currencies are traded against each other, rather than at an individual value, means that there is typically less of an innate long-term underlying trend. On one side, certain markets like indices, and more recently the likes of bitcoin, have shown that it pays to typically long the market, given the long-term uptrend. On the other side, the FX market is a true two-way market, pitching one currency against another. As such, it makes more sense to look for both long and short trades in the FX market compared with some long orientated markets. This article seeks to highlight three top trading methods utilized by FX traders.

Bollinger band reversion to trend

The Bollinger band is a tool that typically encompasses price action, with the bands widening as volatility increases. The outer bands of the Bollinger often provide the spark to send the price back towards the central 20-period moving average. Put simply, when the price moves outside of the Bollinger band, price is ‘extraordinary’. This means we will either be seeing a breakout, or a move that will be temporary, before the price returns back to the direction it came from. Looking at a market that is trending, it makes sense to look for retracements through the Bollinger band to place positions back in the direction of the trend. As with all indicators, it makes sense to note whether the market has been respecting the Bollinger previously on that timeframe.

GBP/USD

Momentum range reversal

Momentum indicators can be a useful tool when providing overbought and oversold signals. However, the use of such indictors can come with pitfalls when not used properly. For this example we will use the stochastic oscillator to provide us with buy and sell signals. When using overbought and oversold signals, you have to ensure that the market is either ranging or channeling. A highly trending market will not respond well to such signals. Next, ensure that the market is respecting the momentum indicator on previous occasions, and find the exact conditions that seem to be working. On the occasion below, the buy signal comes when the stochastic crosses back above the 20 mark. The top of the range proved to not work as well in the initial formation of the range, and as such it made sense to be looking for the long position entry, which proved profitable. Interestingly, the only false signal within this was made once the price broke down from the range, therefore the trade wouldn’t have been taken.

FTSE 100

Fibonacci reversal to trend

Fibonacci retracements will provide a measure of how much a market has pulled back between a swing low and swing high. Taking trades at a Fibonacci level will provide an idea of what kind of risk-to-reward (RR) ratio you can achieve within a trend. The deeper the retracement, the more attainable a high RR ratio is. So, first utilize either price action or an indicator, such as the average true range (ATR), to gauge whether it is trending. Once you find a highly trending market, positions can be taken on a retracement, with the 61.8% and 76.4% levels providing the better RR. The trick is to place your stop loss below previous swing low (uptrend), or above the previous swing high (downtrend).

Oil

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