Top forex trading strategies for currency markets

What is a forex trading strategy?

A forex trading strategy is a systematic plan that outlines specific rules for trading currency pairs. It details which pairs to focus on, when to enter and exit trades and how to manage risk. A well-designed strategy helps traders maintain consistency and provides a framework for analysing past performance.

Having a strategy is crucial because it:

• Prevents impulsive decision-making
• Encourages trades based on analysis rather than emotions
• Provides a consistent approach to measure performance
• Creates a structured way to analyse the market

Your forex trading strategy can be as simple or complex as suits your trading style. The key is consistency and discipline in following your plan.

How to build your forex trading strategy

Developing an effective forex trading strategy requires time, testing and ongoing refinement. Here are five essential steps to help you build your forex trading strategy:

Determine your trading style

The first step is deciding how you prefer to trade:

• Scalping: Taking multiple small profits from tiny price movements (a few pips, which are the smallest price changes in currency pairs
• Day trading: Opening and closing positions within a single trading day
• Swing trading: Holding positions for several days or weeks to capture larger market moves
• Position trading: Maintaining trades for weeks or months based on long-term trends

Remember that holding positions overnight will incur funding charges, so factor these costs into your plan.

Keep a trading diary

Document every trade you make in your diary with details including:

• The currency pair traded
• Your reasoning for entering the trade
• Entry and exit times and prices
• Position size and risk parameters
• The outcome (profit/loss)

This record helps identify patterns in your trading behaviour, highlighting both successful approaches and mistakes to avoid.

Choose your currency pairs

For beginners, major currency pairs like EUR/USD, GBP/USD and USD/JPY offer advantages including:

• Higher liquidity (more buyers and sellers in the market)
• Tighter spreads (smaller difference between buy and sell prices)
• More available analysis and information
• Less volatility than exotic pairs

Implement risk management

Every successful strategy includes robust risk management rules:

• Position sizing: Determine how much capital to risk per trade
• Stop-loss orders: Define your exit point if the market moves against you
• Limit levels: Establish clear profit targets
• Risk-reward ratios: For example, having a risk-reward ratio of 1:2 means you aim to make twice what you risk)

Test and optimise

Before trading real capital, thoroughly test your strategy:

• Backtesting: Apply your strategy to historical data to see how it would have performed
• Forward testing: Use a demo account to practice in current market conditions
• Review and adjust: Regularly analyse your results and refine your approach

Top 10 forex trading strategies

Bollinger band forex strategy

Bollinger bands help identify potential support and resistance levels by measuring market volatility.

How it works:

• The indicator consists of three lines: a 20-period simple moving average (SMA) in the middle with upper and lower bands that expand and contract based on market volatility
• When prices reach the outer bands, they often return to the middle SMA line
• The wider the bands, the more volatile the market

This technical indicator was developed by John Bollinger in the 1980s and remains popular in various financial markets, including forex.

Momentum indicator forex strategy

The momentum indicator measures the rate of price changes, helping traders identify market strength and potential reversals.

How it works:

• The indicator compares the current closing price to a previous closing price (typically from 14 periods ago)
• It moves above and below a centre line (100)
• Readings above 100 indicate upward momentum; below 100 indicate downward momentum
• When price moves in one direction but momentum moves in the opposite direction (called divergence), it can signal a potential reversal

Momentum is one of the oldest technical indicators, dating back to the early days of technical analysis.

Fibonacci forex strategy

Fibonacci retracements help identify potential reversal levels based on the mathematical Fibonacci sequence.

How it works:

• After a significant price movement (up or down), horizontal lines are drawn at key Fibonacci levels (23.6%, 38.2%, 50%, 61.8%, 78.6%)
•  These levels often act as support (price stops falling) or resistance (price stops rising) where price may reverse
• The 61.8% retracement is particularly significant in forex markets¹
• The Fibonacci sequence (1, 1, 2, 3, 5, 8, 13, 21, 34...) appears throughout nature and has been applied to financial markets for decades.

Bladerunner forex strategy

The Bladerunner strategy uses a 20-period exponential moving average (EMA) as a "blade" that cuts through price action.

How it works:

• The 20-period EMA (a type of moving average that gives more weight to recent prices) acts as dynamic support and resistance
• Price often moves away from the EMA and then returns to touch it
• Many traders observe how price behaves when it meets the EMA

The strategy is named after the 1982 science fiction film due to the way the EMA appears to cut through price action like a blade.

Moving average crossovers forex strategy

Moving average crossovers help identify trend changes by comparing faster and slower-moving averages.

How it works:

• Two moving averages of different periods are plotted on the price chart
•  When the short MA crosses above the long MA, it's known as a golden cross
• When the short MA crosses below the long MA, it's known as a death cross

Common moving average combinations include the 50/200 EMA for longer-term analysis and 5/20 EMA for shorter timeframes.

MACD forex strategy

The Moving Average Convergence Divergence (MACD) indicator helps identify trend direction, strength and potential reversal points.

How it works:

• MACD is calculated by subtracting a 26-period EMA from a 12-period EMA
• A 9-period EMA of the MACD line serves as the signal line
• The histogram shows the difference between the MACD and signal lines

Developed by Gerald Appel in the late 1970s, MACD remains one of the most popular technical indicators across all financial markets.

Keltner Channel forex strategy

Keltner Channels use volatility-based bands to identify potential breakouts and overbought/oversold conditions.

How it works:

• A central line (20-period EMA) is flanked by upper and lower bands
• Unlike Bollinger Bands, Keltner Channels use Average True Range (ATR) to set band distance
• The bands represent areas where prices may find support or resistance

Named after Chester Keltner who introduced an early version of the indicator in the 1960s, the modern version was refined by Linda Bradford Raschke.

Fractals indicator forex strategy

Fractals identify swing highs and lows in the market, helping traders spot potential reversal points.

How it works:

• A bullish fractal forms when a high is surrounded by lower highs (usually five bars)
• A bearish fractal forms when a low is surrounded by higher lows
• These patterns indicate potential reversal points in the market

Fractals were popularised by Bill Williams and are based on the concept that market patterns repeat at different scales, similar to patterns found in nature.

RSI indicator forex strategy

The Relative Strength Index (RSI) measures the speed and change of price movements.

How it works:

• RSI moves between 0 and 100
•  Traditional analysis considers above 70 as overbought (potentially overvalued) and below 30 as oversold (potentially undervalued)
• When price and RSI move in opposite directions, it can signal a potential reversal

Developed by J. Welles Wilder Jr. in 1978, the RSI has become one of the most widely used momentum oscillators in technical analysis.

Breakout trading forex strategy

Breakout trading focuses on price movements that occur when support or resistance levels are breached.

How it works:

• Identify key support or resistance levels (trend lines, previous highs/lows, rounded numbers)
• Observe price action when it approaches these levels
• Volume often increases when a genuine breakout occurs

Breakout strategies have been used for decades and remain popular in all financial markets, particularly during periods of increased volatility.

Start trading forex with IG Singapore

Ready to apply these strategies? Here's how to begin trading forex with IG:

1. Create a live CFD trading account
2. Choose a strategy that matches your trading style and risk tolerance
3. Select which currency pairs to trade
4. Open positions according to your strategy's rules and monitor them carefully
5. Regularly review your performance and refine your approach

Footnotes:

¹ Investopedia, 2025.