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The Best Forex Trading Strategies

The concept of trading in multiple currencies has been around for centuries. Although this trading was not thought of the Forex system at the time, trades of different precious metals by weight thus determining their value on the market. For hundreds of years, precious metals were the standard in multiple currency trading. As countries developed, their own currencies were established and global currency trading spread. Forex is the largest financial market in the world, trading global currencies and expanding into cryptocurrency. Continue reading to learn more about the best forex trading strategies.

What is forex?

Forex trading involves the buying and selling of currencies, which fall into two camps: fundamental and technical. These currency pairs quote the exchange rate from changing one currency to another. Traders profit by purchasing a currency to sell at a higher exchange rate or selling a currency to buy at a lower exchange rate.

The forex market includes retail traders, large banks and investment funds. All three take part in speculation and portfolio hedging. Large banks trade in currencies to transact between businesses in different countries. 

Want to start trading and need a brokerage? Check out Benzinga’s 2018 Best Forex Brokers. Here’s a short list of our picks.

Broker Best For Commissions Account Minimum Choose your platform
FOREX.com
  • Traders of all skill levels
  • If you need a great mobile experience
  • Those who like easy-to-consume data and research
Spreads start as low as 1 But vary based on trading volume $250
Get started securely through FOREX.com's website
1 Minute Review

FOREX.com is the is the #1 FX broker in the US by client assets and is also regulated in 7 other jurisdictions worldwide including the UK, Japan, Hong Kong, Singapore, Australia, Canada, and the Cayman Islands. The company educates the average retail investor with its client webinars and educational tutorials. By offering several desktop, mobile, and web-based platforms, FOREX.com caters to the needs of beginner, intermediate and advanced traders. Each platform contains many research tools for do-it-yourself investors, as well as third-party analysis that will do most of the heavy lifting for you. FOREX.com's trade execution is among the best in the brokerage industry with 99.85% of trades executed successfully with an average speed of 0.05 seconds.

Pros
  • Three platforms to choose from
  • Excellent trade execution
  • Positive customer service experience
Cons
  • No automated trading
  • Cannot trade basic equity or fixed income
Current Promotion

TD Ameritrade
  • Beginner investors
  • Advanced traders
  • Investors who want portfolio-building advice.
$6.95 $0
Get started securely through TD Ameritrade's website
1 Minute Review

This publicly listed discount broker, which is in existence for over four decades, is service-intensive, offering intuitive and powerful investment tools. Especially, with equity investing, a flat fee is charged, with the firm claiming that it charges no trade minimum, no data fees, and no platform fees. Though it is pricier than many other discount brokers, what tilts the scales in its favor is its well-rounded service offerings and the quality and value it offers its clients.

Pros
  • Superior technology
  • No account minimum balance
  • Excellent customer support
  • Premier data and news partnerships
Cons
  • Slightly higher commissions
  • Can be for more advanced users
Current Promotion

Trade commission–free for 90 days & get up to $2500

Interactive Brokers
  • Day traders
  • Penny stock traders
  • Forex traders
$0.005 per share minimum $1 and maximum 0.5% of trade value; volume discount available $0 for cash account, or a margin account with $2,000
Get started securely through Interactive Brokers's website
1 Minute Review

If you consider yourself a sure-footed professional trader, Interactive Brokers might a major possibility for you, particularly if you’re adept at navigating tricky trading platforms (can you say 124 option indicators?) or have done more than just dipped your toe a “coupla times” into the complex world of international markets.

Pros
  • Interactive Brokers offers the lowest margin rates in the industry
  • Low pay-per-share commissions on stock trades (up to 1,000 shares) and on options trades (up to 20 contracts)
  • Vast order types options for professional traders
Cons
  • Account fee charges (including annual, transfer, closing and inactivity fees)
  • Complex trading platform, which can be difficult for beginners
Current Promotion

Lower minimum activity requirements ($3/month) and opening account minimum requirement ($3,000) for clients 25 and younger.

Fundamental strategies

What is fundamental analysis?

Fundamental strategies focus on market forces that drive changes in supply and demand for currencies. Fundamental analysis assumes that if a market incorrectly prices a currency, it will correct over time to achieve an equilibrium.

A stronger economy leads to higher demand for a particular currency, while a weaker economy leads to a weaker currency. The measures used to examine economic inputs and outputs include:

    • Borrowing and credit policies: Policies that determine how much debt a person takes on affect the demand for money.
    • Employment: As more people work the need for money to pay them grows. They, in turn, spend that money, which grows the economy.
    • Economic output: Analysts look at the total economic output, whether GDP or GNP, to understand how well an economy performs.
    • Governmental policies: Changes in tax rates and policies will influence investments and savings.
    • Business cycle: Fundamental analysis assumes businesses operate in cycles of expansion and contraction. Understanding where an overall economy exists in these cycles affects the economy.
    • Technology changes: Changes in technology impact how and where businesses invest.
    • Trade: Commerce between countries drives the primary need for exchange between two currencies.
    • Demographics: Countries with growing populations have higher economic output than those with shrinking populations.

 

Information analysis

Forex traders analyze fundamental information like organs of a human body. Each serves an important function, but cannot exist by itself. These include:

  • Government entities: Publications, decisions, as well as speeches by government entities, give information about that country. This includes the central bank, Bureau of Labor Statics and other government agencies.
  • Sponsored surveys: Economic surveys like consumer sentiments and business investments come from organizations like universities and businesses. These reports cover more specific information than government reports.
  • Proprietary research: Investors with deep pockets hire agencies to conduct in-depth research.
  • Historical trends: Traders may assume that cycles and events of the past will either repeat or continue into the future
  • Events and changes: Disruptions to the natural flow of business often lead to changes in currency prices. Global events such as war and revolutions shift demand from riskier currencies to safer ones.

Fundamental strategy example

Imagine you wanted to analyze the U.S. economy before the boom of shale oil production. History showed that the demand for oil from Canada showed a steady increase year after year.  

You’ve begun to notice that the oil production from the U.S. has outpaced historical trends. Reports from the Federal Reserve and private companies show more demand for oil rigs and drilling equipment. What would you expect to happen to the Canadian dollar relative to the U.S. dollar?

Starting in 2010, you’ll see that as oil production increased in the U.S., demand for the Canadian dollar began to weaken. If you had bought U.S. dollars vs Canadian dollars in January of 2010, you would have made almost 30%.

credit: www.poundsterlinglive.com
Credit: https://www.fxstreet.com/

Technical strategies

What is technical analysis?

Technical analysis uses price action to forecast future movements. The relationship between price and movement creates the foundation for technical analysis. Forex analysis relies on charts and indicators.

  • Charts: Graphs of price action provide a key component to technical analysis. By looking at how price moved over time, technical analysts attempt to predict where the price will go.
  • Indicators: Analysts use a variety of mathematical formulas and then graph their outputs to look for trends as well as changes. Indicators either attempt to predict when reaches an extreme or identify trends in the data.

Information analysis

Technical analysis confines itself to a few components:

  • Price movement: How price moves between different values tells a lot about the supply and demand for that currency. Rapid movements in currencies could signal more investor interest
  • Timeframes: Technical analysts chart and measure price movement in specific blocks of time. These blocks range from a few minutes to months. As the amount of time increases, so do the expectations for the strength and duration of a particular forecast.
  • Market interrelationships: The supply and demand in one market impacts other markets. If traders sell euros and buy U.S. dollars, they will also likely be buying U.S. dollars relative to the British pound sterling.

Technical analysts use one or many of the following concepts in their forecasts:

  • Divergences/convergences: Markets or indicators moving in the same or different directions indicate a change or continuation of price trends.
  • Trends: Many forecasts assume past price actions will continue into the future. Currencies with bullish trends will continue to rise, and those with bearish trends will continue to fall.
  • Overbought/oversold: Oscillators along with interpreting momentum indicators to attempt to identify turning points in the market. When price moves quickly or for too long in one direction, analysts pick out when and where price will change directions.

Technical strategy example

The chart below shows the British pound sterling vs. the U.S. dollar weekly chart with a 50-period simple moving average. You believe that every time the price closes for more than three weeks below the moving average you should be sell the pound against the U.S. dollar, and when it closes for three weeks above the moving average, you should do the opposite and be a buyer.

If you used this strategy from 2001 to 2009, you would have profited handsomely from being bullish through most of 2008, and then become bearish and made another sizable profit as the prices dropped in 2008 to 2009. However, if you kept the same strategy for the next eight years, you wouldn’t have made much money at all.

Check out current insights and research from Benzinga in our currencies section.

 

Using both strategies in Forex

Technical and fundamental analysis aren’t mutually exclusive. Many traders incorporate both types into making their investment decisions. Often, traders use fundamental analysis to determine the longer-term thesis for their investments and use technical analysis to enter and exit their trades.