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Advanced Forex Trading Strategies

Advanced Forex Trading Strategies

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First Published date: 29. August, 2022
Last Updated: 3. February, 2023
Fact-checked by Adrian Müller

Forex trading is one of the most popular forms of trading today. It’s also the most liquid form of trading. In forex trading, traders speculate on the price of currency pairs. There’s a base currency and a quote currency.

Speculating between two currencies requires strategy and knowledge. Therefore, successful traders must use sophisticated tools and advanced forex trading strategies to make correct speculations.

Currency prices depend on many factors. Global economic, financial, and political events all impact prices. Even things like geopolitical events can have an impact. That’s where having the right strategy comes in. With more experience, you’ll realize strategy becomes crucial to successful forex trading. That’s what we’ll focus on today. So, without further ado, let’s get started.

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Forex Strategy Basics

We’ll dive into the more interesting advanced strategies later. But to help you understand everything better, a refresher will work wonders. Traders can formulate strategies either manually or automatically.

Manual systems involve lots of hands-on work. Traders spend time looking at signals and the market. They’ll need to study it and figure out the right opportunities. Of course, you’ll need to sit in front of a computer and do the work.

Another way of formulating a strategy is by automating it. Traders can use complex algorithms that can pick up trading signals. Then it’ll carry out the trade. In some ways, this might be the better option.

With automated strategies, there’s no human emotion involved. Therefore, there is no chance of biases, and performance can improve. However, this isn’t a guarantee. It all depends on the algorithm too.

We should warn traders to err on the side of caution about some readymade strategies and software as these success rates are difficult to quantify.

Why Strategy Is Important in Forex Trading

Before we jump into advanced forex trading strategies, you need to know why it’s crucial in the first place. A trading strategy is a framework or tool that allows traders to make informed decisions.

Most strategies are based on two tools – either fundamental analysis or technical analysis. Instead of following the market and operating on whims, successful traders ground their approach.

That’s where the strategy will come in handy. Forex trading has inherent risks. As a result, you can’t always say that one strategy is 100% bulletproof. However, a process is essential to allow you to be disciplined in trading.

6 Advanced Strategies to Make You a Successful Forex Trader

There are many strategies you can follow when forex trading. As you gain more experience, you’ll realize that not all of them are successful.

Meaning that some will be good for you, but others won’t. It’s always best to know about other successful traders’ advanced strategies. Then you either use them as is or adapt them to your needs. It can also help you develop your own unique strategy.

1. Position Trading

In forex trading, you’ll always speculate on a currency pair. For example, USD/EUR or EUR/JPY. A high-level strategy is position trading. It’s a strategy based on your overall exposure to a particular currency pair.

When trading, you take a long position on a currency and a short position on a currency simultaneously. Say, for example, you’re trading a short position on a currency pair. If the pair retraces up, you can take another short position.

Then you’ll be able to calculate your average position from that. You’ll make a profit if the currency pair value drops below your average position.

2. Hedging

Trades who are risk-averse will love this strategy. It’s done by taking both sides of a trade. Therefore, not all brokers allow it. Even though it can reduce risks, it becomes a highly complex strategy.

You start by taking both a long position and a short position. Some traders use different pairs to hedge. Let’s see in brief how it’ll look in action. For example, say you take a short position on a currency pair first.

Then if you realize it’s going strong, you could identify another currency pair moving in the opposite direction. You can take another position on the second currency pair to hedge against your first pair’s position.

As we mentioned, this is an advanced balancing act. It can get quite complicated when you’re trading complex pairs. Also, not all brokers allow you to do it.

Trading beginner - Plus500 -white

Plus500 is a trusted global brand that offers an easy-to-use trading platform for online traders, alongside access to share trading, crypto and a thorough selection of CFDs.

79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

3. Order Block Strategy

This strategy is popular with large institutional traders and banks. It’s great for reading the market. As with most strategies in this guide, it is an advanced forex trading strategy.

So, you’ll need to understand the working mechanisms to use it effectively. Think of an order block as an area of price where it’s settled before it can start momentum. To be more specific, before beginning an impulsive momentum.

Big players in the market will often accumulate and prepare orders. This is done to set momentum. In this case, a retail trader needs to figure out the footprint. Traders can read order blocks and follow them.

4. Scalping

A fact that surprises many people is that many successful forex traders are scalpers. If you do it right, you can earn quite a lot of money by scalping. The keyword to take note of here is doing it right.

You’ll aim to make a very short-term trade when you follow a scalping strategy. It’s usually done with high leverage for a few PIPs. Timing is also important when scalping. Executing this strategy with an exciting news release or following an important event is best. You’ll need to analyze the market well to perform it correctly.

But you need to be careful. Scalping is extremely risky. In addition, it’s difficult to justify the payout regarding the risks. Therefore, we don’t recommend even advanced traders make scalping their primary strategy.

Advanced scalping requires bottom-top analysis. It’s essential to keep an eye on high-timeframes traders. That way, lower timeframe traders can match trading activity to increase the chance of profitability.

5. Ichimoku Cloud Strategy

Most trading platforms have the Ichimoku Kinko Hyo indicator available for free. Many traders ignore it. But it can be used to make successful traders with the right knowledge. In essence, it’s a time zone.

It works as a resistance or support zone. In addition, there are two parts to the Cloud – Span A and Span B. You can assume that the market is bullish if it’s above the cloud and vice versa.

6. Price Action and Context

In this strategy, traders follow big-time investors and traders. It removes a lot of guesswork and makes things simpler. You need to predict a currency pair’s movement. As you might imagine, this is easier said than done.

Since financial intuitions and banks dominate the forex market, there’ll be some signs left behind for any price movements. Traders then can study these signs and speculate on future activity. Price movements can also be speculated based on present and past data.

How To Create the Right Strategy for Forex Trading

Understanding the fundamentals of a good strategy will make you a better trader. You’ll be able to identify good and bad strategies.

Trading strategies can vary a lot. One could be optimized for a specific metric, while the other could be optimized for a completely different one. Here are some important factors that go into designing a successful trading strategy:

Step 1: Figuring Out the Markets

Your first step is to determine which market you want to trade. In forex trading, this will be the chosen currency pair. It isn’t only about knowing which pairs you want to trade.

To create a successful strategy, you’ll need to understand the mechanics of the given pair. If you can read the pairs well, you’ll be well on your way to crafting a successful strategy. Although, we wouldn’t necessarily say this is the easiest part.

It’ll take time and experience to get good at it. However, the following steps have more moving parts you must remember. So, let’s dive into that.

Step 2: The Position Size

Second is the position size. The position size refers to the number of units invested. It isn’t always viable to go for the largest position size. You need to take your account balance and risk tolerance into consideration.

You’ll hear the term position size in many kinds of trading. But it’s more important and widely talked about in forex trading. You should consider trade, account risk, and proper position size to determine the right position size. Let’s look at each of them.

Account Risk

Traders need to calculate the account risk first and foremost. It’s best to avoid risking more than 2% of your account balance on one trade. You’ll risk less than this if you’re a fund manager.

Trade Risk

After account risk comes trade risk; this is where the stop loss order comes in. A stop-loss order is a simple instruction to buy or sell when the price reaches a specific price. This price is called the stop price.

Proper Position Size

After you’ve assessed your account and trade risk, you’ll have a good idea of what you can risk. You’ll divide the account risk by trade risk. That’ll give you the proper position size.

Step 3: Determining Entry Points

Entry points are the initiating price. This is the price point where a trader will start a position at. This is an essential aspect of crafting a successful strategy.

You need to have a good entry point for a successful trade. It helps minimize risk and stops traders from trading forex based on emotions.

Trading beginner - Plus500 -white

Plus500 is a trusted global brand that offers an easy-to-use trading platform for online traders, alongside access to share trading, crypto and a thorough selection of CFDs.

79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

Step 4: Determining Exit Points

Along with entry points, exit points are also important. You should know when to exit the trade. This matters for both long and short positions. If you’re losing a position, you also need to know when to exit.

As you may have already guessed, it’s a fundamental risk management characteristic. You can use all kinds of different ways to exit a position. There are holding periods, stop-loss strategies, and market timing. You can read this fantastic guide on exit points to know more.

Is Strategy All You Need?

Is a solid forex trading strategy all you need to become a successful trader? Well, not quite. Before wrapping up, we have some extra tips and a warning.

It’s easy to think that once you have a strategy, you can hop in and become a successful forex trader. But that isn’t always the case. A lot of things go into becoming a successful forex trader.

While a good strategy is essential, you must also be disciplined. Traders who aren’t disciplined may find it tough to stick to a plan. They might even make many transactions based solely on emotions.

When emotions get a hold of your traders, things can take a turn for the worse. In addition, you’ll need to set clear goals and know your trading style. What do you want to achieve from trading? What’s your risk tolerance?

All these are crucial questions to ask yourself if you want to become a successful forex trader. You should also keep learning new tools and techniques as well. A solid sense of direction and the right strategy make a successful forex trader.

Wrapping Up

So, there you have it. Now that you know all about advanced forex trading strategies, you’re well-equipped to face the forex trading world. Remember that while strategy is very important, it isn’t the full picture. You need to use it the right way. As a trader, it’s your call to choose the right strategy for you.

Thanks for stopping by. Hopefully, this article helped create your next forex trading strategy.

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About the author – D. Schmidt

I’m a German stock trader who has lived around the world. I travel extensively and believe thatmy experiences give me a unique perspective on global markets. I love trading! It’s always exciting to see what happens next. My goal is to help people understand the game so they too can enjoy it to the fullest. In this blog, I will share some tips and tricks that helped me along the way.

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