Forex trading strategies

Forex trading strategies contain rulesets and tools that help forex traders to make disciplined decisions. You can base your own forex strategy on your unique trading preferences, goals, and risk tolerance.

There are forex strategies to suit different trading styles – learn the different forex trading strategies and how to build one that works best for you!

Basics of forex trading

Before we get into some different forex trading strategies, it’s essential to understand the fundamentals of the forex market:

• Largest financial market by trading volume, and one of the oldest asset classes.

• High liquidity for major pairs, 24/5 trading hours.

• Forex pair value represents the exchange rate between the two paired currencies.

• The first currency in a forex pair is the ‘base’ currency and the second is the ‘quote’. 

• Four major forex pairs are EUR/USD, USD/JPY, GBP/USD and USD/CHF.

• Some forex pairs are tradable as part of a currency index, like the US Dollar Index.

• Price movements are measured in ‘pips’ which are equal to 0.0001.

• You can trade forex pairs using CFDs with Capital.com.

Read our guide to forex trading to learn more about the fundamentals of forex trading.

Different trading styles

Before you choose a strategy, take a moment to think about how much time you’re prepared to put aside for trading.

• Longer-term strategies like position trading can take months to see results.

• Shorter-term strategies like day trading take may less than a day, but require strict attention.

Trading styles have different timeframes, and some are more time-consuming than others. Here are some of the different trading styles you can use.

Day trading

As a day trader, you’ll be aiming to start and finish your trades within the course of a day. Forex traders who day trade often seek quick results, aiming to take advantage of short-term price movements.

A short-term strategy that takes between a few minutes to several hours each day, day trading requires constant oversight and rapid decision-making. This means that day trading probably isn’t for you unless you’re able to dedicate focus and time to watching the markets during trading hours. 

It also means that day trading can be stressful and give rise to a range of emotions. Letting your emotions get the better of you when trading can lead to annoying mistakes. Learn more about trading psychology and how to manage your emotional response whilst trading.

Swing trading

Swing trading is a strategy for traders aiming to profit from market swings – that is, short- to medium-term changes in direction that last between a few days and a few weeks. 

As a swing trader, you’ll use technical and fundamental analysis to find trends and patterns in market data. This research helps you identify potential opportunities and set predefined entry and exit points for your trades.

Swing trading requires patience, as well as the ability – and time – to analyse market trends. It doesn’t require constant monitoring like day trading, but you’ll need to do a lot of work in advance – and you’ll still want to check your trades a couple of times a day.

Position trading

Position trading is a trading strategy that lasts from a few months to several years. Forex position traders aim to capture profit from longer-term price trends in currency pairs.

Position trading demands less daily oversight than day trading and swing trading, making it a potential option if you have a busy schedule.

However, it requires more patience, as you’ll hold positions on FX pairs for extended periods. It also demands a solid understanding of market fundamentals and the ability to withstand volatility – both financially and emotionally.

Long-term positions can be affected by significant fluctuations in the FX markets. So it’s crucial to always have sufficient margin in your account, so that you can weather these situations without facing a margin call or being closed out.

If you have patience, a long-term focus, and a solid base of risk capital to put up as margin, position trading could be for you. 

Trend trading

Trend traders look to discover trends in forex prices, and attempt to profit by trading in line with those trends for as long as possible. You can undertake trend trading across different timescales depending on your preferences, and the types of trends you’re looking to trade on. 

As a forex trend trader, you’ll probably make heavy use of technical analysis and indicators – like moving averages, trend lines and momentum – to identify trends. However, since past performance isn’t of future market behaviour, it’s important to remember that these indicators can give you false signals. 

Likewise, reversals in trends can mean losses if you let trades run unchecked. So you’ll want to institute proper risk management to recognise reversals and close trades at your risk tolerance. 

You can use a trend trading strategy to suit a range of timeframes – whether you want to trade a secular trend over years, a minor trend over days, or something in between. If you have a keen eye for market patterns and are interested in technical analysis, you might be a trend trader.

Forex trading strategies

Here are some strategies that provide a structured approach to forex trading. These strategies make use of technical and fundamental analysis, so ensure that you’re comfortable with these concepts before trying anything.

Breakout/breakdown strategy

Breakout and breakdown strategies use support and resistance levels to identify potential entry and exit points for a trade.

Support levels are the lower price – or ‘floor’ – where a currency pair might stop falling, and potentially see a reversal. If a currency pair drops below a support level it's called a ‘breakdown’. 

Resistance levels are an upper price – or ‘ceiling’ – that may signal continued upward movement if broken through. When a currency pair rises above its resistance level, it’s called a ‘breakout’.

As a breakout or breakdown trader, you might enter a long position when the currency pair breaks above its resistance level, or a short position when it drops below the support level –  following the new direction as far as possible.

You can use technical indicators like Fibonacci retracement numbers, relative strength index (RSI) and moving averages to help identify support and resistance levels, and determine potential entry and exit points for a breakout or breakdown strategy.

50 pips per day strategy

The 50 pips per day strategy is used by forex traders aiming to capture a small, steady profit. That profit target is – you guessed it – 50 pips per day. One pip is equivalent to 0.0001 of movement on a forex chart.

Traders using this strategy will usually trade at times with higher volatility – for example, around the opening of the New York or London markets – and tend to use pairs sensitive to these events, like EUR/USD or GBP/USD. 

Suppose you decide to go long on EUR/USD. Once you’ve decided on your pair and entry point, you set a take-profit order 50 pips above your opening price, and a stop-loss 50 pips below. This gives your trade a 1:1 risk-reward ratio.

If the market moves in the direction and amount you hoped, you take your 50 pips profit. If it moves against you by 50 pips, your stop gets triggered and your trade will be closed at a loss – but you were comfortable with that possibility in advance. 

You need to be disciplined to follow this strategy, and not move your entry and exit points based on emotions. 

Carry trade strategy

A carry trading strategy aims to profit from a difference in the interest rates of two countries. It is a frequently used strategy for speculating on financial markets, including stocks and bonds. In forex, it aims to profit from the difference in interest rate between two currencies in a pair, by borrowing a currency with a lower interest rate to buy another. 

Say you’ve noticed that the interest rate in the US is 5%, while in Japan it’s 0.5%. If you place a long trade on USD/JPY, you’re ‘borrowing’ Japanese yen to buy US dollars. So your trade is subject to a ‘positive carry’ of 4.5%, and you’ll likely receive a net gain of 4.5% of your position size if the interest rates remain unchanged.

However, if the interest rate in Japan rises above that in the US, you’ll end up paying the interest rate differential. Likewise, if the yen depreciates against the dollar, your losses on the trade could offset the benefit of the carry payment. 

You’ll want to consider exchange rate fluctuations, central bank interest rate changes, monetary policy, and geopolitical and macroeconomic events when engaging in a forex carry trade.

How to build a forex trading strategy

To build your forex trading strategy, you need to:

• 1. Determine how much time you have to spendCan you spend all day looking at the markets? Great, you may be able to day trade. If not, a medium- or long-term strategy may be better for you. 
• 2. Figure out your risk toleranceHow much risk capital do you have – that is, how much are you able to lose? Set realistic expectations based on the answer to this question.
• 3. Research your currency pairsChoose the forex pairs that you want to trade, and research the external factors that influence their price movements. For each currency you trade, you’ll need to know what’s going on in the countries where it’s used.  
• 4. Identify your entry and exit pointsFigure out where you’ll open and close each trade in advance – preferably through a combination of technical analysis to identify things like support and resistance levels, and by setting profit and loss targets. 
• 5. Test your strategyPractise and refine your forex trading strategies risk-free with virtual funds, using a demo account on Capital.com.

Put your strategy into action. Once you’re satisfied that your strategy is achieving the goals you want it to, you can start trading with your own capital. Set stop-loss and take-profit orders to close your trades at predefined levels, limiting losses and protecting gains. Not all stop-losses are guaranteed.

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