- 1. The essence of trading strategies for Forex: what are they?
- 2. Kinds of strategies for Forex trading
- 3. Are there any simple and nonlosing strategies?
- 4. How to choose a strategy?
- 5. Risk-management
- 6. Summary
- 7. Reviews
The essence of trading strategies for Forex: what are they?
The Forex trading involves the use of a strategy, either typical, used by many traders, or individual, developed by traders who have a good understanding of the market themselves.
The strategy allows you to trade systematically, in accordance with the inherent laws of the Forex market, analyze the market, accurately predict the market behavior, which leads to profitable trading. The strategy is not something constant and unchanged, having to be regularly updated or completely changed in accordance with the changing market situation. At the same time, any strategy a trader applies should be entirely understood by him, in accordance with his objectives, goals, professionalism and psychological characteristics.
The strategy is based on the definition of several points, among which the following can be considered the main ones:
- Currency pair;
- Time period of trading;
- Trading entry point;
- Trading exit point;
- Indicators, if applied;
- Terms of trade with a indicatorless strategy;
- Risks determination.
The use of any strategy does not guarantee a profit, but allows you to have a more efficient trading management and prevent major losses. In general, it can be said that without a strategy, a long-term and efficient Forex trading is impossible.
Kinds of strategies for Forex trading
There are different approaches to classify trading strategies on Forex. For example, by time; that is, there are long-term, medium-term and short-term strategies.
The long-term strategies are meant for weeks or even years; the positions are opened in expectation of gradual changes in the market. These strategies imply a small but stable return on assets that are not characterized by strong volatility and have relatively low risks.
The positions with medium-term strategies are designed for a period from one day to several weeks. These are the most popular strategies for markets with moderate volatility, moderate risks and pronounced trends.
Short-term strategies are characterized by high risks and high profitability on highly volatile assets. The number of transactions can reach dozens per day and more, respectively, the duration of transactions may be seconds.
Forex’s scalping strategies
The scalping is a classic example of a short-term strategy for Forex. Deals with scalping last from a few seconds to a few hours. The profit of it isn´t big and comes from many frequent deals. The speed of deals allows to make money on any trend movements, including the correction and against the trend. However, the scalping also leads to fast losses if the trader doesn´t strictly follow the trading plan or is prompt to stress out. The scalping means high risk, so the trader has to maintain high stress management standards, set stop losses and so on. Nevertheless, this doesn´t mean there will be no risk of losses.
Let’s take a look at a few scalping strategies. One of such is scalping with the help of moving averages. A 5-15-minute timeframe is selected for scalping. Moving averages are selected (Moving Average) in the trading terminal. For trade, a clear trend is needed. It’s supposed that the trade be made at a zone where moving averages do not intersect (fig. 1). The transaction opens when the price tests the area between the moving averages, but leaves the marked area. The place where the price touched a moving average is an extremum: from it you can open deals for sale or purchase, depending on the trend direction.
Another scalping strategy is based on intersecting moving averages (fig. 2). The market is entered after the intersection of two lines, when a local extremum is formed and the price has tested the correction for a noticeable period of time.
One of the popular strategies is the Momentum Elder strategy. It’s used with various indicators, but the Momentum (fig. 3) indicator is compulsory.
This strategy is used, for instance, in conjunction with the Moving Average indicator, in which case, the purchase is made when the Momentum is above the line and the bar has closed above the moving with a certain period. Contrariwise, the sale is made, when Momentum gets set below the average line and the current price is below the moving with the period set by trader.
When using moving averages, it should be remembered that this indicator does not predict the price, but follows it instead. This peculiarity requires a special attention to the signals during trading in order to prevent losses caused by a lagging indicator.
There are scalping strategies that have gained the status of classics. They are based on points and swings. The point is the minimal or maximal price before the trading day maximum or minimum. Swing is a motion from one point to the next one. The strategy is used in case of pronounced trends in corrective movements. This strategy doesn’t work against the trend.
One of such strategies is to trade at two highs and two lows within a trend channel. Transactions are made at the identified maximum and minimum points, based on the correction of extremes.
In scalping strategies, trade is often conducted following the ABC pattern. It is formed, for example, on an upward movement, when the price reaches a maximum at a certain level (A), but doesn’t stay there and rolls back, forming a minimum (B), then rises again to a maximum (C). For other strategies, this figure is not a good way to enter the trade, but for such a frequency one as scalping, it is quite suitable indeed.
Daily Forex strategies
The daily Forex strategies are the most popular by Forex trading. When implying these strategies, positions are opened during the trading day. It often is with them that the development of trading in Forex begins, since single day strategies have a number of peculiarities: they do not require in-depth analysis and constant presence, which saves time; you can profitably work with a relatively small deposit; reduced stress load.
The daily charts show clearer signals, a more stable and pronounced trend, some strongest levels, the most precise price movements that allow to implement many strategies. More pronounced and long-lasting trends allow for making of a lot of transactions without hurry, so day trading is more accurate and profitable.
If at the beginning of trading the direction of the trend can be correctly determined, you can be sure of a high probability, since in day trading the direction of price movement rarely changes suddenly and abruptly, for this you need to change some fundamental factors. In general, day trading is a conservative type of trading and therefore is best suited for the beginners in such activities.
Classic day trading strategies include a variety of breakdown trading and fundamental analysis. When trading at a price breakdown level, traders follow the levels that the price hasn’t broken through and set stop losses, assuming that the level will still eventually be broken. In working with this strategy, you should pay attention to the data of additional indicators and monitor the fundamental factors influencing the price.
When trading on the breakdown of the channel, the trader marks the channel boundaries according to local extremes, respectively, the horizontal lines are support and resistance, the sloped ones are the price channel. Positions are opened following the direction of price movement. Traders put stop losses in the expectation that the limits of the price channel will be broken.
When implementing a trading strategy to break through the trend line, you should be guided by a confirmed price uptrend on the highs or downward on the lows. The trend movement is most often clearly seen on daily charts, and it’s even better if the trend’s confirmed by additional indicators, which can also warn of a possible trend change.
For strategies of volatility breakdown the indicators are used that mark when price extremes are reached. After reaching the maximum or minimum prices, the trade stabilizes for some time, which enables you to open a deal. The main thing with such strategy is to be able to correctly predict the further course of the situation.
Among specific day strategies, let’s take a closer look at the rather popular «Ruler» strategy. When using this strategy, a trader opens a trading position after the candlestick has been completely formed on the daily chart. In this strategy, normally, two moving averages are used: for example, one of them shows a ten-day trend, and the second – a 200-day one to confirm the trend. Moving averages are used to clarify price behavior, and the trades are carried out based on the indicators of the support and resistance levels (fig. 4) The strongest support and resistance lines are plotted on the chart.
If the price rebounds from resistance, and, while working with a candlestick graphic, the candlestick closes above the ten-day moving average, the sale is opened, when the price rebounds from the support level, the buying position is opened.
To prevent losses, stop losses are set slightly higher (for sale) or lower (for buying) at the nearest resistance level. Usually, when implementing this strategy, traders place two orders, one of which takes profits at some level, and the second stays open until the trend goes in the right direction.
Another popular day strategy is the «Three Candlesticks». It involves the trader tracking the formation of three consecutive candlesticks on the trend. The first candlestick in the sequence displays the maximum or minimum, the second one confirms the forming movement, and the third one in the same direction is the signal to make the deal.
Another widespread strategy is the «Weighted Taylor». For its implementation, three indicators are established on the chart (fig. 5) – moving averages, that show the overall price development, RSI oscillator, which allows for a more accurate determination of the auction entry point, and MACD oscillator, which helps to enter or leave trades. Positions are opened according to the RSI readings, which indicates whether a trend is being formed upward or downward.
As for the fundamental day Forex trading, it implies a high theoretical preparation, knowledge of the factors that may affect the price movement, this is, tracking the latest news, events that may affect the prices, important signals, regular and periodic events of the financial calendar. The main thing with this trading is to be able to correctly interpret the information gotten.
By the way, the news background should be considered when implementing any daily strategy in the Forex market.
Forex minute strategies
Strategies with a trading timeframe from 1 minute are related to minute strategies. These are rather tense strategies, since they imply constant monitoring of the bidding process and constant analysis of price movements over short time intervals.
To make it easier to work like this, robots and advisors are created. However, many traders refuse to use them because the risk of an incorrect reaction is too great, and if the error sits in the algorithm, this will result in huge losses. Self-discipline of the trader and his expertise help to avoid this to a greater degree, and the advantage will be a significant deposit and a large leverage.
Among the minute strategies is earning at minimal price fluctuations with the help of special indicators that mark extremes, asset oversold or overbought. Trading with the trend involves opening a position in accordance with the direction of price movement, although with minute strategies you need to be able to react very quickly to minor fluctuations. A riskier and less popular way is trading against the trend.
One of the simplest strategies is trading at the intersection of moving averages, which way you can work basically on any timeframe. On the minute chart, two moving averages are set, based on closing prices, and a trading timeframe is selected. As part of this strategy, entry into the market made when, after a long development of a certain trend, the first candlestick closes below or above the intersection of lines (fig. 6). If the trend was downward, then traders aim to buy after crossing the moving averages.
Another strategy involves trading in the evening or over night. A trader monitors the entry point to the market when the price of an asset leaves a long trend: this movement doesn’t last long, but yet it’s enough to make a profitable deal.
For the five-minute chart, a quite popular one is the trend trading. For this strategy, the crucial part is a clear trend for a fairly long period of time, for example, during the day. The trader expects a short-term price increase on the trend, which first appears on the M1 chart, and is supposed to then also appear on the M5 chart. As soon as the price starts to rise, the trader opens a deal.
The indicatorless Forex strategies
The indicatorless Forex strategies are based on tracing typical graphical elements that are repeated regularly on the price chart. The trading by graphic figures is rather popular since it’s relatively simple and doesn’t require an in-depth analysis of the situation, also eliminating errors associated with inaccurate performance of indicators. Graphic shapes allow you to avoid flaws that are inherent to indicators that tend to lag in relation to the price movement.
At the same time, graphical trading methods require a good understanding of market trends. It’s utmost to clearly define the potential behavior of the trend, the asset overbought or oversold, the strong levels from which the price may vary. The strategies are closed after the complete pattern formation.
On the chart, the combination of such patterns after a long trend as, for example, Double top (two maximums) and Double bottom (two minimums) are tracked. The trades are entered from the second extreme along the trend.
The classic candlestick chart figures «Head and shoulders», «Engulfing» и «Pin-bar» are reversal ones, warning of the price reversal, thus allowing to trade on a pullback.
The «Internal bar» and «Flags and pennants» patterns, meanwhile, shows the continuation of the trend, and the trader can keep on making deals along the trend. The triangles may indicate, depending on the situation, either a reversal or an increase in the current trend. Apart from trading patterns in indicatorless trading strategies, trading can be carried out at trade levels: for instance, breakdown or rebound from support and resistance levels (fig. 7).
Another kind of an indicatorless strategy is trading along the trend, according to which the trader determines the leading direction of the price, builds support and resistance levels and enters the trade during rebounds. The entry points are rebounds from the constructed trend lines on the Forex chart. Economic and, in some cases, political news exert big influence on financial markets, including the Forex market. Therefore, there’s a proper news trading strategy (similar to the news trading system for binary options).
As part of the strategies alike, such news as inflation dynamics, changes in the FED rate (fig. 8), changes in the Central Bank base rate, unemployment dynamics, fluctuations in the consumer price index and political events affect the market significantly. Sharp changes in the international situation and serious internal political events in leading countries are the most tracked.
Following the news strategy, traders open or close positions, for example, before the news are published, such as quarterly or annual economic and financial reports. News strategies are high-risk, since it’s impossible to determine exactly how news will affect the market. Moreover, not all news sources can be trusted, it also being true that trustworthy sources can provide false information just as well.
In addition, the risks of news trading include opening deals according to forecasts without independent analysis of the situation and opening deals immediately after the news.
Are there any simple and nonlosing strategies?
The Win-win strategies are typically offered by pages with rather questionable content that promise profits without losses and success without much effort. Selling win-win solutions to the newcomers is a whole parafinancial industry.
In the real life, of course, there are no win-win strategies: otherwise everybody would quickly learn such strategies, after which Forex market would have to close.
On the other hand, any strategy can be almost win-win for a particular trader if he works it out to perfection and adapts it to his needs. It’s easier to adapt a simple strategy. To do this, the trader needs to have a good theoretical background and effective trading skills, be able use the advantages of the others’ strategies he got to learn, be able to predict market behaviors and model different situations when building his strategy.
Adjusting an already existing personal trading strategy is not a single act task: the trader keeps doing it constantly, for the market situation doesn’t stay the same always. The created strategy can be considered successful if the trader has been trading with it for several years and the profit exceeds losses constantly and significantly.
How to choose a strategy?
Choosing or developing a strategy is of most importance and responsibility, since the effectiveness of all trader activities depends to a great extent on the right choice of strategy. Often on the Internet you can see strategies called the most profitable, but you can’t rely on such characteristics when choosing. The search for the most profitable strategy tends to turn into an obsessive idea when a trader jumps from one strategy to another and doesn’t have time to get a profound understanding of none, the result of which definitely is losing money.
Basically, any strategy can be profitable or unprofitable, so it’s more reasonable for a trader to concentrate on choosing a strategy that he could fully understand, learn all the nuances of working with it and try it out in real trading. It’s important that the trader feel comfortable implementing the chosen strategy. Simpler strategies are easier to learn and effectively put in use.
Obviously, among the parameters that determine the choice of Forex trading strategy stands the amount that a trader can afford to spend on trading. Having a small deposit doesn’t mean that you can’t start trading, but this factor starts playing a decisive role in choosing a strategy: more specifically, in estimating risks, trading time, duration of deals, leverage, and other parameters.
Once the strategy is chosen, it’s important to spend enough time studying it on a test demo account to make sure it suits the trader and allows to control the risks and get profit. Nonetheless, you have to realize that even if the strategy has shown good results during the demo testing, it can fail when on the real market.
When trading on the Forex market, the risk minimization is crucial. The base for the risk management is a clear trading plan, from which you can’t deviate as a result of subjective reasons, such as stress. The plan should include a clear goal and the means of achieving it. The trader must realize exactly the conditions under which an open position will be closed. The plan must have a permissible percentage of losses that cannot be exceeded.
To prevent losses during trading, you need to set stop losses, regularly apply Buy Stop and Sell Stop pending orders, avoid reaching margin call. It’s necessary to diversify risks by opening positions on different currency pairs, at different time intervals, and by other means. Constant researching of the market, tracking the news and developing trading skills are also among the essential points of risk management.
The trades that the trader has conducted, their circumstances and results should be logged in a diary and analyzed. This will allow you to see the errors and prevent them from repeating.
Forex trading strategies are many and varied. When choosing a strategy, you need to take into account the goals of trading, the level of trader’s expertise, the individual trader’s characteristics, preferred timeframes, currency pairs and many other factors. Any strategy should be tested out before implementing it on a real account.
There are no universal win-win Forex trading strategies, but a trader can achieve minimal losses sticking to a strategy if he thoroughly studies it and learns how to apply it in practice. Gradually, as his skill grows, a trader can invent his own strategy. When implementing any strategy, you must strictly follow the rules of risk management. This especially applies to scalping strategies and work on minute charts.