FOREX TRADING STRATEGIES:
Which One to Choose?
First of all, let´s see what are Forex strategies and why they need to be used. A forex trading strategy is a set of tools and rules that can be adapted to changes in the market. However, it should not be understood as an unchangeable guide to action. Moreover, strategies that were profitable in the past sometimes fail to work in the future.
Choosing a Forex trading strategy is one of the most important steps for successful trading. It is the right strategy that can help you stay in the profit zone: it is possible to choose the best moment to enter the market and exit unprofitable deals with minimal losses. Even the simplest strategies can be effective, as long as they perfectly match the trader´s experience and work style.
The most important thing that a good strategy gives a trader is a clear understanding of the market and a trading plan. This is especially true for beginners, as even studying aspects of fundamental and technical analysis does not always lead to an understanding of when to open a trade. A ready-made strategy can effectively solve this problem. Entry or exit is made at the moment when the trader sees the market situation defined by the strategy: price reaching a certain level, formation of familiar patterns on the chart, crossing of indicators set up on the chart, etc.
The strategy also removes the important issue of asset selection. Many strategies are designed for specific currency pairs and help identify the behaviour of this particular asset, such as its liquidity, volatility, etc.
Using a strategy can protect you from losing your whole account, which can happen while trading haphazardly. Of course, a hundred per cent success is not guaranteed in this case, but strategies help traders to be more precise, as they are designed for a certain level of risk and profitability.
There are a lot of strategies, so a beginning trader should take the matter of choosing one very seriously.
All strategies can be divided into three groups according to the length of time they take to hold a position.
Long term strategies. In this case, the open position may be held for several weeks up to a year. It allows watching the market in a relatively calm mode, without worrying about the current state of the deal. Such strategies can be used both by beginners and experienced traders with conservative trading styles, who wish to get small but stable results. However, to operate in this style, the trader must have a certain temperament, as not everyone is able to observe profit changes in positions for a long time.
Mid-term strategies. Usually, they are based on technical analysis (it will be described below), and the positions, in this case, are held open from one day to two or three weeks. During this period, the trader may receive a profit of 50 to 200 or even more points depending on the volatility of the market at the moment.
One of the conditions of medium-term strategy application is an active trend on the market which allows traders to have relatively safe trading.
Short term strategies are the most profitable, but also the riskiest, as the trade is carried out during one day and sometimes it is very difficult to predict the price movement. Short term strategies include 'scalping' and 'intraday'.
How to choose the strategy?
Taking market analysis into account. To forecast price changes correctly, it is necessary to master the basics of fundamental and technical analysis. Some novice brokers think that mastering only one of them is enough for successful work. But practice shows that profitable trading on the Forex market is impossible without profound knowledge in both fields.
Taking into account the experience available. Before choosing a strategy, a trader should realistically assess their trading experience. Practice shows that beginners should not choose risky short-term strategies at once, because they do not have enough knowledge, experience or ability to analyze charts to make a profit. You should not try to devise your own strategies right away, it is better to use your own experience and study existing approaches.
You should take into account the time you have planned. Trading on the "Forex" is most often an additional income, so it is worth determining at once how many hours a day a person is ready to devote to it. On that basis a trader should choose a strategy: if a prospective trader is not ready to intraday trading because he/she is busy with his/her main job, it would be better to choose a medium or long-term strategy.
You should take into account the trader's psychological traits. Before choosing a strategy it is advisable to trace the psycho-type of trader, as it will determine which strategy is right for a beginner. For instance, sanguine people are usually very consistent traders and are not disheartened by losses, but they nevertheless strive to earn and put forth their best efforts. Sanguine individuals are best suited for strategies which are weighted by the profit to risk ratio. Scalping' is not advisable for cholerics because they are too rushed and can sometimes make too impulsive decisions. Long-term strategies are not ideal for choleric individuals as they do not have the patience to wait for the optimal price movement. They can choose strategies with closing intervals of one to four hours. With phlegmatic people, there is no limit to their strategy selection because of their equanimity and good judgement.
Top 5 Forex trading strategies
We bring to your attention five relatively uncomplicated but effective strategies that even a novice trader can take advantage of.
"The London Session".
One of the simplest strategies on the Forex market. Trading time - London Stock Exchange session starting at 10 am Moscow time; trading timeframe - 30 minutes. It is optimally suited for currency pairs, in which the British pound is present. By this strategy, entry into the market is made daily, but only once a day. The first candle closes as a signal for transaction opening, the pending buy order is placed at its maximum and the sell order is placed at its minimum. The stop loss is placed, depending on which order is opened, also on the maximum or minimum of the same candle. Once the order is open and the price has passed 15 points, a so-called breakeven is placed. The second pending order is not deleted, if the price reverses, the trader will still make or break even.
The strategy is applicable to any currency pair. To implement the strategy, a trader should draw two moving averages on the chart: one fast one with a short period, which will be close to the price and will react to its small changes, and the second one with a slow-moving average with a long time period. The essence of the strategy lies in the type of crossover between these moving averages. When the fast one crosses the slow one from the bottom upwards, you should buy, and when it crosses the slow one from the top downwards, you should sell.
The "Breakout Wedge".
The strategy is intraday and can be used for any currency pair on any timeframe. The appearance of the "wedge" pattern on the chart usually indicates the change of the trend, so it is most often formed at the bottom or at the top of the chart. A "wedge" is represented by a series of Japanese candlesticks with resistance and support lines narrowing, and the pattern's narrowing coincides with the direction of the trend. The ascending "wedge" is formed on the market maximum, and the breakdown of the wedge downwards indicates a change in the trend downwards, and the formation of the descending wedge with the breakdown upwards indicates a change in the trend upwards.
The strategy is a scalping strategy and is suitable for any currency pair. The best time to apply the strategy is at the opening of trading in New York and London. You should open a buy or sell position when the price crosses all of the EMAs (exponential moving averages) of the chart. In this case, if the price crosses the EMA from the bottom upwards, it is a signal to buy. Take Profit (automatic closing of the transaction) is recommended to leave the profit no higher than 10 points because the price can change its direction. A transfer to Breakeven is made as soon as the price has moved away from the open trade.
Another scalping strategy with a one-minute timeframe. In this strategy, at the close of the next candle, you need to pay attention to the last three candles. The body size of the last candle should be bigger than the bodies of the previous two. The penultimate candle should be 'bearish' and the last one 'bullish', which means its closing price should be higher. If these conditions are met, a buy trade can be opened at the opening of the next candle. To sell, the closing price of the last candle should be lower than the penultimate one.
Although there are many strategies, the best one is the one developed by the trader by trial and error. But to avoid fatal mistakes, not only try but also learn, absorb the experience, learn ready-made strategies and enrich them with your own experience.