Forex Trading Strategies

One good advice that experienced forex traders give beginners is to maintain discipline in trading. While this is a sound forex trading strategy for beginners, the problem is in ensuring that discipline is enforced when engaged in a trade. A solution is to develop a good forex trading strategy, and stick to it.

If you have thoroughly tested the strategy and you believe that you are using your most successful trading strategy, it will be easier for you to maintain discipline and stay within the rules of the strategy.

In many cases, when Forex strategies are discussed, people are merely talking about a particular method of training that is often just a facet of an entire trading plan. To be considered a consistent trading strategy, it must offer beneficial signals. It is likewise important to consider risk management, position, sizing, as well as provisions for exiting a trade.

Choosing the Best Forex Strategy to Use

There is really no definitive single answer to the question “what is the best Forex trading strategy for me,” and there are various reasons for this.

For one, the ideal Forex strategy must suit the individual trader. Thus, you need to take your personality into consideration, then find the best-suited strategy for your personality.

Bear in mind that what may work well for somebody else, may not work out as well for you. On the other hand, a particular strategy that other people avoid like the plague, may actually be the best strategy for you.

Experimentation is therefore necessary to discover the trading strategies that will work for you. By experimenting, you can also get rid of those that do not produce the desired results for you.

One of the major factors to consider is the timeframe for your particular trading style. Here are a few trading styles, ranging from short to long timeframes that have been popular in the past, and still remain widely-used today.

  • Scalping – Scalping involves trades with very short timeframes, sometimes as short as a few minutes. If you are as scalper, you are looking to beat the bid/offer spread quickly, and skim a profit of a mere few points before exiting your position. Typically, scalpers use tick charts like the ones found in the Supreme Edition of MetaTrader 4.
  • Day Trading – Day traders exit trades they open before the day ends, as implied by the name of the trading style. By exiting within the day, you avoid the possibility of being negatively affected by large movements that may happen overnight. Your trades may last for just a few hours, and the price bars on forex charts may usually be set to just 1 or 2 minutes.
  • Swing Trading – In swing trading, you hold your positions for a few days. The goal is to make profits from price patterns over the short term. As a swing trader, you will often look at bars that show every 30 minutes to an hour.
  • Positional Trading – Positional traders follow long term trends intending to gain maximum profits from major movements in prices. As a positional or long term trader, you would want to take a look at end of day charts.

Role of Price Action in Forex strategies

The extent of fundamentals uses may vary from one trader to another. The use of price action is present in the most successful Forex trading strategies. The process is called technical analysis.

When talking about technical Forex trading strategies, two major styles come to the fore. One is trend following, and the other is counter-trend following. The objective of these two strategies is to make a profit through the recognition and exploitation of price patterns. As regards price patterns, it is crucial to understand the concepts of support and resistance.

To explain simply, support and resistance represent a market’s propensity to bounce back from past highs and lows. Support is the term used to describe the tendency of the market from a low established previously. On the other hand, resistance is the tendency of the market to fall from a high established previously.

The phenomenon happens because of the market participants’ tendency to judge future prices versus recent lows and highs.

Now, what will happen if the market approaches recent lows? The simple answer is: buyers will be lured to what they deem to be “cheap.” And, what will happen when the market approaches recent highs? As opposed to the previous situation, sellers, in this case, will be enticed by what they perceive to either be a good position to lock in profits or an expensive proposition. It can be said that recent lows and highs are the standards by which the prevailing prices are measured.

Support and Resistance levels also come with a self-fulfilling aspect. This occurs due to the market participants’ anticipation of specific price actions at these points. They then act accordingly, and as a result of their actions, the market is prompted to behave as anticipated. Three things, however, are worth noting:

  • Support and resistance aren’t strict rules. They are merely a common consequence of the market participants’ natural behavior.
  • Trend-following systems are intended to gain profits from periods when the levels of support and resistance experience a breakdown.
  • Counter-trending trading styles are the reverse of trend-following. The intention is to sell when a new high is seen, and buy when a new low is imminent.

Trend-Following Type of Forex Strategies

There are times when the market breaks free from a range. It may under the support level or above the resistance level to begin a trend. Now, when and how do these happen?

When a market approaches new lows and the support breaks, buyers will start to hold off. The reason is buyers continuously see lower prices being set, and they would prefer to wait for the price to bottom out.

Meanwhile, some traders will be forced out of position or will engage in panic-selling. The trend will go on until the selling stops, and buyers believe that there will be no more further price declines.

Trend-following types of strategies will look to buy when resistance has been broken through. They will look to sell markets after falling through support levels. Such trends can be both protracted and dramatic.

The moves involved are massive, and because of this, trend-following strategies can potentially be among the most successful FX trading strategies around. The systems use indicators in determining when a new trend possibly started. However, there is no foolproof way to say that for certain.

There’s a bit of good news, though. If the indicator can identify a specific time when a trend probably began, you are in a good position. The indication of a forming thread is known as a breakout. It is a specific time when the price shifts beyond the lowest low or highest high for a given number of days. A 20-day upward breakout, for example, is when the price rises over the highest high registered in the previous 20 days.

A trend-following system requires a specific mind-set. Due to its long duration, at which time gains can vanish with market swings, the trade can be more taxing psychologically.

In times of market volatility, trend will have the tendency to be more hidden, and the price shifts will be more pronounced. This is an indication that a trend-following system may be the ideal strategy to use when the Forex market is trending and quiet.

The Donchian Trend System is a good example of trend-following strategies. Invented by Richard Donchian, a known futures trader, Donchian channels indicate that there are trends being established. You can tweak the parameters of the Donchian channels as you see fit.

Let’s use a 20-day breakout as an example. The Donchian breakout basically suggests one of two things:

  • Buying if the market price goes over the high registered in the past 20 days
  • Selling if the market price dives below the low registered in the past 20 days.

That is not all, though. There’s an added rule if the state of the market is favorable to the system. The rule is intended to screen breakouts that run counter to the long-term trend.

To put it simply, you consider the 25-day and 300-day moving averages. The shorter moving average’s direction will determine the allowed direction. According to the rule, you can:

  • Go short when the 25-day moving average goes below its 300-day counterpart
  • Go long when the 25-day moving average goes over its 300-day counterpart.

You exit the trades the same way you entered, but utilizing a 10-day breakout this time. Thus, if you opt for a long position, and the price dives lower than the established low in the last 10 days, you will look to exit the position, and vice versa.

Counter-Trend Type of Forex Strategies

This type of strategy relies on the fact that the majority of breakouts don’t become long-term trends. Thus, if you are using such a strategy, you want to gain an advantage from the propensity of the prices to bounce off the previously-set lows and highs.

In theory, a counter-trend strategy is the best FX trading strategy to use to build confidence due to its high success rate. It is, however, important to keep in mind that a tight rein is necessary as far as risk management is concerned. This trading strategy depends on how support and resistance levels hold. When the levels break down, there is a risk of a huge downside.

It is a sound idea to constantly monitor the market. This strategy is best suited for markets that are volatile and stable. These market environments offer healthy price movements that are confined to a set range.

Bear in mind that the market can change states. For instance, a quiet and stable market may start to trend. While it may remain stable, it may acquire volatility as the trend emerges.

There is uncertainty as to how the market state might change. You must find evidence of the market’s current state to determine if it is fit for your specific trading style.

Discovering the best Forex Strategy for You

A lot of technical indicator types have materialized through the years. The significant advances in online trading technologies made them more easily accessible for traders, allowing them to develop their own systems and indicators.

By engaging in trial and error, you will discover strategies that are best suited for your own trading style. Take advantage of your broker’s free demo trading account to test your strategies risk-free.