Trading Strategies in the Forex Market
The essence of trading strategies for forex and what is it?
Forex Trading involves the use of a strategy, either a typical one, which is used by many traders, or an individual one, which is developed by the traders themselves, who have a good understanding of the market.
- 1. The essence of trading strategies for forex and what is it?
- 2. Varieties of strategies for forex trading
- 3. Are there any simple and win-win forex strategies?
- 4. How to choose a strategy?
- 5. Risk Management
- 6. Conclusions
- 7. reviews
A strategy allows you to trade systematically, in accordance with the patterns that are inherent to the forex market, analyze the market, confidently predict the behavior of the market, which leads to profitable trading. The strategy is not something immutable and unchangeable, it should be regularly updated or completely changed in accordance with changing market situation. Thus any strategy applied by trader should be completely clear to him, correspond to his tasks, purposes, level of professionalism and psychological peculiarities.
The strategy is based on the definition of several points, among which the main ones are the following:
- Currency pair;
- The time period of trades;
- The point of entry into trading;
- The point of exit from the bidding;
- Indicators, if applied;
- Terms of trading with a non-syndicator strategy;
- Risk Identification.
Application of any strategy does not guarantee profit, but it allows you to build trading more rationally and prevent major losses. In general, we can say that without a strategy, any kind of long and effective forex trading is impossible.
Varieties of strategies for forex trading
Classification of forex trading strategies can be different. For example, by time, that is, there are long-term, medium-term and short-term strategies.
Long-term strategies are designed to last for weeks or even years, positions are opened with the expectation of gradual changes in the market. This strategy implies small but stable profits on assets with low volatility and relatively low risks.
Positions in medium-term strategies are designed to last from one day to several weeks. These are the most popular strategies for markets with moderate volatility, moderate risk, and a pronounced trend.
Short-term strategies are characterized by high risks and high profitability on highly volatile assets. The number of transactions can reach dozens per trading day and more, respectively, the duration of transactions can be seconds.
Scalping forex strategies
Scalping is a classic example of a short-term strategy in forex. Scalping deals last from a few seconds to a few hours. Profit in this case is small, the profit is achieved through the frequency and number of transactions. The transactions speed allows to earn on any trend movements including correction and counter-trend. However, scalping also leads to fast losses if the trader does not follow the trading plan precisely enough or is stressed. Scalping implies high risk, so the trader must comply with the requirements of risk management, place stop-losses and so on. But it still does not save the trader from the high probability of losses.
Let's look at several scalping strategies. One of them is scalping with moving averages. For scalping choose 5-15 minute timeframe. In the trading terminal moving averages are selected (Moving Average). Trade requires a clear trend, trade is assumed to be in the area where the moving averages do not cross (Fig.1). Trade is opened when the price has tested the area between the moving averages, but will leave the marked area. The place where the price touched a moving average is an extremum, - from it you can open a sell or buy deal, depending on the trend direction.
Another scalping strategy is by crossing moving averages (Figure 2). Market entry is made after crossing the two lines, when a local extremum is formed and the price has tested a correction over a noticeable period of time.
One of the popular strategies is the Elder Momentum strategy. This strategy is practiced with various indicators, but the obligatory one is the Momentum (Fig. 3).
For example, the strategy is used in conjunction with the Moving Average indicator, in which case buying is performed when Momentum is above the line and the bar has closed above the moving average with a certain period. Selling, on the contrary - when Momentum is below the average line, and the current price is below the moving bar with the period specified by the trader.
When using moving averages, you should remember that this indicator does not predict the price, but follows the price. This peculiarity requires careful attention to signals when tradingto prevent losses from the lagging indicator.
There are scalping strategies that have the status of classic strategies. They are based on point and swing movements. A point is the minimum or maximum price before the maximum or minimum of the trading day. A swing is a movement from one point to the next. The strategy is used in pronounced trends on corrective movements. This strategy does not work against the trend.
One strategy is to trade on two highs and two lows, within a trend channel. Transactions are made on the identified points of the maximum and minimum, in the calculation of the correction extrema.
It is not uncommon for scalping strategies to trade in the ABC pattern. It is formed, for example, on an upward movement, when the price forms a maximum at a certain level (A), but does not hold and rolls back, forming a minimum (B), and then rises again to a maximum (C). For other strategies, this pattern is not a good way to enter trades, but for a frequent strategy like scalping, it is quite suitable.
Daily forex strategies
Daily strategies are the most popular when trading forex. In these strategies, positions are opened during the trading day.
And they are often the beginning of mastering the Forex trading, because daily strategies have several features: they do not require in-depth analysis and constant presence, which saves time, you can work profitably with a relatively small deposit, reduced stress levels.
Daily charts have clearer signals, a more stable and pronounced trend, the strongest levels, and the most adequate price movements that allow many strategies to be implemented. More pronounced and longer trends allow you to make many trades without rushing, so day trading is more accurate and profitable.
If at the beginning of trading you can correctly determine the direction of the trend, you can be sure of a high probability of profit, because during day trading the direction of price movement rarely changes unexpectedly and abruptly, for this purpose some fundamental factors need to change. As a whole, day trading is a conservative kind of trading and that is why it is the most suitable for the beginning of mastering this kind of activity.
Classic day trading strategies include a variety of breakout trading and fundamental analysis.
When trading to break a price level, traders keep track of levels that the price has not broken through and place stop losses, assuming that the level will still be broken through. When working with this strategy, it is necessary to take into account the data of additional indicators and track the fundamental factors of influence on the price.
When trading on the breakout of the channel, the trader marks the borders of the channel on local extrema, respectively, horizontal lines are support and resistance, sloping lines are the price channel. Positions are opened in the direction of price movement. Traders put stop-losses in the expectation that the boundaries of the price channel will be broken.
When implementing the strategy of trading on the breach of the trend line, they are guided by a confirmed price movement upward on the highs or downward on the lows. On the daily charts, the trend movement is often clearly visible, even better if the trend is confirmed by additional indicators, they can also warn of a possible change in the trend.
When trading on a volatility breakout strategy indicators are usedwhich mark the achievement of price extremes. After the maximum or minimum prices are reached, trade stabilizes for a while, which allows you to open a trade. The main thing in this strategy is the ability to correctly predict the further development of the situation.
Among the specific daily strategies, let's consider a fairly popular strategy, "The Ruler". In trading this strategy, the trader opens a trading position after the full formation of a candle on the daily chart.
This strategy usually uses two moving averages, for example, one of them shows a ten-day trend and the other one shows a 200-day trend to confirm the trend. Moving averages are used to clarify the price behavior. And the trading is carried out according to the indicators support and resistance levels (Fig. 4). The strongest support and resistance lines are plotted on the chart.
If the price bounces from resistance, and - when working on candlestick chartIf the candle closes above the ten-day moving average, then we open a sell trade, and if it rebounds from the support level, we open a buy position.
To prevent losses, stop losses are placed slightly above (to sell) or below (to buy) the nearest resistance level. Usually when implementing this strategy, traders place two orders, one of which fixes profit at some level, and the other is open as long as the trend is moving in the right direction.
Another popular daily strategy is Three Candles. With this strategy, the trader tracks the formation of three consecutive candles in the trend. The first candle in the sequence displays a maximum or minimum, the second confirms the forming movement, the third in the same direction is a signal for a trade.
The "Weighted Taylor" strategy is also often used. For its implementation, three indicators are set on the chart (Fig. 5) - moving averages, which show the overall price development, RSI oscillatorwhich allows you to more accurately determine the entry point into the trade and MACD Oscillatorwhich helps to enter or exit trades. Positions are opened on the basis of the RSI indicator, which shows whether the trend is upward or downward.
As for fundamental day trading, it implies a high theoretical training, knowledge of factors that can affect price movements - tracking current news, events that can affect prices, important signals, regular and periodic events in the financial calendar. The main thing in such trading is the ability to interpret the received information correctly.
By the way, it is useful to consider the news background when implementing any daily strategy in the forex market.
Minute forex strategies
Strategies with a trading timeframe of 1 minute and more are referred to as minute strategies. These strategies are quite intense, since they imply constant control of the trading process, constant analysis of price movement on small time intervals.
Robots and advisors are created to facilitate work in this mode, but many traders do not use them because the risk of a wrong reaction is too high, and if the error is in the algorithm, it will lead to large losses. The trader's self-discipline and experience helps to avoid this to a greater extent, and a significant deposit and large leverage will be an advantage.
Among the minute strategies - earnings on minimal price fluctuations using special indicators that mark the extremes, overbought or oversold the asset.
Trading along the trend implies opening a position in accordance with the direction of price movement, although for minute strategies it is necessary to be able to react very quickly to minor fluctuations. More risky and less popular is trading against the trend.
One of the simple strategies is trading on the crossing of moving averages, which, in principle, you can work with on any timeframe. Two moving averages based on closing prices are set on the minute chart and a trading period is selected.
Under the strategy, entry into the market is made when, after a long development of a particular trend, the first candle closes below or above the crossing of the lines (Fig. 6). If the trend was downtrending, traders aim to buy after crossing the moving lines.
Another strategy involves trading in the evening or at night. The trader traces the market entry point when the price of the asset exits a long trend - this movement is short in duration, but it is enough to make a profitable deal.
On the five-minute chart is quite popular trend trading. The main thing for this strategy is a clearly defined trend over a fairly long period of time, for example, over the course of a day. In fact, the trader expects a short-term increase in the price trend, which first appears on the M1 chart, and is expected to appear on the M5 chart. As soon as the price starts to rise, the trader opens a trade.
No Indicator Forex Strategies
Non-syndicator forex strategies are based on tracking typical chart elements that are repeated regularly on the price chart. Trading on graphical figures - is a popular way of trading because it is relatively simple and does not require in-depth analysis of the situation, and also excludes errors associated with inaccurate operation of indicators. Graphical figures allow you to avoid the disadvantages inherent in indicators, which are lagging in relation to the movement of the price.
At the same time, graphical trading methods require a good understanding of market trends, you need to be particularly clear about the potential behavior of the trend, overbought or oversold asset, strong levels from which the price can change. Strategies are closed after the complete formation of a pattern.
On the chart, in particular, the combination of patterns after a long trend, such as "Double Top"(two highs) and "Double bottom" (two lows). Entry into trading is made from the second of the extrema along the trend.
Classic candlestick chart pattern "Head and shoulders", "Absorption" and "Pin BarThe "reversal" are reversal, foreshadowing the change in price to the opposite, which allows you to trade on a rollback.
Pattern "Inner barFlags and pennants" and "Flags and pennants", in turn, show the continuation of the trend and the trader can trade on the trend. Triangles can indicate, depending on the situation, either a reversal or strengthening of the current trend.
In addition to trading based on patterns, non-syndicator strategies can use trading levels, such as breakout or rebound from support and resistance levels (Fig. 7).
Another variant of the trendless strategy is trading by trend, where the trader determines the leading direction of the price, builds support and resistance levels and enters the trade at the rebound. The entry points are the rebounds from the constructed trend lines on the Forex chart.
The news of the economy and, in some cases, politics, strongly influence the financial markets, including the forex market. That's why there is a separate news trading strategy (similar to news trading system for binary options).
Within the framework of such strategies such news as inflation dynamics, changes in the Fed rate (Fig. 8), changes in the Central Bank key rate, unemployment dynamics, variations in the consumer price index are monitored to the greatest extent; among political events a sharp change in the international situation and serious internal political events of the leading countries have a significant impact on the market.
With the news strategy, traders open or close positions, for example, before the publication of news such as quarterly or annual economic and financial reports.
News strategies are high-risk because it is impossible to determine exactly how news affects the market. In addition, not all news sources can be trusted, and it is also true that reputable sources can also provide untrue information.
In addition, the risks of news trading include opening trades based on forecasts without independent analysis of the situation and opening trades immediately after the news.
Are there any simple and win-win forex strategies?
"Win-win" strategies are usually reported on websites with dubious content that promise profit without loss and success without much effort. Selling "win-win" solutions to newcomers is a whole near-financial industry.
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In reality, of course, win-win strategies do not exist, otherwise such a strategy would quickly become known to all, after which forex market would have been forced to close.
On the other hand, any strategy can be almost a win-win for a particular trader, if he works out its application to perfection and adapts it to his characteristics.
It is easier to adapt a simple strategy. This requires that the trader has a good theoretical training and effective trading skills, could use the advantages of other people's strategies when building his own strategy, could predict the behavior of the market and model different situations.
"Adjustment" of already created personal trader's strategy is not a one-time process, the trader is engaged in it constantly, as the market situation is also changing. The created strategy can be considered successful if the trader has been trading with it for several years and the profit is constantly and significantly higher than the loss.
How to choose a strategy?
The choice or development of a strategy is the most responsible part of trading, because of the correct choice of strategy depends on the effectiveness of the whole activity of the trader.
Often one can see advertisements or just a description of some strategy as "the most profitable" on the Internet, but such evaluations cannot be the basis for the choice. The search for "the most profitable strategy" can turn into an obsession, when the trader jumps from one strategy to another and has no time to understand any of them and as a result suffers losses.
In principle, all strategies can be profitable or unprofitable, so it is advisable for the trader to focus on choosing a strategy that he could fully understand, find out all the nuances of working with it and test it in practice. It is important for the trader to feel comfortable trading within the chosen strategy. It is easier to study and effectively apply in practice simple strategies.
Obviously, among the parameters determining the choice of forex trading strategy is the amount of money a trader can afford to spend on trading. A small account does not mean that trading is inaccessible, but this factor begins to play a decisive role in the choice of strategy - in the assessment of risks, time interval of trading, duration of transactions, the value of leverage and other parameters.
Once you have chosen a strategy, you need to spend enough time on it demo account testingBut it is necessary to realize that even if a strategy has passed a successful demo test, it can fail when going to the real market. But it is necessary to realize that even if the strategy has passed a successful demo-testing, it can fail when entering the real market.
Minimizing risks is necessary when trading on the forex market. The basis of risk management is a clear trading plan that cannot be deviated from for subjective reasons such as stress.
The plan should specify the goal and the ways to achieve it. The trader must know exactly under what conditions the open position will be closed. The plan should include an acceptable percentage of losses, which cannot be exceeded.
To prevent losses when trading, you need to put stop-losses, regularly apply pending Buy Stop and Sell Stop orders, avoid reaching the margin call.
It is necessary to diversify risks by opening positions on different currency pairs, on different time intervals, and in other ways.
Constant study of the market, tracking the news fund and practicing trading skills also belong to the obligatory points of risk management.
Transactions made by the trader, the circumstances and the results of trading should be recorded in the diary and analyzed. This will allow to see mistakes and prevent them.
Strategies for forex trading are numerous and varied. When choosing a strategy, one should consider the trading objectives, trader's level of training, individual trader's features, preferred timeframes, currency pairs and many other factors. Any strategy should be tested before implementing it on a real account.
There are no universal win-win strategies for forex trading, but a trader can achieve minimal losses using a strategy if he thoroughly studies it and learns how to apply it in practice. Gradually, as the trader's skill grows, he can create his own strategy.
When implementing any strategy, it is necessary to follow the rules of risk management, this especially applies to scalping strategies and work on the minute charts.