Forex Trading Strategies Revealed
A forex strategy is a set of studies carried out by a currency trader to decide whether to buy or sell a currency pair at the best possible moment for maximum profit potential.
A trading strategy can be centered on fundamental analysis, event risk or technical analysis charting tools.
It is usually designed to provide a series of alerts which generates buy or sell trade decisions.
A forex strategy can come in the form of a manual or automated trading system.
Manual Forex Strategy
A manual trading strategy will involve a trader having an already set of buy/sell trading rules or conditions that he’s required to adopt based on price/indicator pattern, while he sits in front of his computer to wait for such patterns to develop.
Many traders use techninal indicators to develop their manual systems or strategies.
The trader is required to make sense off the pattern by interpreting whether it is a buy or a sell alert.
Here’s an example of the 10 pips forex scalping strategy:
It’s composed of two technical indicators that generate buy and sell trading signals and also provides the exit or take profit trigger.
You can learn the complete trading strategy rules here.
Automated Forex Strategy
An automated strategy on the other hand is an algorithm with a set of buy/sell rules or trade conditions which are subsequently molded into a software, better known as a forex robot (EA).
Most automated systems are designed for the Metatrader 4 (MT4) trading platform.
It that can be plugged onto your charts, thereby trading on your behalf – it is potent enough to initiate buy or sell orders for the trader.
In most cases, automated trading is said to eliminate the human side of psychology that greatly hampers smooth trading in a lot of traders.
How To Build Your Own Forex Trading Strategy?
In order to build your own strategy, you’ll be required to follow a well-planned route.
Note that your ultimate survival in the FX market depends largely on how successful your trading strategy will become.
The absence of a reliable trading strategy will imply that you are at the mercy of the market or that you’re possibly chasing a breakout (which might possibly turn out to be a snare).
A trading strategy is designed to scan the market for the finest set-ups, which do not in any way promise profitability but are essentially openings with measured risk.
In order for you to build a trading strategy that ensures minimal risk while guaranteeing profitability, you should do the following:
- Learn how to spot worthy trends when in an active market scenario
- Empirically pinpoint what a profitable entry looks like on the activity chart
- Determine your stop-loss and take-profit level via a well-defined risk management approach
- Incorporate a time frame that best suits your lifestyle and trading preference
Having the right mental framework is very vital in the market, as this will help erase the notion that a vast majority of traders obviously fail at trading.
However, currency trading is a personal journey and you must own up to that responsibility.
Test Your Strategy On Demo First
It is imperative that you do not risk your hard earned money just yet. You might just blow up your account before you settle in.
Test your trading strategy on a demo account for a few month, see how to it responds to the varying market scenarios as they playout.
The longer you test your strategy, the better chance you stand in the market.
Trade With a Reputable Forex Brokerage Firm
Do not make a hasty decision when choosing a broker that you intend to pass your cash over to. The FX market has a massive pool of MT4 brokerage firms to pick from.
Each broker has its weaknesses and strengths, making a call to selection, an important one.
If you’re designing a short term strategy then you’ll obviously want to factor in bid/ask spreads and execution, while those gunning for a long term trading strategy need to take into consideration the swap” rates paid by brokers.
This is true if you wish to make money on the interest rate differentials between currencies. See our selection of the best FX brokers here.
Forward and Backward Test Your FX Strategy
We find a lot of currency traders that are comfortable with back testing their strategies. This essentially will reveal how well a strategy performed in the past.
This is a good step to take, howbeit, just because a strategy did well in the past does not guaranteed future profits.
This is so because when you backtest, you actual “curve fit” to a large extent.
Deploy Suitable Risk Management
It is wise to own a rock-hard risk-management strategy and also stick to it. For instance if you have it all planned to risk 2% of your equity on one trade, abide by this…
… and don’t adjust it upward just because you feel so sure about a trade you intend entering.
You might also want to avoid moving your stop loss when a trade is moving against you. You have it all planned, stick to it!
Types of Forex Trading Strategies
Take a look at the various types of strategies you can use to trade forex online.
- pattern strategies
- fibonacci strategies
- scalping strategies
- swing strategies
- trend strategies
- counter-trend strategies
If you own a trading strategy that relies on price action, it means you rely purely on candlestick or chart patterns or a mixture of both, along with technical indicators that define price action.
It is possible to trade currencies by just staring at price bars.
This method is for all intents and purposes formed via the analysis of price movement, and it can adopt a wide range of timeframes.
A strategy that is designed to work on much lower timeframes i.e. 1-Minute and the 5-Minute timeframes, is a forex scalping trading strategy.
This type of forex trading strategy is designed to scan the market for small profits on every trade entered, for instance 5 pips, 10 pips or maybe 15 pips profits.
What this strategy does is that it replicates such trades across the trading session, thereby yielding massive gains when added up.
There’s also a strategy that relies on forex news for buy and sell signals.
If you have a trading strategy that trades based on farm payroll or employment/unemployment or interest rates figures, then it means you are trading the news.
These news releases are issued by various agencies on set dates within each month.
Caution needs to be taken when designing a strategy around economic news releases, considering its extreme volatile nature.
Basic And Simple Forex Trading Strategies
A trading strategy that deploys a set of rules that are easy to grasp and execute when trading pairs is known as a “Basic/Simple forex Trading Strategy.”
Most such simple strategies follow the trend.
Other types of forex trading strategies include the “Complex Trading Strategies” where a lot more rules or trade conditions needs to be fulfilled before executing an order.
Such systems are devoid of numerous rules or conditions that will in most cases leave the trader confused.
Complex strategies are only recommended for expert traders.