Forex strategy
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omid - Blog
omidIntroduction:
The forex market is the largest trading market in the world in terms of market volume, and for this reason, it is very popular among traders around the world. However, making profit from forex without a proper strategy seems far-fetched. A forex strategy helps traders gain insight into when or where to buy and sell currency pairs and improve their trading experience.
In this article, we will first get acquainted with the forex strategy and then we will introduce some of the best trading strategies in the forex market. Whether you are new to forex or a trading veteran, this article can be of help to you.
What is a forex trading strategy?
A trading strategy can be described as a set of rules that help traders determine when to enter trades, manage trades and exit positions in a timely manner. The trading strategy can be very simple or complex and varies from trader to trader.
Learning how to choose a trading strategy in Forex
There are very few traders who immediately find the forex strategy that suits them. Other traders need more time and have to test different strategies until they find the right strategy for them. However, note that there is no such thing as the best forex strategy. Even if you find the most suitable strategy and achieve positive results, you cannot go with the same strategy for a long time. Financial markets are constantly evolving; Therefore, you should make changes in your strategy according to the market.
When choosing a forex trading strategy, you should first determine what type of trader you are and then choose one of the popular strategies. It is clear that this is not an easy task. Sometimes a single strategy is enough; But sometimes you may need to consider a combination of several strategies.
The criteria that affect the choice of forex strategy are:
1. The trading style you prefer
First of all, you need to see what kind of trading style you prefer. Each trading style, from day trading to swing trading, requires a specific strategy. For example, day traders may use strategies that focus on daily market trends. While scalpers should use strategies that generate profit even from 5 pip moves.
2. The currency pair you choose
Knowing which currency pair you prefer in forex can help you determine the right strategy for you; Because the volatility of each currency pair is different from another. For example, the US dollar/Euro currency pair experiences different fluctuations in the market than the US dollar/Swiss franc currency pair.
3. The amount of risk you are willing to bear
Some forex strategies lead to higher profits; But they may be more risky. Therefore, it is very important to know how much you can risk and how much capital you can afford to lose.
4. The number of trades you make
The number of trades you make in a given period of time, say a day, is important. For example, some traders open one to two positions a day; While others may do 20 transactions a day. The number of trades will affect the type of strategy you choose.
5. As much time as you can afford
Some strategies only include setting a stop and a limit. With such strategies, you just need to open the position and let it take its natural course. Meanwhile, some other strategies take more time and if you adopt them, you have to constantly sit at the table and monitor the market.
Introducing the best forex trading strategy
In this section, we have introduced some of the best forex strategies. If you are a beginner, use simpler strategies. Don’t think that if you include a lot of technical indicators in your strategy, you are more likely to succeed. This may cause the accumulation of unnecessary amounts of information and conflicting signals. Start with simple strategies and gradually make them more advanced. Some of the best forex strategies include:
1. Trend following strategy
One of the most popular and simple strategies is to follow the current market trend; Because the only criterion is to trade in the direction of the current market movement. To implement this forex trading strategy, you must first identify the direction of the dominant trend and continue until the market trend reverses. When it happens, get out of the situation immediately. In this strategy, you should open a long (buy) position in an upward trend and a short (sell) position in a downward trend.
This strategy is more suitable for beginners and people who do not have the patience for precise timing. Of course, there are always small and insignificant fluctuations in the main trends, but there is no need for constant monitoring. It is enough to set appropriate stops and limits so that you enter and exit the trade automatically.
2. Range trading strategy
Range trading strategy works in trendless market. A market is trendless when the price of an asset fluctuates between two defined points. Unlike the trending market, the price in this market cannot break the support or resistance lines and therefore, it constantly moves back and forth between these two points. Using this strategy, you should sell when the price reaches a key resistance area and buy when it reaches a key support area.
3. Price action strategy
In a price action strategy, you only need to focus on using a specific tool to decide on price movements, and there is no need for Forex technical indicators. Of course, some traders like to use simple indicators such as moving averages to identify trends.
This strategy is suitable for beginners who get confused by too many indicators, as well as for traders who are looking to profit from short-term movements. By using clean charts without extra indicators, you can identify patterns more efficiently.
4. Positioning strategy
The purpose of position trading is to profit from long-term trends and ignore short-term daily movements. With this strategy, you can keep your positions open for weeks, months, and in rare cases, years.
This strategy is one of the most difficult trading strategies and requires a very disciplined trader who can stay calm and do nothing even when the position moves for hundreds of pips in a day.
5. Daily trading strategy
Day trading is one of the most common trading strategies in Forex. Compared to the one-hour strategy, the daily strategy has more reliable signals and its potential for profit may be higher. With this strategy, traders try to find 2-3 good trading opportunities per day.
If you want to close your positions before the end of the trading day and stay away from the risk of large and sudden price movements at night, this strategy is suitable for you.
6. Scalping strategy
Scalping means making small but reliable profits from small price movements every day. Some traders even target 5 pips per trade. These transactions last a few minutes. In this strategy, you should spend more time monitoring the market and focus only on one or more specific currency pairs.
Scalping comes with a lot of pressure; Because it requires a lot of concentration. If you are a beginner or don’t have much time to devote to trading, this strategy may not be for you.
7. Swing trading strategy
This strategy requires a lot of patience and discipline. It may take days to find a good opportunity, or you may even need to hold your position open for a week or more.
If you like to analyze the markets without any rush and are more comfortable with trades that last for a few days or a week, the swing strategy will suit you.
8. Breakout strategy
The purpose of the breakout strategy is for the trader to start trading as soon as the price breaks out of its range. Traders are looking for a strong momentum in this strategy. Breakout is actually a signal to enter the position and benefit from the market movement in the coming days.
In this strategy, you should closely monitor the price action or set a suitable stop for your buy and sell orders.
9. 50 pips daily strategy
One of the newest strategies in the forex market is the daily 50 pip strategy, which uses early market movements for some highly liquid currency pairs such as GBP/USD and EUR/USD.
First, you set a 1-hour candle at 7:00 AM GMT on your chart. When the candle closes, you send two orders in the opposite direction:
- First, a buy stop order placed two pips above the price ceiling;
- Second, a sell stop order placed two pips below the price floor.
Set profit withdrawal to 50 pips.
Any of these two orders that match the price movement of the currency pair will be activated and the other will be canceled automatically.
In order to manage risk, be sure to place the stop loss 5-10 pips below the lowest price of the candle at 7 am for the buy order and 5-10 pips above the highest price of the candle for the sell order.
When the asset price reaches the stop loss or take profit, the position is automatically closed. If the price does not reach any of these orders by the end of the day, you must decide whether to close it or leave it open for a longer period of time.
Important note: the effectiveness of this strategy has not yet been tested over time, and past performance cannot be a reliable indicator of future results.
10. Counter trend trading strategy
A counter trend strategy is a type of strategy in which traders try to profit from the reversal of the current prevailing trend in the forex market. In this strategy, you need to identify key support and resistance levels and place trades with the hope that the market will reverse at these levels.
This strategy, if done correctly, will benefit the trader; However, it has its own risk.
final word
In this article, we talked about forex strategy and factors influencing its choice. We have seen that in order to have a suitable strategy, we must first determine our trading style and then choose the one that works best for us among the popular strategies. Sometimes it may be necessary to use a combination of several strategies instead of a single strategy.
Sources used:
https://www.forex.com/en/news-and-analysis/forex-trading-strategies/
https://admiralmarkets.com/education/articles/forex-strategy/best-forex-trading-strategies-that-work
https://www.axi.com/int/blog/education/forex/forex-trading-strategies
