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The forex market is characterized by high risk, and forex strategies prove to be helpful in reducing this risk. Having a specific plan in the form of a strategy, a trader makes better investments and is more effective in his actions. Therefore, before trading, a trader should take the right investment strategy.
Forex strategies – what are they and why should you use them?
A trading strategy is not only a plan, but also a set of rules that a trader follows when making decisions. In the forex market, as in other markets, it is necessary to be disciplined and stick to the chosen strategy. This allows you to base your investment decisions on it. It happens that forex strategies evolve. A trader should know when to make trades that are not within his chosen strategy. Nevertheless, he needs overarching principles to help him make decisions.
Why should you have your own strategy?
A good forex strategy will help a trader decide which currencies to sell or buy, as well as when best to do so. It will also help him determine which information is important and plays the biggest role in such decisions.
Investment strategies are often built on signals that occur in the market, when specific factors fit the parameters of the opportunity that the trader has chosen. Many seek to simplify their investment strategy, so they opt for automation by subscribing to tools that allow them to choose the right moments to enter and exit a currency position (read also: Forex currency trading). There is also a large group of participants in the currency market, using a tool that is called copy trading. This is copying the movements of experienced market participants who have achieved good results over the years, and is a reasonable solution for less experienced traders or for people who do not want to spend long hours doing their own analysis.
Trading strategies – the 3 best for beginners
Forex strategies can be divided into basic, intermediate and advanced. The following will be investment strategies for beginners. The first two are based on following the trend. While the third strategy will be based on trading using the interest rate differential between two currencies.
What is a trend?
It is the tendency of quotations to move in one direction. Systems that follow the trend are meant to give a signal at which point it is best to connect to the trend. These investment strategies are among the simplest.
There are a very large number of investment strategies on the market that follow the trend. Each of them may look different at first, but each of them is designed to point in the same direction of the trend. Forex strategies that follow the trend can bring the trader a lot of profit. According to historical data, a sizable number of people have generated relatively high profits using this type of strategy. However, taking such a plan has some downsides that are worth keeping in mind:
- It is difficult for a trader to stick to the rules,
- Long-term trends may be rare,
- Incorrect signals of the occurrence of a trend – in a certain strategy a trader receives a lot of signals, and only some of them turn out to be profitable.
Moreover, during the end of a trend, a trader can always give back a certain percentage of the previously generated profit. It is also important to keep in mind that forex strategies that are based on the trend will require relatively high capital. This ensures that the trader will not be thrown out of the market during a small correction.
Breakout
Sometimes in the market there may be a consolidation between the resistance and support zones. The quotations will move rather in a narrow price range. Breakout then occurs when the quotes overcome the upper or lower band of the consolidation. Before the formation of a trend, the breakout must occur. In such a situation, the breakout is tantamount to a signal for the formation of a trend, as well as taking a position.
However, there is a problem. It is important to remember that not every breakout will turn into a trend. It should be noted that trading strategies also rely on proper capital management. In this case it is the same. A new peak on the chart is associated with heralding an upward trend, while a lower low heralds a downward trend. How do you estimate the length of a trend? Everything depends on the time interval on which the trader is based. A breakout above the average peak on a larger interval, will mean a higher probability of a long-term trend. In contrast, the breakout of a new peak, for example, on the M5 interval will be unequivocal with a short-term trend.
In conclusion, by choosing a time interval, a trader can determine which trend he wants to participate in. If he chooses a smaller interval, his trades will be short-term, and if he chooses a larger time interval, his trades will be long-term.
It is worth looking at the long-term trend following strategy. A buy signal occurs with the breakout of the 20-day peak, while a sell signal occurs with the breakout of the 20-day decline. The conditions are simple, but the trader is exposed to a very large loss of capital, since either a new low or a new peak does not necessarily indicate a trend. Therefore, it is possible to get false signals of the start of a trend.
This problem can be solved by stop loss. This can be done in a simple way. The stop loss will not be on the price of a specific instrument, and the trader will impose a limit on the number of days in the transaction. This is called a temporary stop loss. The transaction should be closed after 80 days. Also note that this is a long-term strategy.
If the trader finds that a certain parameter is not suitable for him, he can modify it. For example, it is enough to change the duration of the transaction from days to hours. Is is about investment strategies, it is worth remembering the historical tests.
Intersection of moving averages
Good forex strategies include a method that relies on moving averages, or SMAs. A Simple Moving Average is a simple moving average that smooths out a time series, or in short, shows the historical price over X periods. The longer the moving average setting, the slower it is.
This is a simple investment strategy, but should not be used alone. It needs to be accompanied by the first strategy shown above. By using two strategies simultaneously, the trader is able to increase his probability of profit. For example, if he receives a buy signal from a breakout, he should see the short-term moving average over the long-term one. You can use the strategy as a short-term trading strategy.
Carry trade
An easy forex strategy should be based on simplicity, so beginners can use it. The third strategy is used by both beginners and advanced traders. It is counted by some as a risk-free strategy, however, in the long term and this is not really true. Of course, there are safe forex strategies on the market, but risk cannot be completely eliminated.
Forex investment strategies allow you to profit in a long-term way. This strategy meets this criterion. As a rule, it involves selling a high-interest currency for a low-interest currency.
You can imagine yourself that a trader decides to borrow Japanese currency at a cheaper interest rate and exchanges it for a high-interest currency, where he receives 3 percent interest on government bills. If you add in any translation costs both ways, etc., the trader earns 2 percent per year.
However, one must beware of a pitfall. Forex strategies involve a certain amount of risk, and the same is true in this case. When there is a strengthening of the yen against the Canadian dollar, the trader will lose on the exchange. However, on the other hand, when the JPY weakens against the CAD, the trader gains additionally from the change in the exchange rate of the currency. Therefore, it is necessary to choose the right currency pairs to use this strategy.
If, when trading on MT4, a trader buys the base currency, which has a higher interest rate, for the quoted currency, which is a lower interest rate, each day in addition to the rate change, the trader will gain from the positive interest rate. The additional profit will be visible in the “swap” position.
For example, buying the Canadian dollar for the Japanese yen will accrue a positive SWAP, or extra profit, each night. However, it is worth remembering that interest rates are set every few months by each central bank, so everything is subject to change. This trading strategy works great when volatility is low and the market is calm.
How to develop your own Forex trading strategy?
In fact, there is no limit to the parameters that can be helpful in developing a Forex trading strategy. Often traders build their own concepts, by selecting elements of popular strategies and combining them into one that will be most suited to individual preferences and needs. Here are some important points that are part of almost every forex strategy for beginners.
Knowing your own situation
In the foreign exchange market, as with other types of capital investments, you need to consider your own personal situation in particular. There are several factors to consider in this case.
Read also: Online forex
One of them is the level of risk acceptance. Investors who are less able to make money and make up for any losses in future years may opt for more conservative investments. On the other hand, younger investors, who have more opportunities to earn in the coming years, may opt for a riskier strategy. It is not insignificant that pension funds change their asset allocation strategies along with the increasing age of the person investing. It is important to realize that risking money that will be needed to pay the bill in a while is not a responsible move.
Read also: Trading app – which one to choose?
Another factor to think about is how much time and effort a trader wants to put into forex trading. Some daily forex strategies may be optimal for traders who have a lot of time to monitor the markets during the day. Other traders who don’t have the ability or desire to do so should choose a more automated trading strategy. If an investor wants to combine active investing with professional work, and at the same time does not want his family life to lose out, he should choose the right strategy. This will help maintain the right balance.
Choosing the moment at which the trader leaves the market
No matter what situation a trader is in, he must not enter the market with capital, the loss of which can significantly affect his financial condition. At this stage, the trader should determine what funds he will allocate as initial capital. The investor must determine the moment when a loss becomes too severe for him.
In order to make sure that the trader does not exceed this threshold, he needs to set certain cut-off points. He can either do this automatically or automate this procedure, depending on the chosen strategy, as well as the level of discipline. Even if the trader believes that he will not go too deep when entering trades manually, it is best to set an automatic stop loss that will close the position if it falls to a specific rate. Another way is to use limit orders, which allow you to buy only if the currency reaches a specific rate. These are principles that are worth applying to other markets as well, as they have a universal dimension.
When it comes to forex strategies and the foreign exchange market, one of the attractive elements is the possibility of leverage. Leverage increases the possibility of generating higher profits, but it is a double-edged sword that can also lead to increased losses. For this reason, before a trader thinks about leveraged trading, he should gather experience by trading I less risky trades and make sure that he does not exceed safety thresholds that will adversely affect the personal financial trader.
Entry and exit rules
These rules are also called points and are sets of conditions that determine when a trader enters and exits a position on a currency pair. In fact, there are no universal and rigid rules that determine how many and what conditions a trader should implement. Depending on whether he prefers technical or fundamental analysis, the entry and exit conditions in the adopted investment strategy can vary.
Type of analysis
There are two basic forms of analysis that are used in the age of different markets, not just forex. Technical analysis is related to the need to dig into the numbers. It is based on collecting patterns, trends and other data to find triggers that signal it’s time to buy or hold.
Fundamental analysis, on the other hand, is a qualitative method. It takes into account things like world news, which includes interest rate changes, as well as politics and other areas. These are used to forecast how they will affect the currency. The choice of analysis depends on the knowledge and preferences of the trader. One can also test forex strategies using both analyses.
Factors that affect the forex market
By knowing the factors that affect the forex market, a trader will have a better idea of what principles are worth implementing in his forex strategy. These include:
- Inflation – the lower the inflation rate in a particular country, the higher the value of its currency, and vice versa,
- Politics – those countries that have a stable political situation are of interest to investors and traders and attract them. It is very often the case that stable national politics is associated with the stability of its currency,
- Interest rates – an increase in interest rates usually represents an action against inflation, so it also positively affects the strength of a specific country’s currency. If it has higher interest rates foreign investors, encouraged by the possibility of higher investment returns, often choose to invest in such a country. In turn, lower and lower interest rates mean a lower value of the currency, as international demand is lower and inflation is higher,
- Fiscal policy – economic activity is negatively affected by high interest rates and thus discourages foreign investors from investing in the country’s markets,
- Strength of the economy – countries that boast stable economies that are resistant to various turbulences are treated as a safe haven by investors.
Types of Forex strategies
Building your own forex strategy may not be an easy task, especially for newcomers. However, there are various forex strategies on the market that you can use and draw from to create an individual one. You can also use a ready-made investment strategy, and you can choose the best elements from several, and then create your own based on them.
Day trading is an investment strategy that is used in many different markets. Traders who use it open and close positions on the same day. What’s more, they don’t use trades that involve buying and holding positions for the following days. This type of strategy requires executing multiple trades in a single day. It also requires a considerable time commitment, as well as keeping an eye on the market during an open position. It is certainly not a suitable Forex strategy for people who do not want to spend too much time investing.
The next Forex strategy is scalping, which is also for committed traders. With a strategy like scalping, you can make many different trades in one day with one low profit. These are very fast trades. The key to successful scalping is to make a large number of trades, and to hunt for small profits that will eventually add up to a high profit. Investment platform fees are very important for this strategy (read also: Investment platform for beginners). In the case of a large number of small transactions, they can “eat” the profit earned. Returns on certain transactions can improve leverage. However, it is important to keep in mind that leverage can also exacerbate a loss when a transaction does not go the trader’s way.
If the market participant is more patient, who, moreover, applies fundamental analysis, swing trading may be the right choice when it comes to forex strategies. It involves holding currency positions for a slightly longer period of time. It usually takes a few days to a dozen days to enter as well as exit. People who use swing trading make money from price changes that are triggered by important factors. Such traders watch charts and trends, but also economic and political events that can affect the change in the price of a currency. They take advantage of price swings to realize a profit. When they close a trade, they wait for the next favorable moments in the market, which will enable them to re-enter the market and realize profits on the next trade.
Positional trading, on the other hand, is a strategy that provides for opening trades in line with the trend on time intervals that are longer than one day. Such longer holding positions on cause noise and price oscillations to be excluded. The position trading strategy does not allow realizing high profits in the short term. However, it does have some advantages, especially for those who do not want or cannot spend many hours each day following charts and looking for signals to buy or sell.
Another investment strategy is currency hedging, which also provides a hedge for transactions in foreign currencies (read also: How to invest in currencies online). This strategy can be used, for example, by companies that trade internationally and aim to hedge their finances.
In Forex, as in traditional stock markets, investors can use a trend-following strategy. But in Forex, unambiguous trends may not be easy to detect. In this case, the strategy of using price ranges proves useful. Adequate estimation of the ranges, as well as the time of entry and exit in a particular currency pair, makes it possible to realize profits through market participants.
The next strategy, which is well known to investors from other markets, is the momentum investment strategy. It is based on selecting currencies that are in a strong trend and realizing profits, taking advantage of this.
As for currency trading strategies, there are many more. Perhaps one of the ones presented will appeal to a trader and he will take some elements from them to use in his investment strategy.
Trading news
All those who are involved in forex trading know well that technical strategies dominate the market. When it comes to practice, it is rare for a currency pair to reach more than 100 pips in a few minutes just because of technical factors. However, to be useful, they must feature solid fundamentals, such as a central bank statement. It is worth remembering that in 2015 trading news played a key role primarily because of, for example, the abolition of the minimum exchange rate for the franc by the NBS, the Swiss National Bank.
Price Action
This forex strategy signifies the movement of price over a certain period of time and is widely considered one of the best strategies used when trading forex. It allows you to effectively make an insightful analysis and evaluation of the past. This trading strategy relies on the analysis of actual price movements to discover trends and relationships that will affect further trading. The candlestick chart is one of the simplest, yet most effective tools, as it helps traders visualize how the price movement has gone. High and low volatility and resistance tests, as well as consolidations are the most commonly used price action strategies.
Pop ‘n’ Stop
This method is considered one of the most effective forex strategies. When traders are having a difficult time, a breakthrough usually occurs when a sharp movement takes place, regardless of its direction. In such situations, traders are tempted to close positions and cut losses. However, if one begins to chase the price, sometimes the results turn out to be the opposite of what was intended. In order to come out of this defensively, it is necessary to determine at what point the price was “out of range”, and when its growth was stopped only temporarily.
The idea with this strategy is to determine whether a certain position is heading for disaster, and if it is, the position should be closed before this happens. Such a picture can be obtained by further observation and by identifying “pop ‘n’ stop” signals. One way to do this is to find the point at which the price is out of range, and then place a stop loss order a few pips ahead of them.
Fractals
People who trade based on the Fraktale trading strategy are not easily convinced that the market is ruled by chance. Although they may seem to follow clear patterns and trends, especially over the long term. The main idea in the case of trading when it comes to the fractals strategy specifies that they check important market trends to simple as well as predictable reversal patterns. Fractals in the currency market consist of 5 or more elements.
There are many ways to put the Fractals strategy into trading. The best is to use them in conjunction with other indicators, such as using moving averages, as well as using them at different times. Although they may seem very complicated the first time, they are important tools that can help traders with their investments.
Forex strategies are worth testing
No matter which strategy a trader chooses, before applying it to a real forex account, he should test it on a demo account. This way he will be able to determine its effectiveness, as well as verify that it meets his expectations and preferences.
Test strategies should both traders who are beginning to trade in the market and those who already have some experience in the market. Trading on a demo account is done with virtual money. This makes it possible for a trader to use different strategies without worrying about losing money. Most intermediaries, or forex brokers, give the opportunity to set up a forex demo account completely free of charge. However, some give the opportunity to use it only for a month. A person who is interested in using long-term investments should make sure before opening an account that it will be open to him for a sufficiently long time.
Read also: Best CFD broker and CFD trading
What is the best forex strategy?
A good forex strategy should answer the most important questions, such as – what is the purpose of a particular investment? The reasons can be based on fundamental analysis, technical analysis or other economic data.
Other important questions are how does a trader decide when to make a trade? For example, does he trade before or after the release of specific economic data, or does he prefer to trade during the day, night or during a specific session, such as when the Australian or US markets are open? As a rule, forex trading largely depends on the opening and closing times of the markets. This time must be determined in advance.
What type of trader expects profits? And what is the level of risk he accepts? This means that before a trader decides to trade, he should determine the levels of profits and losses. A trader can always change these levels, either depending on emerging changes in the general economy or due to the occurrence of a specific event. It is important to set real goals, especially if the trader is a beginner (read also: Forex for beginners).
It is also important to remember that the best investment strategy is one that allows you to manage your funds wisely. Some traders prefer to start by taking low risks and gradually build up their account with small, but profitable trades. It is also important to control and monitor, as well as analyze the results of your trades as you apply a particular strategy, so that you can evaluate its success. This will help you learn from your mistakes, as well as improve your strategy for the future. No forex strategy will be successful 100 percent of the time.
What is trading?
Trading is speculation in financial markets to make profits on trades. The difference between the opening and closing price of an order is the trader’s profit. When a trader buys a financial instrument at a lower price and then sells it at a higher price, he makes a profit. It is also possible to make a reverse transaction, that is, to sell an instrument at a higher price in order to buy it back later at a lower price. This type of transaction will also bring the trader a profit.
Investing and trading are some of the best ways to gain financial independence. In addition, they are also passionate, as well as allow you to broaden your horizons. However, it is important to keep in mind that trading is associated with continuous learning and expansion of investment knowledge.
It is also necessary to create an investment strategy, which is also called a trading plan. Creating an investment account can be compared to starting a business. You need to have a plan of action, as well as the development of the business, etc. The same is true for trading in financial markets. The first thing a trader should do before making his first trade is to create his plan – an investment strategy.
Read also: Making money on forex
The next step is to master all the basic terms and issues that are related to investing. It is necessary to learn the definitions of such terms as leverage, quoted currency, base currency, etc. This will enable the trader to navigate the market smoothly. This will allow him to focus on his strategy, without having to wonder during the transaction why the deposit is of this size and calculated in this currency, and the trader’s profit in another. Proper factual preparation will protect him from making a variety of basic mistakes.
It is also important to keep notes from the beginning of starting trading. This will make it easier for the trader to stick to the chosen investment strategy and the adopted plan. By writing down a certain transaction, the trader will be able to immediately see whether it was in line with the strategy or the opposite. The trader can then learn from his own mistakes, which he will have to eliminate. Moreover, the transaction log teaches consistency in action and discipline. The trader has it written in black and white what kind of results he is getting, as well as whether he is growing.
Once a trader has mastered the basic terms of trading, developed a trading strategy, the time will come to test it. The forex strategy can be tested on a forex demo account. The trader will be able to see if his strategy is profitable and suitable for him. Or are there still issues to improve? Making adjustments and corrections is a natural issue. However, one should not give up on the chosen investment strategy after just a few unsuccessful trades. However, it often happens that novice traders, after a few losing positions, give up the chosen investment strategy and look for a completely new one.
After finding a new one, once again after a few unsuccessful trades, he will give up and look for another, better strategy, which also may not bring the expected results. Searching for the perfect strategy that will not always generate profits is simply a waste of time. It can be better used to perfect one strategy that was created at the beginning of forex trading.
Then will come the time to start trading on a real account. This is the final step on the way to becoming a professional trader. After some time, it is necessary for the forex strategy to be tested in a real trading account. After all, no demo account will allow you to train yourself to properly handle the emotions that will accompany a trader on every trade (read also: Forex training courses). Even a real account with a minimal balance will already show the trader how he copes with stress and what he needs to do to control that stress as much as possible. Investing real money will be accompanied by various feelings, such as stress, fear, greed, pride, etc. As he gains experience, the trader will know how to deal with all of them.
Tips to keep in mind when investing your own capital
Here are some important rules:
- Proceeding in the same way as in the demo account. If the trader has so far acted in this way on the demo account and everything was fine, then he should act in the same way on the real account,
- Distance – it is not worth converting profits and losses into money. It is worth enjoying your own successes without comparing yourself with others,
- Reason – one should not gamble with money to be used for important needs,
- Acceptance – one should accept the investment risk and the possibility of losing money,
- Risk management – you need to learn how to manage your capital and risk.
Forex strategies for beginners are characterized by simplicity and affordability for traders. However, nothing prevents you from creating your own individual trading strategy, which will be a combination of several elements from various ready-made forex strategies. Everything depends on the trader’s situation and his preferences and expectations from trading.