WHAT ARE FOREX STRATEGIES AND WHY THEY ARE NEEDED?
Imagine that you are entering a dark and unfamiliar room. If you do not turn on the light, you can stumble on some objects, fall, hit, or break something. If you turn on the light, you can safely go around every object and get to the right place.
The Forex strategy in this context is light. Applying it, we illuminate and "see" the market, predicting its movement. Without a strategy, we are in complete darkness, make mistakes, lose money, and see no further path. Now think what is more profitable: stay in the dark or turn on the light? So what is a strategy?
A strategy is a developed system of rules, which the trader, which seeks to increase his money in the foreign exchange market, must strictly follow.
It allows you to confidently enter and exit the transaction and not open/close the trades, ultimately losing all the capital on the deposit. The strategy is like a traffic light: you always know that you open a deal when it’s green, for a yellow you’re waiting, and when it’s red you are out of the market without even considering the possibility of entry. The experienced traders know these principles, and they are mostly neglected by beginners.
It is true that having a decent real deposit, the most difficult thing is to open a trade. The strategy immediately relieves you from these serious thoughts: you just enter the market when you see a certain situation (signals). But what are the rules for the opening?
The rules for opening deals can be as follows:
- interception of the indicators installed on the chart;
- reaching certain levels;
- candles shape or candlestick combination;
- the formation of a schedule of familiar patterns (figures) and much more.
You can follow someone else's Forex strategy, you can combine them, you can develop your own, based on a lot of others. The main thing is its presence.
Testing a trading strategy in the foreign exchange market is carried out exclusively on a demo account. The test period should be at least six months. If for six months the strategy shows the results that suit you, you can use it on a real account.
THE CRITERIA FOR THE SELECTION OF FOREX STRATEGIES
There are only three criteria for the selection of Forex strategies:
- Duration of holding open positions.
- Approach to market analysis.
- The method of analyzing graphs.
Now more about each of them.
Criteria 1. Duration of holding open positions.
Some people like a marathon, and some – a sprint. The strategies are the same. By this criterion, the following are distinguished: short-term, medium-term, long term.
1. Short term.
Suitable for experienced traders. It is assumed aggressive trading: about 100 transactions can be opened per day. This also includes scalping and intraday.
- Scalping - suitable for traders with small capital. An open position can be held from 5 seconds to half an hour. Up to 200 transactions can be opened per day. But more does not mean better. Among traders, scalping is considered one of the most difficult approaches to trading. Forex scalping strategies are used regardless of the price direction (short or long).
- Intraday is intraday trading. The transaction opens and closes during the day. Such strategies are simple, understandable, suitable for all traders. There may be several deals opened per day for different currency pairs. Typically, this approach opens from 2 to 5 transactions.
Knowledge of technical analysis is required. An open position can be held from 1 to 45 days.
Such Forex strategies are suitable for both beginners and experienced traders. An open position is held for up to a couple of months, which allows you to monitor the market in a quiet mode and not worry about the current state of the open transaction. No need to sit at the monitor all the time, just open the schedule once a day. With the correct forecast, the profit is significant (up to several thousand points).
Criteria 2. Approach to market analysis (fundamental and technical)
To predict the direction of prices with the highest probability, you need to know about the fundamental and technical analysis. Someone naively believes that only one type of analysis should be mastered. Unfortunately, the market does not tolerate amateurishness. Want to make a profit? Comprehend everything.
Fundamental analysis is a forecast of price behavior based on news and the general economic situation in the world.
Why analyze news? It is the release of some important news that can lead to an abrupt reversal of the trend and reversal of the price, which you may not be ready for.
The basic rule of experienced traders is not to trade when important news comes out! Why? Because your stop orders (stop loss and take profit) are almost 100% likely to work. The best way out is to close a position before the news is released.
Technical analysis is an approach to market analysis using price chart analysis.
Such a forecast is based on the market movement in the past. Indicators act as tools for analysis, the price chart itself, and its elements: candlestick patterns (bars). Technical analysis is well suited for short-term trading in a non-aggressive market.
Criterion 3. The method of analyzing graphs (figure, indicator, candlestick)
Technical analysis is reduced to three main methods of forecasting:
- According to the figures.
- According to the indicators.
- By candles.
The figure analysis assumes the visual detection of a figure (pattern) on the price chart and a clear knowledge of where the price will go next. The direction of the price is determined by the exact rules that the trader needs to know.
Indicator analysis involves the installation on the chart of various technical indicators that will give signals to buy or sell. The abundance of indicators may not bring profit, so you need to choose some suitable and understandable for you. Experienced traders usually use no more than 2-3 indicators at a time.
Candles analysis involves the study of all the familiar combinations of candles to determine the trend change or its continuation. Perhaps the candle analysis is the simplest and most understandable.
Candles are a display of graphics in the form of rectangles whose body is colored in different colors depending on the type of candle. If the candle is dark, then the opening price is higher than the closing price. If the candle is not colored, then the opening price is lower than the closing price. According to candle patterns, one can predict the continuation or reversal of the trend.
TOP 5 TRADING STRATEGIES
So we finally got to the long-awaited and “delicious” section. Here we will look directly at the strategies themselves with a detailed and understandable description of them.
№1 Breakdown Trading
Breakdown strategy is the most common trading technique in the markets. Its essence is to find the key price level, and then buy or sell an asset when the price breaks through this level. The assumption is that if the price was strong enough to break through this level, it will most likely continue to move in that direction.
The breakdown strategy is relatively simple and implies basic skills in understanding the concept of how support and resistance levels work.
When there is a strong trend in the market and the price is confidently moving in its direction, trading using the breakdown technique ensures that you do not miss a strong movement.
Often, the breakdown strategy is used when the market is in the area of local maxima or minima defined in the past. It is assumed that the price will move in the direction of the trend, break through the highest point, and continue its movement. To open a profitable position, we need to set a trading order slightly above the maximum or below the minimum, and the transaction will automatically become active when the price touches a given level. This type of order is called a limit order.
It is important to remember that it is worth avoiding trading on breakdown when the market is not in a trend, as this can lead to incorrect transactions and losses. The reason for such losses is that the market does not have enough strength to continue moving beyond the highs and lows. When price enters these zones, it often rolls back to where it was before. As a result, those traders who opened trades in the hope that the price will continue to move with sufficient force will suffer losses.
№2 Correction Trading
Trading based on corrections requires a slightly different approach and is caused by the assumption that the price moves in a fairly strong trend and will continue to move in this direction. Such a trading strategy is based on the fact that the price, after the main movement in any direction, at some point will be rolled back slightly. At this time, traders take profits and beginners try to open trades in the opposite direction. Such kickbacks provide professional traders with an excellent opportunity to enter a trade before the price continues its movement in a given direction.
As in the breakdown strategy, support and resistance levels are also used when trading on corrections. An important role is also played by the fundamental analysis of the market.
After the initial movement, traders will already be aware of the various price levels that have been broken through in the price movement. They pay close attention to the support and resistance zones, as well as round price values, for example, 1.2500. These are the levels at which the purchase or sale will be carried out later.
Trading on corrections is carried out by traders during periods when the short-term market mood is replaced by the influence of the release of economic news. Such news may cause temporary activity in the market, which is reflected in price pullbacks from its original level.
Fast price movements can make investors nervous and close positions, which causes corrections. Since the initial movement is still valid, professional traders use the moment and buy the asset at a price lower than usual, hoping that it will continue its movement in the same direction.
Trading on corrections will not be as effective if it is not supported by fundamental factors of market analysis. Thus, if you observe a strong movement, but you cannot find the reasons why it could be caused, what might seem a correction will often be just a new movement in the opposite direction. Consequently, those who decide to continue trading with the trend will suffer losses, since the price may turn in the other direction.
№3 Reversible Trading
Reversible trading is usually practiced by traders in a more or less calm market. At this time, the movement of the market is often limited to a certain range in which the price moves in one direction or the other, without a specific direction. Traders identify key levels from which the price bounces, and make short transactions to obtain a small profit.
With this approach, as a rule, the same tools are used as in previous strategies, which include support and resistance lines, as well as fundamental analysis data.
Before proceeding with reverse trading, you need to make sure that no important news, including speeches by politicians, is scheduled for release during the session since such events can provoke strong price movements and lead to losses.
Key levels that are determined by traders who trade with this strategy usually include the highs and lows of the previous session, pivot points, Fibonacci levels, and zones in which all these levels overlap. Such overlappings are known as "mergers", and represent an excellent range of price zones, from which the price will rebound during the trading session.
Price maneuvers may vary, but, as a rule, traders tend to take a small profit of several points rather than keep open positions for several sessions.
Reversible trading works best when the market is not moving in any direction. However, trading should be done with extreme caution, because otherwise, you may incur substantial losses.
№4 Impulse Trading
Impulse trading is less related to “accurate” inputs. It is more calculated on the strength of the price movement and its duration. Traders are not looking for kickbacks or price breakouts from any particular level, but prefer to move more or less in the general direction of the prevailing trend.
This type of trading is more based on fundamental factors, but also involves the use of technical indicators, such as moving averages and oscillators, which provide trading signals.
Traders resort to impulse trading when they assume a prolonged price movement of the asset they are planning to trade. For example, if traders see future changes in interest rates in any country, they will immediately begin to buy or sell the currency of that country when these changes take effect. Other examples include geopolitical events that may last for several months or even years.
During such important changes, professional traders will look for an opportunity to open long-term deals that will last several weeks or months.
Since such an approach to trading requires a lot of time, traders are not very concerned about the entry points to the position. They are just waiting for a superficial technical analysis to provide them with the opportunity to open a potentially profitable long-term deal.
A popular indicator for this type of trading is the moving average with a period of 200. As a rule, traders wait to enter a trade when the price crosses the moving average line from one side and as soon as this happens, they enter the market.
Outputs from a position are usually determined by the same indicators of fundamental analysis as at entry. Traders monitor economic and geopolitical events and, based on this information, make decisions on the management of current transactions.
№5 Position trading
This strategy is partially reminiscent of impulse trading, however, here the factor of accurate entry into the position is even less significant. The main task of a trader using positional trading is to be in the market at a time when the price ultimately moves in one direction or another. Traders often form their position in the course of a price movement over several days or weeks. The main components of such a strategy are confidence in the prevailing fundamental conditions driving the price, and the assumption that the market, over time, will move in the right direction.
Such a description is very similar to the impulse trading style, however, the key difference lies in the approach to opening a position. When the market involves moving in one direction for a long period, traders will almost immediately sell the selected asset in very small amounts. The reason for such actions is that during a long price movement in one direction, there will almost always be corrections in the market that can be used to open profitable deals.
Such tactics provide a good opportunity to buy or sell a traded asset at a more favorable price, while blind trading with a trend will cause confusion and uncertainty during corrections. Position traders do well with emotions that help them close positions in time and take profits during short-term price movements against the main trend direction.
Given that the market moves in this way, many traders tend to increase the volume of their positions as the price provides favorable conditions for this while forming the best price to enter. This approach also implies that the initial positions may be in a long period of drawdown; therefore each individual transaction opens with a very small volume relative to the total amount of capital.
It is worthwhile to use positional trading only on those assets that have a well-defined fundamental background and are most likely to keep the trend of movement for several weeks or months. The key role in this style of trading is played not only by the confidence in opening a position but also by the ability to add the necessary volume at the appropriate time.
Well, I think after reading the article, you once again convinced yourself that following a certain strategy in the Forex market is very important for profitable trading.
If you are a beginner, then the described trading systems will help you to take the first steps in the foreign exchange market. Over time, you can create your own trading strategy. And if for now, you have no ideas about one, then you can just borrow ready-made ones.
Here I described the popular Forex strategies which are used by both novice traders and professionals (usually improved for themselves). As you can see, making such an improvement is not so difficult, you just have to practice trading for several months.