To have a shot at success in forex trading, you need robust forex trading strategies that work. This article covers some effective strategies you should consider, and general tips that can increase your chances of generating consistent profits in the market.
Forex trading strategy is a methodology a trader relies on to know when to place a buy or sell order on any tradable instrument. A good strategy contains both entry and exit parameters, thus removing the guesswork from the trading experience.
The best forex traders plan ahead on how to take a position in the market. Trading without such a plan can be likened to blindly gambling on the market’s direction. Trading without a plan may work for some time, but the likelihood of success, in the long run, is slim to none.
With a forex trading strategy, you will have a clear idea of where the market MAY beheaded. The emphasis on “may” is because even the best forex trading strategies don’t guarantee 100% accuracy in predicting the market’s direction—they only give you a high probability of directional bias.
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There are three main types of forex trading strategies. They are covered below.
Scalping forex strategies are designed to capture micro market movements within a short period. Most scalping forex strategies require you to target a few pips (usually less than 10) in 15 minutes or less.
+ The market exposure is very limited as all trades are closed within a short while.
+ There is the possibility of closing several profitable trades in just a single trading day.
+ Scalpers can focus solely on technical analysis as longer-term macro data don’t have a significant impact on such ultra-short-term trading
− Scalpers need to enter and exit a high number of trades over the course of a trading day for a shot at generating stable profits. This leads to high transaction costs (spreads and commissions).
− Sudden fundamental reports can still turn a trade in profit into a loss.
− It is difficult to stay in front of a computer for hours entering and exiting positions. The use of automated software (EAs) can help some traders deal with this aspect, but not many people have the skill.
Trend following strategies are designed to generate trading opportunities in the general mid-term direction of the market. The logic behind such strategies is the fact that the market is likely to continue in a specific direction for a period. Trend following strategies basically try to“go with the flow".
+ Trend followers don’t have to spend too much time on analysing possible market direction. They wait for the market to move and then join in the existing direction as early as the strategy dictates.
+ The transaction costs are lower as you don’t have to enter multiple trades in both directions. Even when using a trend following strategy on a short timeframe like the 5-minute chart, there may be less than 4 trading opportunities per day.
+ In volatile markets, the profits from trend following can be substantial, assuming you are trading in the right direction.
− The market is not always in a trend.
− Trend followers have to deal with a lot of false trend beginnings before catching a profitable trade.
− Holding onto a position as a trend follower can be mentally tasking.
Range trading strategies try to extract profits from the market when it is in a lull or moving with no bias for a specific direction. In such a situation, the tradable instrument oscillates between specific higher and lower barriers. Such strategies attempt to help you catch the top or bottom of a move. You’ll then need to hold the trade and hope that the market returns to the previous top or bottom (depending on the trade direction).
+ When range strategies work, they can generate accurate entries and exits with little drawdowns.
+ You have a clear picture of where the market is most likely headed next with a glance at the charts.
+ They allow traders to enjoy excellent risk to reward ratios.
− The range can be broken without any warning.
− Such strategies tend to force traders into“catching a falling knife" or“suppressing a rocket". This means trying to pick a bottom or top when the instrument is strongly bearish or bullish.
− Getting an exact entry may require staying glued to the computer screen for hours. Automating the process with software or limit orders increases the chances of a loss when the market eventually moves out of the range.
Now that you know some of the main categories of forex trading strategies, here are some powerful strategy options you should consider adding to your trading arsenal. Remember, these strategies are not infallible—none of them is.
They can help you generate profits, but you will also have losing trades.
Use them at your discretion. Try them out on Mitrade demo account before risking your live funds with them.
The basic principle of this strategy is that the start of the London session (8 am British Summer Time) is usually when the day’s direction is set on many trading pairs. To trade this strategy, open the 1 HR chart of the pair you are interested in, and mark the high and low for the day (from the open of the Asian session to the start of the London session).
For a buy trade, wait for an hourly candle to close above the existing high before the London session opened, and wait for an hourly candle close below the existing low for a sell trade.
For a buy trade, your Stop Loss limit should be the day’s low and vice versa for a sell trade. The Take Profit level should be at least two times the Stop Loss value.
The Exponential Moving Average (EMA) is one of the best technical indicators in forex trading. It helps you to get a directional bias on any chart with just one glance. EMA crossover strategies deploy two EMAs of different values (lower and higher) and then take a position in the market based on the direction of the crossing.
Some popular EMA combinations for this strategy include 5 and 7, 10 and 20 (the combination used in our sample image) and 15 and 30.
Generally, you should enter a sell trade if the lower value EMA crosses the higher value option from the top to down. It is signifying a downward trend (shown in the image above). If the lower value EMA crosses the higher value variant from the bottom, it is showing an upward trend.
In a buy trade, the Stop Loss limit should be at the most recent low. In a sell trade, it should be at the most recent high. The Take Profit level should be at least two times the Stop Loss Value. Some users of this popular trend following strategy hold their position until they get an opposite crossing, but this increases the chances of losing some or all of your existing profits if the market makes a sudden reversal.
The Gann trend following strategy uses a technical indicator based on William Delbert Gann’s angles to decide the market’s next possible direction. This strategy may require you to download a technical indicator for your trading platform. For Metatrader 4, there are lots of Gann related indicators available for free. One of them is shown in the chart below:
When the Gann indicator displayed shows a yellow ribbon, it means that the market has potentially entered a downtrend. The blue ribbon signifies an uptrend. Ideally, you should enter a position just after the close of the candle that triggered the colour switch. The entry candles are marked by the three arrows.
As you can see on the chart, some of the trend switches were false dawns that would have led to a losing trade. However, the positive trades were richly rewarding. This is why you need to be careful with your Stop Loss and Take Profit limits when using this strategy.
Many users of this strategy place a Stop Loss limit at the low or high of the signal candle (the first candle that caused the switch), depending on the direction of the trade. They also trade without a designated Take Profit level, trailing the profits instead.
This is a powerful range trading strategy that attempts to predict where the market is likely to turn. The logic is that the market will turn bearish at a resistance level, and bullish at a support level. This means that at a resistance level, you enter a sell trade, and at a support level, you enter a buy trade.
There are many tools for establishing support and resistance levels. Some of the options include Bollinger Bands, Pivot Points, Fibonacci Ratios, and more. Choose a specific method and research on it extensively.
With Pivot Points, for example, you can map out the possible support and resistance levels for a day, week or month, and take trades off these levels. Below is a chart of what trading off a support or resistance looks like:
You can see how price reacted at the top of the range (resistance) and bottom of the range (support).
If you enter a sell at resistance, your profit target is the support level and vice versa. The Stop Loss limit should be 10-20 pips away from the latest high or low before your entry.
The pinbar strategy uses one element of Japanese Candlesticks to predict future price movement. The logic is that a pinbar shows that the market is about to change direction—like an arrow created by the behaviours of market participants. It is often used in combination with other strategies like Support and Resistance for a higher probability of success.
In the chart above, the red arrow shows a pinbar formed exactly on a support zone. This market went on to go on a mini bullish run.
The profit target when using such strategies can be the next support or resistance zone, or multiples of your Stop Loss value for a good risk to reward ratio. The Stop Loss limit should be placed below or above the pinbar, for buy or sell trades respectively.
The Bollinger Bands is another powerful technical analysis indicator that has been around for decades. It creates a channel around the market movements on a chart. If the touches the lower boundary, there is a possibility that the lower band will act as a support level and cause a reversal. This is shown in the image below.
Gold real-time quote on Mitrade
In this case, wait for a bullish candle close, and enter a buy trade. Place a Stop Loss limit a few pips below the latest low. Your target, on the other hand, should be the upper Bollinger band.
Still based on the Bollinger Bands, this strategy is designed to help you find the start of a new trend. Before the trend starts, the Bollinger goes into a squeeze. A break of it in either direction signifies the possible start of a trend.
The red arrow in the image shows the squeeze while the green arrow signifies the breakout. In our chart, entering a sell trade at the breakout of the lower Bollinger would have yielded a decent profit. If the breakout happens on the upper Bollinger, it is a buy trade.
For a breakout entry, place the Stop Loss limit directly above or below the candles in the squeeze area. To secure your profits, use a trailing stop or a fixed profit target.
Are you trading on Metatrader 4? Custom indicators like the“DDFX" or“Tidane Trend”are based on the Bollinger Breakout.
Here are some important tips you should keep in mind when using any forex trading strategy:
● No Strategy is Infallible
Regardless of how good they look, ALL strategies will have losing trades. Spend as much time as possible evaluating each one in backtests to see what works and what doesn’t.
● Embrace Money Management
Since we have established that it is impossible to be 100% accurate with any trading strategy, you should risk only a fraction of your trading account on any given trade. Even if a forex trading strategy has a 70% success rate, it still means you will lose 3 out every 10 trades. Proper money management ensures you don't go into deep drawdown or lose your entire trading account on those three losing trades.
● Be Realistic with Profit Targets
Although we have talked about using multiples of your Stop Loss limit as the profit target to ensure a positive risk to reward ratio, you need to be realistic. Setting a 100 pips profit target on a currency pair that has been moving an average of 50 pips per day over the last one month, is not realistic—especially when you don't intend to hold the trade for long periods.
● Experiment with Time Frames
Some strategies do well on all timeframes, while others will only work on the hourly chart and higher. Experiment with various timeframes and choose what works for you.
● Keep Emotions in Check
When you have decided on your strategy, stick to it. Remember, trading is a business of probabilities. You don't know which trade will end in a profit or loss. Keep your emotions in check, follow your strategy strictly, and let the numbers work in your favor.
A good forex trading strategy is a must if you are to achieve your dreams of making consistent profits.
Go over the options we have provided in this article, choose the one you feel most comfortable with and test it on a demo account (after a backtest). At the end of the test, you can start trading with it on your live account.
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