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You may have heard that maintaining your discipline is a key aspect of trading. While this is true, how can you ensure you enforce that discipline when you are in a trade?
One way to help is to have a trading strategy that you can stick to.
If it is well-reasoned and backtested, you can be confident that you are using one of the successful Forex trading strategies. That confidence will make it easier to follow the rules of your strategy—therefore, to maintain your discipline.
A lot of the time when people talk about Forex strategies, they are talking about a specific trading method that is usually just one facet of a complete trading plan. A consistent Forex trading strategy provides advantageous entry signals, but it is also vital to consider:
- position sizing
- risk management
- how to exit a trade.
Picking the best Forex strategy for you
When it comes to what the best Forex trading strategy is, there really is no one single answer.
The best FX strategies will be suited to the individual. This means you need to consider your personality and work out the best Forex strategy to suit you.
What may work very nicely for someone else may be a disaster for you. Conversely, a strategy that has been discounted by others, may turn out to be right for you.
Therefore, experimentation may be required to discover the Forex trading strategies that work. Vice versa, it can remove those that don’t work for you.
One of the key aspects to consider is a timeframe of your trading style.
The following are some trading styles, from short time-frames to long, which have been widely used during previous years and still remain to be a popular choice from the list of best Forex trading strategies in 2017.
- Scalping. These are very short-lived trades, possibly held just for just a few minutes. A scalper seeks to quickly beat the bid/offer spread and skim just a few points of profit before closing. Typically uses tick charts, such as the ones that can be found in MetaTrader 4 Supreme Edition.
- Day trading. These are trades that are exited before the end of the day, as the name suggests. This removes the chance of being adversely affected by large moves overnight. Trades may last only a few hours and price bars on charts might typically be set to one or two minutes.
- Swing trading. Positions held for several days, looking to profit from short-term price patterns. A swing trader might typically look at with bars showing every half hour or hour.
- Positional trading. Long-term trend following, seeking to maximise profit from major shifts in prices. A long-term trader would typically look at the end of day charts.
The role of price action in Forex strategies
To what extent fundamentals are used varies from trader to trader. At the same time, the best FX strategies invariably utilise price action.
This is also known as technical analysis.
When it comes to technical currency trading strategies, there are two main styles: trend following, and counter-trend trading. Both of these FX trading strategies try to profit by recognising and exploiting price patterns.
When it comes to price patterns, the most important concepts are those of support and resistance.
Put simply, these terms represent the tendency of a market to bounce back from previous lows and highs. Support is the market’s tendency to rise from a previously established low. Resistance is the market’s tendency to fall from a previously established high.
This occurs because market participants tend to judge subsequent prices against recent highs and lows.
What happens when the market goes near recent lows? Put it simply, buyers will be attracted to what they see as cheap.
What happens when the market goes near recent highs? Sellers will be attracted to what they see as either expensive, or a good place to lock in a profit.
Thus recent highs and lows are the yardstick by which current prices are evaluated.
There is also a self-fulfilling aspect to support and resistance levels. This happens because market participants anticipate certain price action at these points and act accordingly.
As a result, their actions can contribute to the market behaving as they expected.
However, it’s worth noting three things:
- support and resistance are not iron-clad rules, they are simply a common consequence of the natural behaviour of market participants
- trend-following systems look to profit from those times when support and resistance levels break down
- counter-trending styles of trading are the opposite of trend following—they look to sell when there’s a new high and buy when there’s a new low.
Trend-following Forex strategies
Sometimes a market breaks out of a range, moving below support or above resistance to start a trend. How does this happen?
When support breaks down and a market moves to new lows, buyers begin to hold off. This is because buyers are constantly seeing cheaper prices being established and want to wait for a bottom to be reached.
At the same time, there will be traders who are selling in panic or simply being forced out of their positions. The trend continues until the selling is depleted and belief starts to return to buyers that the prices will not decline further.
Trend-following strategies buy markets once they have broken through resistance and sell markets once they have fallen through support levels. Trends can be dramatic and prolonged, too.
Because of the magnitude of moves involved, this type of system has the potential to be the most successful Forex trading strategy. Trend-following systems use indicators to tell when a new trend may have begun but there’s no surefire way to know of course.
Here’s the good news.
If the indicator can distinguish a time when there’s an improved chance that a trend has begun, you are tilting the odds in your favour. The indication that a trend might be forming is called a breakout.
A breakout is when the price moves beyond the highest high or lowest low for a specified number of days. For example, a 20-day breakout to the upside is when the price goes above the highest high of the last 20 days.
Trend-following systems require a particular mindset. Because of the long duration—during which time profits can disappear as the market swings—these trades can be more psychologically demanding.
When markets are volatile, trends will tend to be more disguised and price swings will be greater. This means a trend-following system is the best trading strategy for Forex markets that are quiet and trending.
An example of a simple trend-following strategy is a Donchian Trend system.
Donchian channels were invented by futures trader Richard Donchian and are indicators of trends being established. The Donchian channel parameters can be tweaked as you see fit, but for this example we will look at a 20-day breakout.
Basically, a Donchian channel breakout suggests either of two things:
- buying if the price of a market goes above the high of the prior 20 days
- selling if the price goes below the low of the prior 20 days.
There is an additional rule for trading when the market state is more favourable to the system. This rule is designed to filter out breakouts that go against the long-term trend.
In short, you look at the 25-day moving average and the 300-day moving average. The direction of the shorter moving average determines the direction that is permitted.
This rule states that you can only go:
- short if the 25-day moving average is lower than the 300-day moving average
- long if the 25-day moving average is higher than the 300-day moving average.
Trades are exited in a similar way to entry, but using a 10-day breakout. This means that if you open a long position and the market goes below the low of the prior 10 days, you want to sell to exit the trade—and vice versa.
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Counter-trend Forex strategies
Counter-trend strategies rely on the fact that most breakouts do not develop into long-term trends. Therefore, a trader using such a strategy seeks to gain an edge from the tendency of prices to bounce off previously established highs and lows.
On paper, counter-trend strategies are the best Forex trading strategies for building confidence because they have a high success ratio.
However, it’s important to note that tight reins are needed on the risk management side. These Forex trade strategies rely on support and resistance levels holding. But there is a risk of large downsides when these levels break down.
Constant monitoring of the market is a good idea. The market state that best suits this type of strategy is stable and volatile. This sort of market environment offers healthy price swings that are constrained within a range.
Do note, though, that market can switch states. For example, a stable and quiet market might begin to trend, while remaining stable, then become volatile as the trend develops.
How the state of a market might change is uncertain. You should be looking for evidence of what the current state is, to inform whether it suits your trading style.
Discovering the best FX strategy for you
Many types of technical indicators have been developed over the years. The great leaps forward made with online trading technologies have made it much more accessible for individuals to construct their own indicators and systems.
You can read more about technical indicators by checking out our education section or the trading platforms we offer. A great starting point would be some of the simple, well-established strategies that have worked for traders already.
By trial and error, you should be able to learn Forex trading strategies that best suit your own style. Go ahead and try out your strategies risk-free with our demo trading account.