There are roughly two kinds of Forex traders out there. The first group believes that a little bit of luck and a few bucks is all you need to become a currency trader. You may have come across some of them using the word “play” instead of “trade” when they talk about the market. Needless to say, they always fail tremendously. And then there is the portion of Forex traders who understand the whole complexity of the matter and treat it accordingly. This means thorough planning and constant analysis. Of course, this approach consumes much more time, but on the other hand, this is the only way to get any positive results in your trades.
The foundation of any professional tarder’s success is a trading strategy. Strategies also known as trading methods are designed to make trading as organized and systematic as possible. Now, with the amount of trading styles and preferences available, there is also a huge number of strategies to choose from. In order to simplify the procedure of selecting the right fit strategy for your Forex journey we are going to talk about what are the strategies in general and what is the best Forex trading strategy this year. In here you will read about:
- What is a Forex trading strategy and how does it work
- Major types of strategies including: day trading, scalping trading, position trading, swing trading, automated trading and seasonal trading
- How to create your own Forex trading strategy
- Tools and software you need to successfully implement any Forex strategy
- The place to test a Forex strategy
- The example of the best strategy for 2020 for EUR and USD pair
Forex trading strategies exist to make your life easier. There are a lot of factors to be taken into consideration during trading. From which techniques to choose, to where to seek the source of necessary information. Because of online trading’s growing popularity the amount of options is larger than ever. In order to navigate this ocean of opportunities traders choose to stick with a specific course of action - aka trading strategy. Once you choose a trading method that suits you best, you will not need to worry about making an important decision on every step of your way. Simply put, a trading strategy is a guideline system that allows you to follow it step by step and focus on the outcome rather than the process.
Very obviously, depending on each individual trader’s goals and resources their trading strategies may vary on level of complexity and style. Most well known strategies proved themselves effective by many professional traders. But this does not necessarily mean that they will work just as well for you. The best way to narrow down your search for the right trading method is by answering the following six questions:
- How much money am I willing to invest in trading?
- How much time do I have for Forex on a daily basis?
- What are my financial goals? (For example you may choose to multiply your initial amount once or make trading your primary source of income altogether)
- How fast do I want to make a profit?
- What are the risks I am willing to take when it comes to trading?
- How much experience do I have in trading?
Once you have a clear picture on all of the above in front of you, it will get much easier to sort through dozens of available trading strategies. Some of them will turn out to be too difficult to follow and some will take longer than you expect. But then again, there will always be a few that would turn out to be just right. So let’s dive into the technicalities and discuss the major categories of Forex trading strategies.
Forex day trading strategies
The trading methods that fall into the category of daily are very attractive for the new traders. The idea behind day trading is fast paced buying and selling within one particular day. Day traders base their analysis on small time frame charts like fifteen minutes to half an hour and do not tend to hold their trades overnight. While this might look like a solid strategy to achieve several small wins in just one day, any of the day trading strategies require a certain level of experience and knowledge of the market. In case you do decide to go with one of the day trading methods, here are some tips on how to keep things under control:
- Limit your risks and set specific trade size limits. Risk management is a crucial concept in trading and by not allowing yourself to risk more than you can afford you can ultimately master the slow and steady approach even applied to fast paced environment of daily trading. One of the examples of this method is a highly popular ten pips a day strategy.
- Stick with a few tools that you are comfortable to use and understand well. For example, choose to work with only one or two trading indicators in the beginning to focus your attention on getting them right.
- The timeframe you use has to match with your personal schedule. Some trade Forex non-stop and some only have a couple of hours a day to pay attention to the market. So make sure you are working with a timeframe that reflects the information in a way that suits you.
A helpful tool for an intraday trader is leverage. Leverage in Forex trading is a type of credit provided by the broker to increase the trade size and therefore maximize the income of a trader. Because of the small size of daily trading profit the day traders use leverage to increase their winnings and achieve their goals faster. Depending on your broker and the specifics of your trading account you will have access to different levels of leverage and as long as you use it wisely it can make an irreplaceable tool for getting a visible result.
Scalping trading strategies
Scalping Forex strategies are based on the idea of gathering many small profits to accumulate into a big one. This involves a series of small trades that benefit of minimal changes in the price value. The key to mastering Forex scalping is to have a foolproof exit strategy, since one big setback and flush all of small victories put together. There are two types of traders who tend to use scaping - the ones who adopt it as their primary style and the ones who combine it with other more long term strategies for additional effect. But no matter which of the two you are using, it is best to stick to the following principles:
At the beginning, keep on the long side (buying) and gradually progress into balancing short and long with time.
Have a strict set of rules as a part of your strategy: for example, avoid keeping a position open overnight.
Solid technical analysis is essential to successful scalping.
Just as anything in trading, the skill of scalping comes with experience, so remain patient and keep learning as you go.
Last but not least, choose the right broker who will allow you to open and close trades as much as you need without getting overcharged in commissions or spread.
Forex position trading strategies
On the opposite side from extremely short term day trading and scalping there are long shot Forex position trading strategies. There are two main ideas behind the theory of position trading: holding on to your assets for extended periods of time and minimizing the risk ratio by limiting the number and size of transactions. Position traders do not tend to rush and usually allow for a several minimal losses before achieving a big win. This helps them to secure a larger portion of their account while still actively participating in trading to branch out their trading portfolio.
To succeed in position trading a trader needs to work out an individual way of analyzing the data. The biggest issue you might have with this type of strategy is the amount of data to consider. For an effective action plan a position trader has to compare charts with different time frames: from intarday to monthly. On top of that position trading always has to be backed up by a reliable source of fundamental analysis. But with all this said, position trading can also be considered the least stressful strategy category due to the prolonged continuity. As long as you stay focused and utilize the right tools you should be able to master this type of Forex trading over time.
Forex swing trading strategies
For those who do not wish to wait months to gain profit with position trading and find day trading too stressful, there are Forex swing trading strategies. Swing trading is still on the short term side as it focuses on capturing a single swing - a change in price value from the entering point to just before it reverses. The full swing itself however might take anywhere from a couple of hours to two weeks, so sometimes the trade will stay open for longer than initially expected. This also adds the risk of keeping your tardes open overnight - an unlikely scenario for short term strategy traders.
The pro tip to mastering the swing trading is to not get tempted by mass trends or the desire to wait just a little longer. Since the majority of swing strategies are based on technical analysis, the vast amount of the trades will still fall into the trend, but knowing when to stop is the key. Usually, the exit plan for the swing traders is to take profits just before the resistance level. Additionally, the stop loss will also be set up a little above the support level. So you can see, this type of trading lets you sort of stay on the safe side. The goal of a swing trader is to minimize the amount of moves through precise planning via the use of trading indicators. The most popular indicators among swing traders are Stochastic Oscillator and RSI (Relative Strength Index).
One more thing to keep an eye on while swing trading is if the strategy comfortably applies to the situation at the market. Different charge configurations call for different actions towards them, so make sure your action plan is valid in the current situation. Best way to do this is to learn and practice as many swing strategies as possible to prepare yourself for every possible outcome.
Automated trading strategies
Another example of a minimum stress trading approach is the automated trading method. Automated trading is the way to analyze the market and place your tardes via a computer program which can also be referred to as a trading robot. The main perk of choosing automated trading is that the trader can be virtually absent at the market while all of their trades take place. This means that the robot itself is going to systemize the market data, work out an effective strategy and process the trades. Clearly, this allows a trader using the robot to save a great deal of time as well as to remain calm while the market gets chaotic.
The downside of automated trading is mainly in the search for the right software. In the current market there are many trading robots offered and more than half of them are scams. So, in case you do decide to trade by using an automated software take your time looking for the right one.
Seasonal trading strategies
Seasonal trading is not much of a strategy as it is a philosophy. A timely trading saying tells us to sell in May and go away, and there is definitely some logic behind it. Due to various economical, political and social factors the Forex market tends to slow down and get a little unusual during the summer months. And the opposite change happens the week after Christmas - when the speed and amount of trades increase drastically. It is fair to say that while sticking to seasonal trading is a nice option for the traders with limited time or resources, it will not fit the ones who need to make profit all year round. A true professional trader does not need to trade during specific time of the year to get results. But for those who wish to keep Forex trading occasional - seasonal trading is a great solution.&
As we now have discussed some of the main trading strategy categories, it is time we move onto the ways of how to create a Forex trading strategy and what tools to use for its successful implementation as well as how to backtest a trading strategy in MT4.
Even with a large quantity of trading strategies to choose from, many traders decide to build their own strategy. The individual trading method can be either based on an existing strategy with a few alterations or designed completely from scratch. An obvious benefit of having your personal trading strategy is that will fit your goals and resources perfectly, plus, since you are the one making the rules you can always bring the necessary adjustments in the process. Here are seven simple steps on how to build a Forex trading strategy that will work for you individually:
- Select a timeframe to operate within. Depending on how much time you have available for trading and what kind of trading style you prefer, you will need to select a timeframe that meets your personal requirements. Important note: you will still need to look at several different timeframes from time to time, so by choosing the main time frame you are just setting up the basis. More specifically, this will be the frame you will use to find trading signals.
- Choose the indicators that identify the trend. Trading indicators come in several categories, one of which is the indicators that help to locate the trend. For example, the most popular trend identifier is a Moving Average (MA) used in the trick called an MA Crossover. In the crossover a trader sets up two separate averages - a fast one and a slow one, and then wait for them to cross at the chart. This point of them interfering with each other is usually a string reversal signal.
- Confirm the trend with another set of indicators. Once you have identified a trend you now need to confirm it. There are plenty of indicators that assist with that. One of them - Moving Average Convergence Divergence (MACD) works by identifying whether the trend is bullish or bearish. By comparing the values indicated by MA with the MACD you can either find the right path to move forward or avoid the false trends.
- Establish your risk rate. Sad but true, a trader has to always consider possible losses before starting to consider possible wins. There are many approaches you can take in finding the right risk ratio, but no matter what you choose you need to make sure you are one hundred percent comfortable with risking that specific amount. A good strategy is to focus on preserving the larger portion of your balance and use the smaller one in trading. However, this type only works for the traders who do not mind taking it nice and slow, as small trade sized lead to small achievements.
- The next step of how to develop a Forex trading strategy for yourself is to establish strict rules for entering and exiting the trade. This part is again very individual and varies from trader to trader based on their personal style. As you make the rules, it would be better if you went through a few existing options (for example entering when the indicators match up and exiting after a certain amount of pips has been reached) and then select the one that fits you most while making some changes to it as well.
- Write down all the specific steps and rules you will need to follow according to your strategy. Be as specific as possible and try to include many various scenarios with an easy to follow action plan. Remember, you can always make changes if something is not working right, what is important is that you learn from you exeprience and grow and develop with the market itself.
- Gather all the necessary tools and start implementing your strategy. One thing you can also try is to test your newly invented trading method in demo version which we will discuss later on. Have fun and make sure to make adjustments when needed.
As you have figured out what to do next, it is time you find out how to do it exactly. Theory is definitely a lot, but not enough to bring even the most profound strategy to life. That is why it is important we denote the nest segment to all the necessary tools you need to obtain before starting to trade.
In the center of our attention is the number one software tool of any online Forex trader - the trading platform. A trading platform is a computer program that serves as a gateway to the market as well as the analysis tool and a terminal for all of the transactions. One of the most popular Forex trading platforms at the moment is Metatrader 4 or MT4 for short. Metatrader is widely known for its broad range of features as well as high usability. This means that traders of all levels of expertise can find a feature suitable to their trading needs without having to wreck their brain on difficult to follow interface. MT4 is simple and effective. What’s more, the Metatrader platform is totally adjustable and you are free to arrange the layout according to your preference as well as to choose from over fifty trading indicators. All this comes with the chance of receiving fresh updates from time to time that translates into having the most advanced tool out there.
To get your hands on the copy of MT4 software you do not need to purchase yourself. You can simply download Metatrader 4 for free from your broker’s website. Later on you will find the recent software updates at the same place. As you download the platform and get comfortable with its variety of options, it would be a great idea to get yourself a copy of an MT4 user guide. The guide will take you through every available button and menu in the terminal. Additionally, you will get access to short description of every available indicator and even the list of hotkeys which you will find very convenient during trading. And yet another great opportunity offered to you in MT4 is a chance to practice your skills and test out any trading strategy for free in the easy to access free demo account.
How to back test a Forex trading strategy in demo account
In case you haven’t heard about demo account for Forex trading before, it is a copy of a real live account that gives you access to all the features and functions including the live feed of the market in a virtual mode. Basically, this allows traders to practice using the platform as well as develop and test their individual trading strategies. By getting access to a demo account you can take your time and gain experience in trading without risking your money, since there is no invested needed to start trading in demo. Of course, this will mean that all of your profit in the demonstration mode is not going to be real, however, all the knowledge and expertise you get will be not only real but also kind of priceless. There is absolutely no downside for starting to trade on demo account first. And there is no other more convenient tool to backtest a Forex trading strategy. To make it brief, here are some guidelines on how to back test trading strategy in MT4 demo mode:
- Before you get to practicing existing strategies and inventing your own ones, start by getting to know the platform and all of its features. You can do that by using the MT4 manual guide. This step will save you a great deal of time both in training and in the conditions of the real market.
- Take a few well known trading strategies and try to follow them in demo mode. This will allow you to get familiar with handy tools such as trading indicators and various supporting features. You will also get an idea of how different actions work out in the real market and what to look out for when you are trading.
- Do not be afraid to make mistakes. In fact, in demo account mistakes are good as they let you learn better from seeing how they play out. It is better to do this when no real money is involved, so make sure to use this opportunity at its fullest.
- Keep a record of every new technique or strategy you try. Just in case you won’t remember using a specific trading method, you can always look back to see how it worked out for you. A convenient way to store trading related information can be either Microsoft Excel or any similar sheets software. You could also make it as simple as a paper journal, just make sure to keep it organized so you can easily access the data you need when necessary.
- Even after you move on to the real account do not be shy to come back to demo every once in a while. Whether you want to practice analysis or test out a new indicator it is always better to do it risk free at first.
You now know about all the basics of Forex trading strategies. Next, as promised we are going to quickly discuss the best Forex trading strategy in 2020 for the traders who chose the EUR and USD pair.
Traders who choose EUR and USD as their preferred pair know that this can be both exciting pair to trade and an indicator of the market on its own. Since these two currencies tend to go close to each other they can provide traders with the idea for an entire market. Some of the tips for EUR USD currency pair traders in 2020 include:
- Keep your hand on the pulse of the market with the daily fundamental analysis for your chosen pair. 2020 is an exciting year for many currencies and that also affects EUR/USD. So make sure to always be in the know.
- Master the technical analysis tool called Bollinger Bands. This tool consists of three additional lines at the chart, one of them being a good old Moving Average and the other two are its modified values that can tell the trader a lot about the situation at the market. John Bollinger, the inventor of this tool, has a detailed set of rules that can help you in using the Bands.
- Alongside with daily fundamental analysis watch out for scheduled news regarding the pair. This includes both US news and the news from every country that uses the Euro as their primary currency. It can definitely be a lot, but as long as you have an idea of what to expect, you should be just fine.
By considering all of the above, you can now easily navigate through hundreds of available Forex trading strategies as well as create your own. The main advice as always: keep learning and practicing your trading skills to be one step ahead of the market. Rome was not built in a day and just like that the trader’s work is never over, so brace yourself for large amounts of info to process and get ready to become a successful Forex trader in no time.
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