Simple forex trading strategy is the only way to make money on Forex.
In this article, I will deal with the concept of what is a forex trading strategy, as well as the following issues: what types of forex trading strategies exist, what the best forex trading strategies for beginners are, which strategies are the most profitable and why, if there are strategies to trade forex with zero risk, and most importantly, I’ll describe in detail how to develop your own winning forex strategy.
Forex trading strategy
Probably everyone who has ever heard about forex trading and tried to understand this topic has come across such a concept as a trading strategy or a strategy of trading. I’d like to start with the concept itself.
So, the very notion of trading strategy implies making some trading operations. The main and the most popular trading operation is the sale and purchase operation. This operation was performed by each of us many hundreds of times.
Trading in the financial market implies the same thing, there are buy and sell transactions, similarly carried out. It is like in the common market where sellers wish to sell their products more expensively, and buyers want to buy cheaper, just, instead of products, they trade financial assets (stocks, currencies, commodities, and so on …) on the exchange.
So, you understand word trading. Now, let’s deal with the concept of a forex trading strategy. Well, a strategy is a behaviour pattern in a particular situation. When you come to a food market, you don’t even think about it, but you apply your own trading strategy. What is based on? It is easy. You just buy everything that is sold.
You have an aim and understanding what exact products you need, and you don’t pay attention to the other goods. Next, you aren’t likely to buy the goods you need in the first store you come across. You rather visit all the stores, compare prices for the products you want to buy.
When you identify the price, suitable for you, you’ll find out the quality of goods, so on and on ...The entire process in your mind takes a few seconds, because strategy was determined by you a long time ago and you have applied it hundreds of times. You don’t even think that something may go wrong. You are absolutely confident in the strategy as it always yields you a positive result; you buy the needed products at better prices than without any strategy. And so, your strategy yields you a profit in the form of the money, you save up.
Now, how it looks in the financial market.
A foreign exchange is same as a common market. Trading in forex without any safe forex trading strategy, you’ll buy and sell everything at random, and so, it won’t yield any positive result, just like a purchase of a product in the first place.
Another matter is when you trade according to a simple profitable forex strategy, developed in advance. First, you define a set of trading instruments (just like goods), you are interested in. Next, you determine the price for an instrument (a product), suitable for you. There is also much to say about the quality of an instrument (a product). In this definition, the essence is how well the price corresponds to the instrument (the product). Differently put, whether the instrument is overvalued or undervalued. And only after that, when you estimate all these factors, you make a transaction of sale or purchase. That is basically the concept of a simple forex strategy for beginners.
Main types of Forex strategies
So, you already know why you need a trading strategy, now, it is time to learn forex trading strategies and in what way they differ from each other.
There is a lot of information on the Internet about forex trading secrets trading strategies for the forex market, but, like with other issues, it is mostly absolutely wrong. So, forex trading strategies are divided according to two main indicators: time and money.
Types of strategies according to time
By the average time spent on holding a position opened, trading strategies are divided into:
- Scalping (holding time is from 2 seconds to 5 minutes);
- Short-term (holding time ranges from 5 minutes to 4 hours);
- Intraday or forex day trading strategies (holding time is from 1 hour to 24 hours, in other words, an average duration of a trade is about one trading session);
- Middle-term (holding time ranges from one day to one month);
- Quarterly (holding time is most often a quarter (3 months). The reason for such a time period is operation from expiration to expiration, and the most popular expiration terms are quarterly);
- Long-term (holding time ranges from one month to q year. I, personally, prefer operating in these time periods. Why? I’ll tell you later…);
- Global (holding time is over a year. For example, I know real cases when trade held a position opened during three or four years. It is thought that Forex no-loss strategies are possible only in such time intervals).
For each of these time frames, there are about a hundred of trading strategies; that is why it sometimes so hard to make choice. It always seems to you that another strategy is better that the one, you are currently employing. That is why you always want to give up one strategy and to start employing a new one, thinking that this one should exactly be a zero risk forex strategy! This is psychology that is impossible to be removed. It will always seem to you that the most winning forex trading strategies are in free access, you just need to find them. Many combine forex fundamental strategy and forex technical trading strategies. In fact, any strategy is profitable. The result just rather depends not on the strategy, but on the way you apply it.
As for me, when I conduct forex strategy builder tutorial, I tell my students in the very beginning that the result of the training will be the development of an individual simple profitable forex strategy. For each person it will be different. But the only condition for this strategy efficiency will be strict following its rules and requirements. Simply put, you will gain profits only if you never change your strategy and follow its rules in any situation, even if at some point they seem absurd. If the number of all those who have been trained is taken as 100%, then up to this point, not more than 10-15% of them really follow this rule. And they are the people whose main work is forex trading. And what then to say about beginners who are just starting to trade. That is the public opinion is that profitable forex strategies are a myth. That is, they are constantly breaking the rules, and strategies are to blame.
Types of strategies, based on the money
According to the total funds of a traders or investors, participating in financial trading transactions, as well as according to the risk/reward ratio, trading strategies come into the following groups:
- Super risk or the most aggressive trading strategies. (In general, the strategies imply a possible loss of 100% of the funds, engaged in the trade, but they also have a huge potential that you can gain 500% of profit from one trade. Many of you haven’t even thought that this amount of profit is possible at all). This is true, and to employ such strategies, there are special financial instruments, for example, a stock option (not to be confused with a binary option - these are completely different instruments). Such strategies require tremendous patience and readiness, in case of a failure, to lose all of your investment. I also know a real example how this strategy worked out in 2014, when the USDRUB pair was growing. At that time, just in a week, the bet on the pair growth yielded a profit of 89,000%. This fact was even recorded in the history of the exchange);
- High risk. (You don’t even suspect, but this type of strategy is used by more than 95% of forex traders. Yes, all indicator strategies, namely indicator strategies that are the most popular among beginners and traders with little trading experience, are the most risky. Why are indicator strategies so popular? It is because each of us wishes just to watch others doing your job for you. And the main myth about indicator strategies is myth that they are clear and easy - the indicator itself will tell you when to buy or sell. And if you also employ an Expert Advisor, then you don’t even have to press the button, only calculate your gains and that’s it. But the statistics on such strategies is rather gloomy. It says that 98% of traders, applying indicators and Expert Advisors, lose their money, rather than gain. I described why it is so in detail in my previous article, so, I won’t get to it again);
- Hedging (It is a special type of trading strategies, which primarily aim at preventing or partial covering of losses. And the secondary goal may be making profit. As a rule, such strategies are designed for long-term trading. Most often they are quarterly strategies. They are used by big businesses that want to protect their supply of goods or raw materials from currency fluctuations. The most popular financial instruments to employ such strategies are options and futures);
- Low risk. (Everybody, who has read that far in the article, is now anticipating to learn the magic trading tool. Moving ahead, I’ll tell that there are such strategies. But, it is rather strange, this type of trading strategies is not very popular, and few people use them, even though they know those. There are two main reasons: the first is that they require quite a lot of money on the investor’s trading account. Admit, this answer is clear. If you have 1,000,000 USD it is enough to make 1% of profit per month to lead a well-off life. But very few have such an amount of money. That is why these strategies are not popular. The second reason is in the timeframe for operating, it is usually a long-term or a global strategy. This factor is also repulsive, because we all want a lot of profit right now, and not once there in a year. By the way, it is one of the reasons why I mainly work in long-term time frames. Because they belong to low-risk strategies.
But, if all these arguments did not discourage your from using low-risk strategies, I'll share some forex strategy secrets. I would say that I will do a detailed analysis of one of these strategies in my next article. The strategy is called “spread.”
So, now you understand that one of the most popular search queries on the Internet, no-loss zero-risk forex trading or a completely safe forex trading strategy, is nothing more than a myth. Such a strategy does not exist and will never exist. Where there is money, there will always be risk. No trading strategy can yield you only winning trades and only profits. Always in any, even the longest series of profitable trades, there will also be some losing ones. How strictly you follow your strategy rules is the key factor that determines whether this losing trade will affect your total financial performance, will it exceed all the winning trades or will be unnoticed.
Best Forex trading strategies
Well. I think I have described main concepts in sufficient detail, now time to talk about why you started reading this article at all. I’d like to present several trading strategies that, in my opinion, are the simplest, most accessible, and most importantly, effective.
I decided to arrange them in terms of availability and ease of use from simpler to more complex:
Trendline breakout trading strategy
According to statistics, this strategy is the most popular among the best forex strategy for beginners. It is taught by everybody, even by those who haven’t traded on a real account. Just because it is often promoted by amateurs, it is perhaps the most underestimated strategy. As I said above, any trading strategy can be forex winning strategy, you just need to use it correctly. So, this principle is the most appropriate for this simple profitable forex strategy.
This strategy was invented one of the first and is based on the main theory of forex technical trading strategies - Charles Dow theory. According to the theory, in the price chart, there are three types of trends that are constantly alternating. An uptrend is followed by a downtrend, which again is followed by an uptrend; and this wave-like movement is enclosed in a global corridor, called flat or a sideways trend.
So, when it became necessary to identify each trend separately, quite clear rules were developed for determining when one trend is replaced by another. In modern trading, this moment is called the trend pivot point or the place where the trend reverses. So, the basic rules say that a trend is considered to have reversed if:
- When the price broke through the major line of the current trend. I am sure that 99% of the modern traders haven’t even heard of this concept. According to our basic knowledge, each trend has two lines, the support and the resistance line. So, one of these line becomes the trend major line at some point. What point? It depends on the trend direction. At any moment, it is clear that an uptrend will always be replaced by a downtrend, and vice versa. That is, for an uptrend, the support line must be broken through, and for a downtrend – it is the resistance line. Therefore, the trend major line is the one that will be broken through when the reverses.
- The price has formed a local extreme that is higher/lower than the previous one in the ongoing trend.Differently put, if the price has went through the resistance line in the chart and formed a local low that is higher than the previous one, the requirement is met.
- The price, having broken through the main trendline, reaches or exceeds the previous high/low. Differently put, if, in the current downtrend, the price breaks through the resistance line from below and reaches or exceeds the previous high, the requirement is met.
Well, if all the three requirements are met, you can state that the trend has reversed, and so, you can start operating in the new trend.
The chart above presents how exactly you need to enter trades according to this strategy.
The strategy work principle:
You open a sell position if there was an uptrend and all the three requirements of trend reversal have been met.
Thus, you put a sell order at the level of the local low, preceding the point of the main trend line breakout or lower (sell zone 1). Target profit is at the level of the local low, preceding the sell entry (profit zone 1). A reasonable stop loss can be put either at the local high level, preceding the trendline breakout, or higher (stop zone 1).
You open a buy position if there was a downtrend going on and all the three requirements have been met. Thus, you put a buy order higher or at the level of the local high, preceding the trend major line breakout (Buy zone 2). A take profit will be at the local high, preceding the buy entry (profit zone 2). A stop loss will be lower or at the level of the local low, preceding the trend main line breakout (stop zone 2).
If you understand it, the strategy is quite simple and doesn’t require constant attention.
- It is easy to use;
- You can operate in any timeframe;
- You can trade with pending orders;
- The levels to put limit orders are always clear;
- It yields as a rule short and quick profits;
- You can trade nonstop due to the constant change of trends;
- The profit/loss ratio for 10 trades is 7/3.
- The Stop level is almost always above the Profit level;
- There are big errors in short timeframes;
- It is very dependent on the number of trades.
Fan principle to spot the trend reversal
This strategy is mostly like the previous one; it was developed to filter off the great number of the previous strategy, thus pressing down the profit size, but the stop size became really less.
The strategy suggests spotting the trend reversal and trading in the new trend. You identify the ongoing trend, find out the levels of its beginning and assumed end.
Next, you draw the main line of the ongoing trend. In the given example, there is a downtrend, so the major line is the resistance. If anybody has forgotten, it is drawn by the local highs of the ongoing trend. After that, you expect the price to go through this line. It will be a nearly signal of a possible trend reversal. When the line has been broken through, the entire preceding trend is divided into two parts and you draw a line at the level of 50% from it.
Thus, there will be a cross in the chart when the horizontal line (50% trend) crosses the vertical line, drawn through the ending point of the downtrend (end down trend). Now, draw a straight line through the points of the downtrend start (start down trend) and the meeting point. An entry signal will be when the price goes through this line.
You open a buy position when the price again goes through the drawn line and at the moment of the crossing it is already possible to open an order (Buy zone). The level to put a take profit is identified in the following way: the distance from the horizontal line (50% trend) to the level of previous trend start (High trend) is divided into 3 sections (30% new trend), and the target profit is put in the zone where the upper third of the distance starts (profit zone). A stop loss isn’t put right away because it is the zone that is below the breakout indication line (stop zone). Differently put, a trade is loss-making when the price, having broken the middle line upside, went below it some time later.
- Stops are rather short, so, you’ll avoid big losses;
- It is easy to use;
- The profit level is almost always higher than the stop;
- The profit/loss ratio for 10 trades is 7/3.
- The stop can be triggered by the market noise just after you enter the trade;
- It misses over a half of a trend;
- It often sends false signals in short timeframes;
- It strongly depends on the number of trades.
Three MAs breakout strategy
My list of strategies won’t be complete without indicator strategies that I like so much.
This strategy is one of the basic indicator strategies and, like the previous ones, is quite simple and applies the trend reversal principle. It is one of the simplest trend trading strategies, based on the trend reversal, indicated by three exponential moving averages (EMA).
Contrary to the general understanding of trend indicators operate, the strategy is aimed precisely at signals of the trend reversal and signals to enter a trade. The strategy employs three EMAs with different averaging periods: blue EMA -21, red EMA -14, green EMA – 9. The trend reversal signal, and, accordingly, the entry signal, is the point where all the three EMAs meet.
A sell signal is sent when the green and the red MAs cross the blue MA from above, and the green MA must also cross the red MA from above (sell zone 1,2). You take the profit when the green MA crosses the red one in the opposite direction (profit zone 1(s),2(s)). A stop loss is basically a target profit at the same time, since, when the green line crosses the red one in the opposite direction, it is an exit signal (stop zone 1(s),2(s)).
A buy signal is sent when the green and the red Mas cross the blue one from below, and the green MA must also cross the red one from below (Buy zone 1,2). You take the profit when the green line crosses the red one from below (profit zone 1,2). A stop loss is in fact a take profit at the same time, as the inverted meeting of the red and the green lines is the exit signal (stop zone 1,2).
- It is the simplest of indicator strategies;
- You can receive a big number of signals;
- Stops are very short;
- The profit size is much more than the invested amount;
- You can operate in any timeframe;
- The profit/loss ratio for 10 trades is 6/4.
- It is an indicator strategy;
- Entry signals are often lagging;
- It strongly depends on the number of opened positions;
- You need to constantly monitor your trades;
- You can’t operate with pending orders.
Divergence trading strategy
Divergence in forex is the contradiction between the price and a technical indicator. Differently put, when an indicator signals rise, and the price is going down down at the same time, it is divergence. The opposite situation is convergence, when the price chart and the indicator are moving in the same direction. Convergence is a normal market state.
And, again, it is an indicator strategy. All indicators are divided into oscillators and trend indicators. The previous strategy is based on the trend indicators MAs. But divergence can be indicated by only oscillators. This strategy applies MACD and Awesome Oscillator (AO) by Bill Williams. MACD specially was designed to indicate this phenomenon, but it has a number of drawbacks, which later resulted in the development of a new, more accurate oscillator Awesome Oscillator (AO). So, I’ll describe this strategy, based on the signal, sent by the AO indicator.
The above chart presents the EURUSD movement in the H4 timeframe. As I have already written above, a divergence occurs when the price chart and the oscillator are moving in the opposite directions. The trend direction can be identified according to the highs and lows. Therefore, you compare to consecutive lows or highs with the lows or highs on the oscillator. If you draw straight lines through them, you should focus on the points, where the lines meet, rather than go apart.
In technical analysis, divergence is thought to be the strongest signal of the trend reversal.
How to spot a divergence signal:
- The AO indicator, unlike MACD, is painted in different colours. Declines are indicated with red. An increase is highlighted with green.
- The wider is the gap between the oscillator and the price chart, the stronger is the signal, and so, the more is the expected profit.
- A divergence signal is true only provided that the trend in the price chart corresponds to the indicator. Differently put, if the chart indicate the price growth, than the graphs of the indicator must be above zero level.
A buy position is entered when all graphs of the indicator cross zero level after the divergence signal, and there is the first column above zero level (Buy zone). The profit is taken when in the new series of columns, there is the first column lower than the previous one or it is red (Profit zone). A stop loss is basically the exit level, or the take profit. Differently put, you exit the position once the indicator crosses zero level again (stop zone).
- The strategy is fully independent from the timeframe.
- Signals are sent not so often, so you can save time;
- It is easy to identify signals;
- Profit size is always more than a stop;
- You can accumulate the position;
- The performance doesn’t depend on the number of trades;
- The profit/loss ratio for 10 trades is 8/2.
- It is an indicator strategy;
- Entry signals are often lagging;
- Constant monitoring is needed;
- You can’t operate with pending orders.
Volume candlestick strategy
And, finally, I’ll describe my own original strategy that should draw a line under my delving into the best trading strategies.
This strategy applies price patterns, that is, it is based on looking for and employing a technical pattern. In this case, the pattern is a single candlestick in the price chart. It is the candlestick that has no or a very short body and very long shadows. I called this candlestick a volume candlestick. It is because when it emerges, there are huge trading volumes, clashing in the market. By the moment of the candlestick close, the market hasn’t yet determined the trend direction, since the demand and the offer are roughly equal. In the next moment, the trading volumes of either the buyers or the sellers outweigh, which causes the price to move in the right direction. At that moment, when the price breaks through the low or the high of the volume candle, there is an opportunity to join the winner of the previous fight. And this, as you understand, is a zero-risk forex trading strategy. For what could be the risk if you trade in the direction of the prevailing volume. They write everywhere that the best strategy is when you trade with the trend. The problem is that very few people succeed. And this strategy provides such an opportunity for a short period of time.
You open a sell position, when the price has reached or broke through the local low of the volume candlestick (Sell zone). The target profit is put at the distance, not longer than the distance between the closing price and the low of the volume candlestick (Profit zone sell). A reasonable stop loss is put at local high of the volume candlestick (Stop zone sell).
You open a buy position, when the price reaches or exceeds the local high of the volume candlestick (buy zone). The target profit is put at the distance, not longer than the distance between the closing price and the high of the volume candlestick (Profit zone buy). A reasonable stop loss can be put at the local low of the volume candlestick (Stop zone buy).
I have developed a few rules for this strategy to perform more efficiently:
- The body of the volume candlestick must be at least 10 times less than its total length;
- The size of each shadow should be not less than 400 points;
- I operate with this strategy only in two timeframes: Н4 and D1, but it is the most efficient in the H4 timeframe.
- Rare but very reliable signals;
- It is quite easy to identify signals;
- You can completely automate trading by using pending orders;
- Profit/loss ratio is 9/1;
- I believe it is the most reliable trading strategy currently existing.
- As for me, there aren’t any!!!
How to develop Forex trading strategy
In the final part of my article, I’d like to write about designing your own forex trading strategy.
Any task will be successfully completed if the number of rules, it suggests, are observed. An individual strategy is a number of rules, which are featured by a particular user of the strategy. It often happens when the same strategy works differently, applied by different people. I conveyed a number of the most important principles of a strategy development below:
Each of us has at least once heard or read that psychology is the most important thing for a trader. It is really so. But the concept of psychology itself is rather extensive, and very often simple technical mistakes are confused with it. In fact, the psychological factors, affecting your strategy, are not that numerous:
- Fear of the sharp price swings (everybody, who has looked at the price chart even once, faced this problem. It is when you entered a trade and the price starts swinging sharply. Even if the price is moving in the needed direction, you feel certain discomfort. And when it is going against you...You forget about the stop loss. You just want to exit the trade as soon as possible not to watch all of this. But each person is individual, and the ability to get through such shocks is different for everyone. Someone is scared, and the other, on the contrary, feels fine in a volatile market. Therefore, the first thing you need to decide before creating a strategy is how comfortable the price fluctuations are for you. If they scare you or create discomfort - trading on the news or in a volatile market is not for you.
- Willingness to put up with losses. (The phrase may seem an exaggeration, but it fully explains the matter. Everybody knows that you need to invest something to make profit. And when it is about investments, the risk emerges by itself. But all people see risk differently. Of course, all of us want no risk at all, but it can’t be so. And the more time you spend on trading, the more you realize that there is always risk. Some people are willing to put up with risk and when their trade is making a loss they take it easy. Other people, at the sight of even the minimum negative value in the profit section, start getting nervous and lose their balance. I just want to say that if you are not ready to see even a minimal loss on the screen - trading is not for you. Your perfect trading strategy should consider your individual ability to treat losses.
- Risk-taking. (The concept overlaps with the previous one, but rather reflects the trader’s desire to risk with his/her own funds. Those who are absolutely not ready to risk will choose a conservative trading strategy that implies minimum income with minimum risks. Some people are not too worried about losses and are willing to invest in trading more money, and sometimes their entire deposit. The main advantage here is the opportunity to earn more. The greater is the risk, the greater is the possible profit. You should develop a strategy based on your willingness to risk either a part of your funds, or all at once.)
This group includes all the factors that don’t refer to the psychology matters, in particular, time, money, desires and others. But let’s see it in more detail:
- Time. (Time is the main deterrent that can affect your trading results, even money is not so important. It’s not enough to know if the price will go, up or down - the main thing is to know when this will happen. Current trends in the development of financial markets are reduced to the fact that the average time a trader holds a trade is reduced almost daily, and if a couple of years ago it was about hours, now it’s not even about a minute, which means that more and more people are absolutely not ready to wait. Everybody wants quickly, with no risk and right away. Of course, those who make money on inexperienced traders perfectly know about this statistics and understand that most of such potential victims are short-term trader, and so, they invent more and more new tricks and market mechanisms. So, before you choose a strategy, determine whether you a ready to wait for a few month before achieve a positive result, or it is too long for you and you need the result the sooner the better.
- Money.(It makes no sense to write in great detail here. We all understand very well that our profit directly depends on the size of our deposit funds. The strategy also strongly depends on this. There is no point in choosing a conservative strategy that will generate 2% per month, if you have a 100 USD on your account. And there is no point in taking risks and choosing an aggressive strategy, which involves the more than 50% of the deposit in a trade, if you have 1,000,000 USD on your account.
This is the main set of factors that you need to take into account if you want to develop a trading strategy for yourself.
In conclusion: As a rule, if you want to create your trading strategy, you do not need to reinvent the wheel and develop it it from scratch. It is enough to take one of the basic strategies and simply adapt it for yourself, taking into account your personal factors, which I described above. Of course, if this seems difficult or impossible for you, you can always contact me, and we will make up your personal trading strategy together.
Most importantly, if you decide to use a strategy - do not give up on it when you receive your first losses, this can only be a period. Remember, any strategy works on a period of time, and in order to get a result, you need to collect statistics from a large number of trades according to this strategy.
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Price chart of EURUSD in real time mode
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