Most reliable forex trading strategy, successful and simple for everybody
What is spread trading strategy? Why doesn’t big money use popular trading strategies? What is hedging? Is there a no-loss trading strategy with zero risk? You will find the answers to these and many other questions in this article.
Forex money making strategy. What does the choice depend on?
That is why you need to look for new trading systems all the time, differently put, you need to be always in motion, in search. To be fair, that is true in a way! There is some truth, but just a little. Not all trading approaches need changing. Everything is interconnected, and strategies change, following the changes in the market itself. And now the question is: does the market often change? Any of you, without thinking, will answer - the market is changing constantly! Why did you answer so easily and quickly? Because, again, everywhere on the Internet, they write about it. Even if you did not study this information deliberately, it came to you just by chance, because there is a huge amount of it. I won’t spend much time on writing who and why publishes it, I’ll just say that this is a wrong answer. The market is constant, it doesn’t alter! Only the price of certain assets changes, but the market itself remains the same! The market change means that the principles of concluding transactions are changed, as well as products delivery schemes and many other things. And these principles never change since the first days. And, if the market never changes, why should the approaches to work in this market change? Only because we are made to believe in ...Well, the lyrical digression is over, let’s get back to the topic of the article, which is to the forex trading strategies.
Things, I’m going to talk about next, may contradict the way you understand how trading in financial markets work. So, forget about almost everything that you have read on the Internet, and try to look at forex trading from a different side.
So, all trading strategies come into two groups, according to two basic principles. These are short-term trading strategies and long-term trading strategies. And trading approaches are divided in just those that deal with big money and little money. Of course, there is no clear border, but, we shall conventionally imply that big money is the transactions by large participants of trading process (banks, funds, large individual investors). And little money is just you and me. As for the time intervals, I have already explained it in one of the articles.
So, if it sometimes makes some sense to change trading systems for short-term strategies, then global long-term strategies never change. But if the strategy is global it doesn’t mean that it won’t work at short time intervals. It will work, but not so efficiently as at long time periods. There are many reasons, and I have also described them in one of the articles.
Why trading strategy should depend on the amount of money, you trade. It is also very plain. Having a big capital, you thing in percentage points of the interest (it’s enough to earn 1% from a million dollars per month to afford everything you want. Any of you of course think that it is easy.) But if you possess, for example, 1000 USD, the challenge becomes much harder, and you have to think with the concept of money, rather than percentage points (1% from 1000 is just as much as 10 USD, and this money doesn’t make up an earning, let alone the living). Here the problems begin from; you increase your challenge, thinking that you need to gain at least 100 USD, which, again, doesn’t seem to you such a great amount. However, you forget that it is already 10% a month, the target is too ambitious, and, as experience proves can hardly be reached. That is why you want to always look for a new strategy that will allow you to meet these targets. There is such a strategy, but it won’t provide you this interest rate all the time.
So, before we move on, you need to answer the most important question: What is more important for you? To generate a modest income with the minimum risk steadily or to be able to get unstable income with an opportunity to receive high interest from time to time, running a great risk.
В зависимости от склада характера каждого из нас, все мы сделаем разный выбор. Однако в данной статье мы будем говорить о первом варианте ответа.
Global Spread Trading Strategy
Those, who started their trading career in the foreign exchange market, know just one meaning of the word “spread”. Spread is a commission, charged by the exchange or the broker to conduct a transaction in the market. A more accurate definition of this word would be “the difference between the purchase price and the sale price of a financial asset”. The key concept in this definition is the phrase “the difference between prices”. In the global market, a spread is not called a commission, it is rather just the difference between prices for different products belonging to the same group. I should make a reservation here. In the classical interpretation of spread, products or assets should really belong to the same group. For example, we compare the prices of the two most popular commodities in global oil market: USCrude oil and UKBrent oil.
Basically, it is the same oil, but it costs differently. Why? According to one of the versions, this is done to provide an opportunity not to invest large amounts of money in one asset with limited capacity, but already in two and to earn on the arbitrage technique.
At first sight, it is clear from the chart above that there are periods when these two assets have roughly equal prices, and there are periods when their prices are rather different. At the time of this writing, the difference in prices between assets was approximately 10 price units, or more precisely, 10 USD. This value of 10 USD is the target point of reference in the strategy. The essence of the work is to track changes in this difference and compare these changes with the average generally accepted. And if there are strong differences - this will be a signal for action.
The chart above presents quite a long monitoring period for these two currency pairs since 2006 till 2015. As you see, in the beginning the spread between the pairs reached all-time highs up to 55,000 points, but a few years it was narrowing to almost the parity, reaching 10,000 points. The essence of the work is again simple, you monitor the spread deviation from the average values and trade on its future narrowing or expansion. Of course, the time interval used in the chart above is very long and for the average trader or investor is something impossible. We are rather interested in shorter timeframes. Let’s see the chart of these currency pairs in a less global period of D1:
It presents the current year. It is clear that there are no such big changes as in the previous chart.
Now, it’s time to discuss how we can use these data and how to make money on this. To do it, let’s make the timeframe shorter, and switch to H4.
Since early November of 2018, there had been strong GBPUSD growth, which outpaced the growth of the EURUSD pair, and by the end of the rise, the first pair had grown by 4700 points, and the second - by 2000 points over the same period of time. This resulted in the fact that the average steady spread between the pairs widened from 14000 points to 16700 points. What does this information imply? It suggests that the current spread should again return to the established value of 14,000 some time later. It may occur in a few ways:
- A depreciation of the more expensive asset and the parallel appreciation of a cheaper asset.
- A depreciation of a more expensive asset, while a cheaper asset will remain the same.
- A depreciation of a more expensive asset and a parallel depreciation of a cheaper one, but the more expensive one will be falling faster and outrun the cheaper one.
- A further appreciation of the more expensive pair and a parallel appreciation of the cheaper one, but the cheaper one will be growing faster and outpace the growth of the more expensive one.
We only need the most suitable way. You don’t just randomly choose, but based on what have already occurred. To do it, let us study the chart and find out the key points:
- Both currency pairs are direct quotes to USD, and so, they are directly correlated (they move in the same direction as a rule).
- GBPUSD has increased almost twice as much as EURUSD
The conclusion is obvious. The spread has broadened mostly because of fast GBP growth. Therefore, the spread is also likely to get narrower due to the GBP movement.
If you study the pairs’ moving over the recent time, you may see that the GBPUSD rate is more volatile than EURUSD. Taking into account a potential growth of the US dollar that is expected by the entire global economic community, I may assume that both pairs are more likely to slide down than climb up.
So, the choice has been made. We choose the scenario where both the pound and the euro will be sliding down, but, because stronger volatility, the pound should be outpacing the euro in the number of points passed.
The direction has been determined; now, we need to identify target profit. They are defined in the task statement. The spread has widened by 2700 points, and so, it should logically narrow by the same number of points. There is one more important moment. The strategy aims at targeting the difference between the assets prices, rather than the prices for each asset separately!
Over a long period of time, the assets may be going down, but the spread between them will be the same, that is you won’t achieve a positive result. You can make profit only provided that the spread will be narrowing.
Let’s see how it will look in practice. There are two ways of entering a trade: aggressive and conservative. It is clear from the definitions that one way is less risky and another one is more risky.
Spread trade with integrated hedging (minimum risk)
When you start trading you need to enter two trades, one for each asset. You also need to provide integrated protection for your transaction in order to almost completely eliminate the risk when investing. This protection in the financial world is called hedging.
Well, we decided to operate based on the supposed decline. We also expect that the pound will go down faster than the euro. Therefore, the asset with the highest potential will be sold, and the asset with the lowest potential will serve as a protection.
Open a position: Sell (GBPUSD) 1 lot
Open a position: Buy (EURUSD) 1 lot
In this situation, it doesn’t matter to us whether the pound will fall faster, or it won’t move at all, and if the euro rises, the result will be one - profit! Once the target profit is reached, both trades are exited simultaneously, and the strategy is considered to work out. One trade will yield you a profit, and the other one – a loss. And the profit will exceed the loss, exactly by the number of points, the spread has narrowed.
Let’s study opening a spread position for some of the most liquid currency pairs
It doesn’t make any sense to study this position in detail, let’s analyze the key moments.
As you from the chart, the spread between the pairs is on average of about 1000 points. But sometimes, it broadens or narrows. For example, in late 2018, the spread between these pairs was almost zero, making about 100 points. It was clear that it couldn’t last for a long time and the spread would either broaden or the pair would change places. That is how it was, didn’t stay lower for long and, already in late November, GBPUSD took its natural place in the spread, above GBPCHF.
Currently, the spread is about 700 points, which is quite acceptable. But if you look at the chart, the franc is now higher than the pound, which is not correct historically. Therefore, the spread may get as narrow as 0 points in the near future, and then, it may broaden in the opposite direction, to the advantage of the pound.
Let’s study opening a spread position for the instruments, where it is used, probably, most often in the world:
You have already seen this chart. There are two sorts of oil, but now, I have indicated the main moments of narrowing and broadening the spread for these assets.
Unlike currency spreads, these assets are more capacious and allow you to invest huge money. And, as I wrote at the very beginning, the larger is the invested amount, the smaller is the percentage of profit that will satisfy the needs of the investor. With the amounts invested in oil price fluctuations, a movement of even 1% is enough to ensure huge profits in the annual time interval. And if the price of oil itself is very volatile, then the oil spread is a very conservative position. The more money is engaged in an operation, the less is the risk, an investors is prepared to run to reach the target; and so, the most conservative strategy is usually chosen. One of the most suitable of such strategies is the spread strategy. Well, the oil spread is a strictly regulated value that never changes randomly. It can’t change several times a week or even a month, like, for example, the foreign exchange spread. Oil is huge amounts of money, which never put into the market right away. It is always a gradual accumulation of positions, and so, the spread also changes gradually. Differently put, oil spread is shifted. For example, the spread was $5, half a year later, just in a couple of days, it becomes $10. The transaction is made; the spread yielded the profit of $5. I don’t have to say, what these 5 dollars turn into in terms of billion-dollar trades. It will take a long time to change the spread again, for the big players to accumulate a position.
In conclusion, I want to add that this strategy engages the lowest risk, compared to any other trading system, but it requires patience and accurate calculation. And the most important, you must strictly observe the entry and exit rules. The fact that this strategy is mainly used for large funds doesn’t mean that it can’t be applied to the short-term trading.
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Price chart of EURUSD in real time mode
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