Having a good strategy when speculating in the world of Forex is essential to obtain long-term profitability. Anyone can have a stroke of luck, or a good week, but in the long run if you don’t have a strategy to follow you will end up burning your account.
For this reason, we show you the best strategies to follow to obtain long-term profitability by investing in Forex.
- 1 The definitive strategy to always win in Forex
- 2 Trend Trading Strategies
- 3 Breakout in Trend Trading
- 4 Lateral Trading Strategies
- 5 Trading strategies according to the time frame
The definitive strategy to always win in Forex
I’m sure you’ve entered the blog looking for what we offer you in the title above. A definitive strategy, with which it is impossible to lose , with which to obtain great benefits without having to worry about anything…. That doesn’t existeee!
It must be clear that the strategy that one works for another is not, and that depending on the currency where you want to speculate, you can effectively apply one strategy or another. It is for this reason that there are DEMO accounts , to test the strategies and find the one that best suits your way of investing and the currencies where you invest.
And yet you have to think that the market does not always flow the same . Whether due to economic or political issues , they can take unexpected turns that, no matter how studied we have it, we do not expect.
Technical analysis is based on graphs and and takes as its premise one of the postulates of Dow’s theory: the market discounts everything.
As you already know, the graph consists of two axes that mark the time and the price of the currencies. Price action appears on the chart for interpretation, regardless of your trading style . It all starts with studying the charts and price action.
Strategies based on candlestick patterns are among the most used of all time and can be used in various markets and at different times. But as much as they are useful, relying solely on the movement of the candles is not enough as they often lack precision to give signals.
The basis of price action trading is to observe that the market often returns to the levels where it previously consolidated or turned, that is, at resistances and supports.
Most of the time, traders avoid trading near the resistance and support levels , due to the fact that you cannot know for sure if the price will rebound or if it will break the level to continue with the new trend.
Trading using the resistance and support indicators, that is, waiting for the price to bounce or break is one of the most common (but not the most profitable) trading systems. Normally, when a candle has broken the resistance or support line and the candle closes, the trader usually thinks that the price will follow the direction of the breakout.
Apart from these levels. the technical operators can use other graphic patterns such as the trend channels , the triangles , etc. Another of the best known techniques is Fibonacci retracements , which are used to try to predict future price action.
The most important point of technical analysis is the combination of the other two postulates of Dow: the market advances in trend and it does so until there are definite signals to show otherwise .
The most used indicators in trading platforms are the MACD and the stochastic indicator, designed to indicate the existence and strength of a trend.
Traders who stick to these techniques always follow the trend , that is, they buy when the market is going up and sell when the market is going down. They never open the operation at the beginning of the trend to avoid possible scares, they require confirmation that the price direction changes are the beginning of a new trend, and not a reversal.
This is why these types of traders do not like markets with a horizontal or lateral trend , with the price fluctuating in a narrow corridor.
In these situations the trends are not clear, and everyone waits patiently until a breakout of the channel occurs and a new trend appears.
Fundamental analysis, unlike technical analysis, relies on the fundamental forces that influence supply and demand as the main drivers that move price.
Fundamental analysis appeared in the stock market, at a time when no one bothered to plot price action on charts. Forex traders focus on the general conditions of the economy that supports the currency that draws our attention.
The problem is that as currency investors that we are, we have to understand that: countries are a lot like companies but currencies are not the same as stocks.
In the case of countries, unlike companies, better economic performance does not always mean an appreciation of their currency . The relative value of a currency is the result of a great variety of factors that include economic indicators, the country’s monetary policies, international developments and technological advances.
Most of the fundamental factors always remain in the category of “let’s see what happens” and are not reliable enough on their own to be the most profitable Forex system.
Before continuing with the blog, we want to leave you here with an essential book if you want to delve into one of the most famous methods that has brought more benefits to traders in the last year.
- Raw materials
Trading Contracts for Difference is useful for most of the trading styles and strategies that you will learn about in the next section.
Below we show you the different types of trading strategies available.
Trend Trading Strategies
Sometimes the market breaks out of a range, thus moving out of a resistance to start a new trend.
Once the support is broken and the new trend is created, the price moves to new lows, at this point buyers wait for the new lows to be established to take action.
As you can understand, trend-following Fx strategies sell when the price has broken support and buy when the market has broken resistance .
This type of system is one of the best known for being the most successful strategy in the world of Forex speculation.
There are indicators to tell when a trend may have started and when it did not. The indication that the trend is forming is called a breakout.
A breakout is when the market moves above the highest high or below the lowest low in a certain number of days.
This type of monitoring system requires good trader psychology . Due to its long duration, traders can experience different emotions seeing that profits are being lost because the market turns. That is why it is one of the strategies that most demand a good psychological state.
A trend following system is the best strategy to use when the Forex market is calm and trending , not when it is volatile.
Following trends can, in the long run, pay off hugely. But not everything is good, this type of strategy has some disadvantages:
- Big trends don’t abound
- Trends are hard to follow
- Conditions that signify the potential start of a trend are infrequent
In other words, this strategy tends to generate numerous losing trades . The good side is that these losses will be offset by winning trades, which, although less frequent, carry more profits .
One of the big problems is that it takes a lot of capital to be able to follow the monitoring systems effectively. Due to the fact that if we have a large capital, the chances of going bankrupt during a prolonged period of losses are reduced.
In short, these strategies can be very useful and easy to understand for beginner traders, but they must have a good PsychoTrading, if you are interested in reading more about trader psychology: The importance of PsychoTrading .
Breakout in Trend Trading
The consolidation is the term used when the market moves between bands support and resistance . That is, in a channel horizontally.
When there is a break in the channel and the marking moves above or below the limits of its consolidation, a new trend will be produced (trading opportunity).
But even a strategy as simple as this, and which at first may seem very safe and easy to follow, carries its point of risk in the Forex market. This happens to what are known as false breakouts of the consolidation channel, when the price breaks the highs but then returns to the channel.
In any situation and any strategy that we are going to follow in Forex we have to manage the risks , since adequate risk management would minimize losses in the event of a false breakout.
Breakout Fx strategies can be adjusted to react faster or slower to the formation of the new trend . Reacting more quickly will allow you to run through the new trend from its starting point, but it may turn out to contain shorter-term trends.
The use of the stop loss can help us alleviate several problems when trading currencies.
Another of the strategies that can give us the best results is the use of the simple moving average (SMA) . They are a lagging indicator that uses more historical price data than the other strategies, and moves much slower than the current market price.
The longer we set the period over which the SMA is averaged, the slower this average will move. The most common is to use the longer SMA in conjunction with a shorter SMA.
To use this strategy in the Forex we will use a moving average of 25 days (the short term) and another of 200 days as the long term average.
In the chart above, the 25-day moving average is the orange line and closely follows the actual price. The 200-day moving average is purple and can sometimes be very far from the current real price.
When the short moving average crosses the long moving average, it indicates a change in trend.
- When the short moving average moves above the long term it tells us that the most recent prices are higher than the old ones and that we have to buy .
- When the short moving average moves below the long-term moving average, it suggests a downtrend and that is our sell signal.
Apart from this function, moving averages are often used as confirmations of the general trend, which means that we can combine them using the confirmation aspect of our average to make our breakout signals more effective.
An example would be, if we receive a buy signal for our breakout and look to see if the short moving average is above the long moving average, we will place the order.
Lateral Trading Strategies
Sideways or counter-trend Forex strategies are based on the fact that most breakouts do not develop on long-term trends.
In theory, the sideways Forex trading strategy is the best Forex strategy to boost self – confidence , as it has a very high success rate. But as always, risk management is a fundamental point to consider again.
These Fx strategies are based on the resistance and support levels to hold. The problem is that there is a danger of large losses when these levels break. That is why the use of the stop loss is recommended .
Market monitoring is a good idea. The market state that best suits this strategy is when it is stable and volatile, that is, the price makes good turns but always within the range.
You do not know what the market will do in the future and if its status will change. You should be looking at all times for evidence of what its current state is to see if it suits your trading style.
The two strategies that we have just seen (the trend and the counter-trend) are intended to benefit from recognizing and exploiting price patterns, that is, the most important concepts are those of support and resistance.
Tradinc Carry Trade Strategy
The strategy that we present below is one of the most widespread Forex trading strategies among professional traders , so it is not a strategy for beginners. The best? It is easy to understand and implement.
The heart of the carry trade strategy is trying to profit from the difference between the returns of two currencies .
To understand the strategy we will imagine an investor borrowing a sum of pounds sterling. Because the benchmark UK interest rate is high, the cost of maintaining this debt is significant.
Once we have these pounds, the investor exchanges them for Canadian dollars and invests the product in a government bond that yields 0.5%. The interest received on said bond must exceed the cost of financing the debt of the borrowed pounds obtained.
But we are faced with a problem, the currency risk involved in this transaction. If during the operation the pound appreciates enough against the Canadian dollar, the investor will end up losing money. These principles apply to Forex.
This strategy works very well in times of increasing risk appetite , as investors tend to seek higher-yielding assets .
Although this strategy has been very successful, there is currently a problem. Due to the global low interest environment, it has reduced the differentials in the different interest rates during the crisis, so that as the crisis progressed, equity funds flowed towards the refuge of the Japanese yen.
Trading strategies according to the time frame
First of all, to clarify that scalping is not a trading strategy per se, but a very short-term and very aggressive type of trading.
It is often said that this type of trading makes the trader grow his heart rate and his adrenaline, since they are very fast operations looking for profit in the very short term , we are talking about minutes, even seconds.
The main idea of Scalping is to make a large number of entries (operations) that each generate small profits (normally between 5 and 10 pips each) but that by combining the small profits, a large number of green pips is obtained.
One of the biggest traders who use the Scalping method is mr. Paul Rotter. Rotter opened buy and sell positions simultaneously in the Eurex derivatives market, quickly making profits through one of these alternatives.
This is a style in which traders buy and sell multiple assets on the same trading day and mostly exiting them at the end of the day. Very rarely do day traders hold their positions overnight.
The most common time frames used by intraday traders are the 4-hour, 1-hour, 30-minute, and 15-minute charts.
This style of trading is the most common among beginners , as they are attracted by the multiple possible entries they can make during the day and are profitable.
It is true that day trading can be very lucrative (and very addictive). But at the same time it is undoubtedly the most difficult to master and at the same time that it can generate many benefits, it can result in great losses for those beginners without any experience and with insufficient knowledge.
Swing Trading is a strategy in which traders buy and sell securities with the purpose of holding them for several days and even weeks. In short, it is the traders who keep the profile between day traders and long-term traders.
Strategies of this type can only use the technical analysis of a chart to reach investment decisions . However, sometimes these types of strategies also use fundamental information , or analysis of multiple time frames. They do this to obtain more information and to make their entries more secure.
Positional trading, also known as long-term trading , can be a potentially profitable strategy for the Forex market.
This implies maintaining your long-term positions , this means having open operations in a period of time between a month and a year. The tricky thing about these strategies is having a good long-term plan and having the ability to predict the future direction of the market.
As a general rule, the long-term trader usually has several losing trades (of minor importance) until reaching the big winning trade . This allows you to risk small amounts on trades, in order to increase the frequency of the number of trades performed so that you can differentiate your portfolio.
This is a method in which the trader uses computer programs to enter and exit trades. The trader will acquire a software to which he will pass certain rules and conditions for the program to act accordingly. This method is commonly known as robot trading.
The problem with this is that the lure of wealth in robot trading lends itself to many Forex scams where novice traders invest by buying software that is ultimately totally a scam.
Many traders use market algorithms to help search for certain conditions that are part of their trading strategies in order to find the market to trade in.
Seasonal trading is about trading with the possibility of a repeatable trend year after year . This happens when some markets show seasonal characteristics due to repeatable patterns over time.