Basic Forex trading strategies for beginners
The number of Forex trading strategies for beginners and advanced traders is probably as large as the number of traders themselves. Given all the factors that are taken into account
when constructing a trading strategy, this is not a surprise. The following parameters have to be looked at when creating a trading strategy: market and economy peculiarities, analysis instruments and theories, and real skills of beginner traders.
For a trading strategy to be considered simple, the following key criteria must be met: the concept should be clearly understood and it must contain enough information so that any trader is able to apply it in practice.
There are also more complex preconditions for a trading strategy, which include the following: does the strategy need permanent scrutiny, analysis, time, and money? This article delves deeper into this matter as we explain simple Forex trading strategies that work.
To begin with, there is one important issue that needs to be pinpointed – a significant error in the thinking of beginner traders that affects their perception of trading strategies.
Forex newbies usually picture the Forex market as impersonal. What they see is graphs and news pieces that have influence over the market, and they tend to forget about other traders.
This is a problem for it makes traders perceive the market as a place where they have no authority. This is a major misconception which should not be shared, because the market is steadily changing and the traders' activities absolutely do influence the market.
So, in order to perform outstandingly in Forex, a trader must be ready to do more and have a competitive advantage against other traders.
Virtually, there is no such trading strategy that can be applied to any market condition, every price detail, or any case that you confront. This is why it is crucial to become competent at one of two of the following options.
First, you might want to become an expert in one strategy and use it whenever applicable; second, you opt for mastering a small selection of strategies and apply them in a number of various cases.
Despite being the wisest ones to follow, these options have their flaws. The first one demands that a trader is extremely patient; the second one requires that you are able to hold your emotions and are not caught unaware by complex cases and conflicting signals.
This article outlines three simple Forex trading strategies that might be used in different markets, are easy to apply, and are detailed enough to be implemented.
Each of the strategies requires different amount of time spent on it, degree of capitalisation, and level of mental control. The strategies are: the carry trade strategy, the simple trend following strategy, and the simple breakout strategy.
If you are a newbie to trading, it's important that you don't just cram and copy these strategies, but comprehend the basic principles they rely on, test them thoroughly, and see where to improve them in order to align them either with your current market or your own trading principles.
One example of a beginner Forex strategy is breakout trading. It does not demand a lot of time, but can be difficult to tackle for those traders who are not patient enough and cannot concentrate on long-term results and tend to focus on immediate outcomes instead.
First step: setting
Before even looking at a chart, each trader must first know for certain what he or she is looking for. This means that you must be sure the market conditions are right before starting trading. Knowing what you are looking for enables you to go quickly through many charts without missing any important data, no matter how complicated or simple the Forex trading strategy is.
To start using a breakout, you need a ranging market. This means a relatively narrow horizontal price corridor with relatively low volatility. In this corridor, the bears and the bulls have almost equal strength.
Various methods are used to distinguish a ranging market. The Forex strategy for beginners described here applies a 200 period simple moving average (SMA) on a daily chart. The number 200 has been selected because it is roughly a number of trading days per year, so it means you are seeing a yearly average. Use the market and its average daily volatility to set a price range – for instance, it might be 50 pips on either side of your 200 SMA.
A breakout signal will then be the price closing above or below the daily range.
Second step: entering
This strategy has simple entry rules. If a candle originates on one of the sides of your 200 SMA, yet breaks out of range on the other side, you must enter in the direction of the breakout. Look for at least 50-60 pip skyscraper candle.
Third step: exiting
Exit conditions are as important for a trade as entering conditions. This applies to any Forex trading strategy revealed, simple or difficult.
Always stick to your 200 SMA for a hard stop. Hard stop is a stop of no debate and hesitation. If the price comes back to it, you should know it was a false breakout. The market is still raging, and the bulls and bears still continue at this price level.
The worst case for you would be losing 50-60 pips. The best case scenario will be if the breakout develops into a trend.
If you manage to track a stop at 50-60 pips behind the price, this will move you away from the SMA 200 to a profit
This simple Forex strategy is great due to its logic, simple use, and easiness of management. If you master it, you will only have to quickly look at your charts once a day using the breakout strategy.
This strategy's weak point is that it would not work in times when markets range a lot, for instance, during summer. Another drawback is a static range. You might notice false signals by the strategy is you look back and test it, but on the other hand, if you follow its strict exit rules, you will still receive profits from it in the long term.
Forex traders usually discuss this issue a lot. You might choose to tighten the entry conditions – this will reduce the total number of your trades but will improve your winning rate. The same applies to making the exit rules stricter – by doing so, you will face fewer losses but will also miss some profitable trades.
Every financial investor must comprehend market trends. Trend following is one of Forex's simplest strategies. Usually, the market heads in the same direction for some period of time. However, it is important for traders here to be quick at identifying and certain at entering the market when seeing a trend, so that they are among the first to benefit from it.
First step: setting
To tell a ranging market from a trending one, traders in this strategy usually apply a 200 exponential moving average (EMA) to the hourly chart. Candles closing near the EMA, as a rule, indicate a range and mean that we have to stop. Candles that close quite far from the EMA mean there is a trend here and tell us to continue. Similarly to the previous strategy, traders are looking for a breakout.
Second step: entry
For this strategy, Bollinger bands are applied to see the entry points. Bollinger bands, which are a dynamic standard deviation, confirm in this strategy if the market is ranging. They also assist in seeing a pull back – the best place to enter a trending trade.
If you see the uptrend in the market, which means both the price and Bollinger bands are higher than 200 EMA, search for a buy signal shown by the price hitting the lower Bollinger bank, which is also the end of the pullback.
To the opposite, a sell signal is shown when the market is in a downtrend and the bands are below EMA. At the same time, the price is hitting the upper band, demonstrating the end of the pullback.
Third step: exit
To see when to exit from either trade, look for the price hitting the opposing Bollinger Band – the lower in the downtrend and the upper in the uptrend. When you follow these moves, you will be able to capitalise on these trend moves without losing time on the pullbacks.
This strategy is a simple Forex trading strategy that is characterized with sound logic. On the other hand, it also has its weaknesses just like any other trading methodology.
Compared to the previous strategy, this one is more constant for it applies to hourly charts. It can also bring great results when used in trending markets, but with ranging markets this strategy might cause losing trades.
To sum up with the two strategies, take a look at how the second strategy builds upon and applies the elements of the first one.
Carry trade strategy
The third one of the three simple Forex trading strategies for beginners explained in this article differs a lot from the other two. The first two strategies are performing better in the environment of high volatility and trending market, while carry trading prefers ranging markets and does not depend on the absence of volatility. In addition, this 'set-and-forget' strategy is good for the long run, for it requires very little time to manage but takes a while to start bringing
To get the most out of carry trading strategy, you need to look for currency pairs with low volatility and the highest interest rate differential. Bigger differentials usually mean bigger swaps. Then you should trade in the direction of a positive swap, i.e. sell the currency with a lower interest rate or buy the currency with the higher interest rate. This will allow acquiring significant profits in the long run with the help of a positive swap.
The economic theory from the fundamental analysis textbook further backs the logic of the carry trade methodology. This theory stipulates that a currency with higher interest rate draws more investors and appreciates relatively to the counter currency in the long run through their financial input.
The strategy's downfall is that the trades might be influenced by short-term price swings. This is why traders should be tolerant and accept that they may be positioned negatively for long time periods. Moreover, carry trade methodology needs tough money management and considerable capital, given that such trade might last for at least a few months.
So, these three simple Forex trading strategies are quite simple to follow, and they are to some extent different from each other, which means they can be used by various types of beginner traders.
It is worth noting once again that the above mentioned example strategies blend different principles, apply different tools, and follow different rules. Although they are good to start with in Forex, they should not be considered perfect. They could be amended and perfected to some extent, and they probably would not bring you dramatic profits.
So, if you are set to prosper in Forex, make sure you think for yourself and create your personal strategies. And a simple Forex strategy should only be applied to begin with.