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How to Succeed in Trading With the Most Profitable Forex Strategy

September 06, 2016 12:28 UTC

Forex Trading Strategies

Now, you are about to submerge yourself into currency trading, right? You might even have decided on the currency pair. What you lack is the universal recipe of how you can earn your fortune on currency trading. We've got both bad and good news for you. Good news is that your secret to success will be closely associated with a profitable Forex trading strategy that you will choose. The bad news is that there is no universal recipe: even if you pick the most statistically profitable strategy, you will have to adjust it to your trading style and to the present-day market conditions. Don't be frustrated though: in this article, we'll provide you with some of the most profitable Forex trading strategies and tell you a bit about each of them.

First of all, let's try to understand what people usually mean by a "Forex trading strategy". It is a sequence of calculations and estimations which result in traders deciding on opening or closing of their trading position. Charts, technical analysis, major news and events, etc. — it all can serve as a foundation for making certain decisions. Other elements of a trading strategy can be indicators and tools that trigger trades. A combination of all these determines the type of the strategy used by the trader to generate profit.

There are ready-made strategies which are either manual or automated, free or which come at certain price, and strategies which are developed and personalised for a particular trader's needs. While using the ready-made ones might seem like a very attractive option, it's every trader's task to to find his or her own profitable Forex strategy.

This choice is often determined by a number of factors. For example, it's always better to go for a simple profitable Forex strategy than trying to understand the elaborated one that will turn out to not fit your style. You should be able to understand it rather quickly, so that you can start using it right away. It doesn't matter whether it is manual or automated — whatever is comfortable for you should be fine.

For a start, you can try to use some help from your broker: they usually have an arsenal of strategies available at a certain cost. If you are a beginner, the recommendation for you will probably be what is sometimes considered the most profitable Forex strategy, the one that's based on the Simple Moving Average indicator (SMA).

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What you need to know about the SMA Forex trading strategy

The SMA (or Simple Moving Average) strategy will help you to balance out the risks and profits. SMA is a line on the price chart which is calculated using the sum of closing prices divided by the number of periods. This way, if you look, for instance, at the 12-period SMA, your "buy" trigger should be the moment when the price goes above the SMA line. When you see that the price line goes beyond the SMA line, you might consider selling.

SMAs help traders to see the liquidity of the currency over short periods of time. Just as its name suggests, it is a simple indicator which can (and often should) be used in any strategy, especially if you combine it with other Forex indicators or SMAs for longer periods of time to determine the beginning of an uptrend or downtrend.

A simple moving average is a standard indicator which is very easy to plot on your graph; that's why it is recommended for everyone as a starting point in their trading activities. SMAs are designed to be used by both beginners and experienced traders.

As a part of your customised profitable Forex strategies, SMA will be the first tool to maximise your profits and minimise the trading risks. It will provide you with signals of when it's better to buy or sell, or hold your positions. What's most important, SMAs are graphical objects that allow you to see what is happening to your currency pair on the time graph.

Surely, there is always a need to perform backtesting before starting to use moving averages when real money is involved. SMA can be also a powerful tool which can be used to test your account with the broker of your choice. When you are only beginning to trade currencies, you can start with applying SMA on its own, then plot more SMAs for longer periods of time, and then apply other indicators or instruments for more profitable trading.

Having started with a basic indicator, we will continue to expand your understanding of the profitable Forex strategies by providing you with a few examples below.

Positional trading as one of the most profitable FX trading strategies

When you are starting to trade currencies, a strategy you might end up with could be positional trading. In other words, a positional trading strategy refers to long-term trading. There are a lot of traders who believe it to be the number one Forex profitable strategy. For many, it is associated with long-term and steady success in trading. Surely, there are risks involved, as with any other methodology, but, once taken seriously and with all precautions, positional trading can multiply your capital.

Long-term trading is good for those who intend to keep their positions for long periods of time, usually for more than a month, up to a year. You will be seeing high volatility, up to 1,000 pips, over this period of time, so you need to stay patient and wait. Big market moves are associated with high risks, which is why you should avoid high leverage ratio and high margins. The biggest shortcoming of positional trading is Swaps which occur every once in a while (you might consider those as fees which traders should pay for keeping their positions open) — sometimes, Swaps can exceed the profit from trading. Just keep that in mind when calculating the potential expenses.

In fact, when starting to trade long-term, you should take into account a number of factors which might affect your profit or increase the risks. Plan everything carefully, study the market, and analyze the price behavior, so that you can make most accurate predictions. Most importantly, be ready to accept any outcome. In general, however, positional trading is a very beneficial currency trading strategy; and there are two main reasons for this. Firstly, it is designed for traders who do not have the time or patience to spend hours online daily — you just set up the strategy and only check your trade every now and then. Secondly, the strategy makes it possible for you to generate more revenue than if you were trading short-term.

In order to get started with long-term trading, the most important step is to choose your currency pair. You need to be familiar with it and its market behavior. There are also several tips you should follow when you are involved in positional trading. See them below.

Watch the long-term volatility

When choosing a currency pair to trade, make sure it has high long-term price volatility. This is very important if you want to make some feasible profit. If it's not volatile enough, you can end up losing all your earnings to the overnight Swaps. Some currencies demonstrate the significant price movements over the course of long periods of time, so you need to have at least one such currency in your pair. Watching for the big economic and political events in the region associated with your currency might help you predict its price behavior.

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Make sure the short-term volatility is low

Long-term consistent changes in price are much better than short-term fluctuations which will just make you all stressed out. What's more, if your currency experienced unfavorable price changes, you might be forced to close your position too early, either due to your personal precaution, or as a result of a stop-loss. So, always search for currencies with low level of short-term volatility.

Set your margin low

Be aware of the leverage, especially when you are trading long-term. While traders are welcome to try scalping on a margin of 200:1 or even 500:1, this should be absolutely avoided in positional trading. Always remember about the capital that you have and how much you can afford to lose. The higher price movement you are expecting from your currency pair, the higher might be the risk of losing your investments. So, a general recommendation would be to avoid high leverage ratio and set a stop-loss level that will save you in case your losses exceed the acceptable norm. The lower your margin, the better it is for your financial health. Remember that when setting up your Forex profitable strategy.

Scalping as an alternate Forex strategy

If you find positional trading not fitting your personality or your preferred trading style, than there are alternatives available. Actually, a very profitable Forex strategy that is completely different from positioning is scalping. It is perfect for those who feel the need to monitor every second of their trade, as well as for those traders who prefer to act quickly, rather than wait for the market to do its thing.

Scalping is a trading strategy which presumes a series of small gains over short periods of time. Through scalping, traders normally earn up to 5-10 pips per each trade, and one trade often lasts between 1 and 5 minutes. Surely, one needs to make a number of trades each day to feel the profit. There are special instruments designed for this type of short-term fast-reaction trading, including EMA (exponential moving average), MACD (moving average convergence divergence), and RSI (relative strength index).

Profitable Forex strategies

There is no absolutely profitable Forex strategy which would suit everybody in trading. Each trader should complete their own way of planning, developing, and testing a strategy that would match their style and individual characteristics. Once such a strategy is found, it should be thoroughly tested, so that you can be sure that your risks do not exceed your potential gains.

Shaping up a personaliszed Forex strategy is a complex process; however, it is important to go through it to insure your financial stability or, at least, the minimization of potential losses. To get started, you should only decide for yourself the following things: how much time each day are you willing to spend actively trading, how well you can work under stressful conditions, and how well you can accept the risk of losses. They will help you pick the base for your strategy and choose the most important indicators that you will use.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.