Having an effective trading strategy is one of the key preconditions of profitable trading in any financial market, be it foreign exchange, stock, commodity or cryptocurrency market. Sticking to its rules helps make a profit, while chaotic entries are a recipe for disaster and obviously losses.
In today’s article, we are going to throw some light on what a profitable trading strategy is and why you need one, using illustrative examples.
The trading strategy is essentially a list of steps one needs to take when making trades. It outlines market conditions under which a trade can be opened, specifies direction of the position, and where stop loss and take profit should be placed. Typically, these rules also stipulate the position size and financial instruments these trading strategies can be used for.
So, why should a trader stick to the strategy? It is known that there are specific rules the market follows. The price movement depends on the psychology of its major players, and also has its own patterns. This is what price behavior rules are based on, helping to track down the direction of quote movement. These very patterns lie at the heart of profitable trading strategies. Each of them provides positive mathematical expectation, even though trades can be both losing and winning. That being said, the overall trading result will be in the black.
If each trade is opened according to different rules and signals, this means you are trading chaotically and chances of making money in forex are close to zero.
When trying to figure out how to trade Forex, the newbies always ask what trading strategy is best to trade with. But there is no correct or definite answer to this since there are so many different strategies while the only criterion that helps differentiate between bad and good ones is mathematical expectation. If the outcome of trades you make according to the chosen strategy for a period of three months or longer remains positive, it is safe to say that the strategy performs well. However, if it fails to produce profits, you should consider switching it up.
Every trading strategy is based on one or several types of analysis: technical, fundamental and indicator one. It can be either simple or complex, and have one or several rules for position opening. It can be as old as exchange trading itself, or developed by a trader on his/her own.
Forex trading strategies used to trade in the currency market can differ in terms of position opening duration. They can be long-term, whereby the position is held open for a month or longer, medium-term and short-term. Intraday and scalping strategies belong to them as well.
What trading strategy will suit your needs best? Your own understanding, preferences and profitability are the factors you should rely on when choosing the strategy. Its rules should be clear to you, and duration for holding positions must be comfortable.
intraday strategies will work for those who stay up at night worrying about an open position;
Below we shall examine Forex trading strategies even a newbie can master and use to make a profit in the financial markets.
This trading strategy is also referred to as support and resistance trading. It is based on the rules of technical analysis. Essentially, there are particular horizontal levels. When the price reaches them, it either rebounds from them, or breaks them out and moves to the next line. According to this strategy, the prices move from one strong level to another, and you can open trades between them using rebound or breakout techniques.
When trading with this profitable trading strategy, you need to draw price levels from a monthly time frame to the one you are working with (e.g. hourly time frame). Horizontal lines are built along the highs or lows on the charts, the shadows a strong movement started from, the values from which the quotes have rebounded upwards and downwards (mirror levels), as well as at the prices of the sideways trend.
The technical analysis and Charles Dow’s theory, which states that the prices move in direction of the main trend (moving in channels), lie at the heart of this trading strategy.
Channels in the market can be ascending and descending. Aside from that, the price typically moves in a sideways trend which is basically a corridor between two horizontal levels.
1. When there is an uptrend, we go long only in case of the third and subsequent rebounds of the price from the support line. Stop loss order should be placed behind the previous low or lower boundary of the channel, with take profit being slightly below the resistance line.
2. Similarly, in case of a downtrend, we open short positions only when the price rebounds from the resistance line. The stop loss order should be placed above the resistance line, with take profit being slightly above the lower boundary of the trend.
3. In case of a sideways trend, we trade rebound in both directions: go long from support with a target at the upper boundary, and go short with a target at support when the price rebounds from resistance.
This is a trading strategy where the Moving Average (MA) indicator is used. The indicator and its derivatives are used very often, and trading strategies can be downloaded on any trading-related online resource.
The process of choosing a strategy is both simple and complex. Having a trading strategy is a must for traders but the one they eventually pick depends on many, often very personal, factors. Plus, the trading system should be tested out carefully and include its own risk management indicators.
You can either download a trading strategy or get it at a brokerage company. That’s what traders at Gerchik & Co do. The key requirement is that it helps you make consistent profit in the financial markets.