Forex trading strategies are those methods and techniques used by forex traders to spot and trade potential opportunities for profit in the forex market. The definition of forex trading strategies does not start and end with the trade ordering process only. Many traders on the retail side simply believe that having a trade strategy is the gateway to unending profits in the forex market. Nothing could be further from the truth. The fact is that strategies are not just about the trade process itself. Forex trading strategies in the real sense of the word, start from the process of preparation way before any trades are made, and extend all the way to the immediate aftermath of the trade process. This is how professional traders operate, and since they are largely successful when it comes to trade performance, it only makes sense that retail traders who really want to profit from the forex market adopt the same forex trading strategies that are used by these professional/institutional traders.
The Forex Trading Strategies
The forex trading strategies that work for professionals and which would also work for beginners, do not just cater to the trade aspect of the entire setup. Successful forex trading strategies incorporate aspects that are dependent not just on the trade itself but also on the trader.
From the trade aspect, forex trading strategies which perform creditably well are those which have taken care of everything that happens before the trade, during the trade as well as in the immediate aftermath of the trade. From the trader’s aspect, there is a lot of the process which is driven by psychology such as the trader’s decision making process, which is also influenced by the trader’s state of mind and body. Therefore, certain habits or psychological traits that traders need to adopt for rational decision-making would also form part of the process of the development of any forex trading strategies that would be used.
For instance, the question must be asked: what does a typical day for a professional forex trader look like? What do they do when they wake up? Professional traders constitute 95% of the successes seen in the forex market. A close look at the life of these traders show that their forex trading strategies start with clearly defining the goals that are to be achieved, whether the funds being traded are those of the trader or those of other people being managed.
Apart from setting the trading goals, forex trading strategies are created with emphasis on the following areas:
- Putting together materials which are used for preparation of trades for different time zones.
- Putting together the right strategies and attitudes which will be used for optimum performance during the trading day.
- Adopting proper lifestyle choices which will impact profitability. This includes committing enough time to sleep and exercise.
Successful forex trading strategies have a trade preparatory phase, and professional traders practice this as part of their work schedule. What constitutes the preparatory phase of a forex trading strategy?
- Knowing what to trade and when to trade.
- Understanding the forex calendar.
- Knowing when market news will hit the market and what to do with your trades when they do.
- Money management.
- How to set trade orders.
Good forex trading strategies are built to take advantage of major market movements within a trading day. The market may be a 24-hour market, but trade entries are best performed during the overlap periods of two trade time zones. These periods of overlap between two trading zones (London/New York or Asia/London) mark the periods of greatest price volatility and therefore periods of the best profit potential. It is also pertinent to know what currencies will experience volatility during those overlap zones. For instance, during the overlap of the London and New York trading sessions, you cannot expect to have plenty of market volatility on currencies that are most actively traded during the Asian trading session. If you want to trade market news from the US during the London/New York overlap, you will be best served trading the EURUSD or GBPUSD and not the AUDJPY. So good forex trading strategies enable the trader know what to trade and when to trade them.
Related : The Best And Worst Times To Trade Forex
Good forex trading strategies that work for beginners and professionals also factor in the economic calendar. The economic news is what moves the market. So any forex trading strategies adopted by the trader must use the news to the trader’s advantage. An understanding of the forex economic calendar is key, because it shows what news will be released at a particular time/date and also what impact they will have on the market. That way, traders know when active trades should be kept open or closed, or when new trades should be setup.
How about money management ? Money management entails risk management by apportioning appropriately sized trade volumes to a trade, with reference to the account capital. Management of risk is an integral part of all good forex trading strategies. The essence of money management is to ensure that in the event of a trade loss, the trader’s account will live to see another day. It is not all the time that the market will be conducive for trading. There will be occasions when the trade opportunities dry up, and the focus of the forex trading strategies will shift from capital appreciation to capital preservation. It is at these times that the knowledge of how to manage risk in the context of money management will come to play. When it comes to money management, it is good that a trader has a mentor that will provide coaching on how to manage trades with minimum risk.
A very important component of forex trading strategies is the methodology of setting trade entries and exit targets. There are different types of trade orders for entries and exits. For entries, the trader can use market orders or pending orders. If the market price is not favourable for a trade entry, a limit or a stop order can be used to get trades executed at more desirable price levels. For trade exits, traders can choose to use regular Take Profit (TP) price targets or go for the less conventional trailing stops. A trader may use a regular TP if the price target is static and clearly defined. A trailing stop is used when it is felt that the market has the potential for further advance. Trailing stops can also be used to protect unrealized profits. It is important for all traders to fully understand when to use each type of order for trade entries or trade exits. In your work, you will come to understand that while some forex trading strategies depend on pending orders for maximum performance, there are others that will use market orders and still end up just fine.
The Trading Day
At least one trading session would have occurred during a trader’s sleep hours. Therefore, it is essential to find out as soon as the trading day begins what has transpired during the prior trading session in the other time zones. Market moving events tend to occur in a sequence. For instance, if major market news is released during the New York session, it will later cause reverberations in the Asian trading session and then the London session, in that order. Therefore, knowing what was responsible for a particular major move in a previous trading session will enable the trader to plan trades for the current and future trading sessions better.
What happens in a typical trading day? For some traders, it is an opportunity to setup new trades. For other traders, it may be an opportunity to re-evaluate active trades. These actions are all part of a forex trading strategy.
For instance, if a trader assumes a swing trade or position trade which lasts for days or even weeks, there has to be a periodic evaluation of any active trades to check to see if there are any new circumstances in the market which may negate the trade outcome. A trade may have been setup based on a particular market news event, but what is to prevent other market news exerting a contrary influence on the outcome of the active trade? The answers are to be provided by the re-appraisals of any active trades. Of course, if there are new trades to be performed, then the normal procedures for setting of trades can be followed.
The activities the trader will perform on a market day activity depends on the forex trading strategies being used at the time. Therefore, it is quite normal to see no new trades being setup by professional traders who manage positions for the long-term. But for day traders, every trading day is a period of non-stop action. Irrespective of whether trades are performed on a long-term or intraday basis, they are usually dictated by the major economic news releases.
How does a trading day end? This is when traders take stock of what has transpired during the course of the day with performance reviews, noting where mistakes were made or where better performance could have been achieved. This is also when traders can look at the economic calendar to take note of the economic news that will be released in their off hours. This is especially important for those traders who have long-term trades open.
Good forex trading strategies must also incorporate healthy lifestyle choices. Trading can never be optimally performed if the trader’s mind and body are not in a good state. The fact that there are only a few times within a trading day when the market experiences the most volatility within a 24-hour trading cycle produces a situation where traders must make some lifestyle modifications. Therefore, the forex trading strategy must also incorporate an appropriate schedule for sleep, exercise and relaxation. Furthermore, the practice of staring at charts the whole day can lead to depreciation in social life and therefore appropriate time must also be given to maintenance of interpersonal relationships with family and friends.
The essence of incorporating healthy lifestyle choices as part of a forex trading strategy is to ensure that the body and mind of the trader are all in a state of wellbeing. The best trading decisions are made when the mind is alert and at peace, not when the trader is experiencing a riot on the inside. Therefore, the forex trading strategy which is suitable for beginners and professionals must have the following components:
- Must be one which does not demand that the trader starts to trade during hours when he or she should be asleep. Sleep deprivation will ultimately lead to trade losses, since the ability to think and make rational decisions will be compromised in a sleep-deprived state.
- Must be one which is implemented only at certain times of the day so that enough time can be allocated to other social activities that keep life going. Healthy relationships and moments of relaxation are just as good for the trader’s mind as good sleep.
- The simpler the forex trading strategies, the better for the trader. Complex strategies will produce more intellectual and emotional strain on the trader.
Forex trading strategies that are suitable for beginners and professional forex traders are those which allow traders to spot good trading opportunities with sound entry and exit parameters. They also allow for sound money management as well as trader-centric advantages such as sound mind and body as well as good trading psychology. All these elements must come together in order to form good forex trading strategies.