Forex Trading Methods
It is often said that around 90% of forex traders lose their money, while about 10% eventually learn to trade successfully. Ever wonder why most traders fail and few become profitable? There are a number of factors which are important, but one of the most critical if you want to succeed is having a trading method.
Traders who use reliable forex trading methods do well. Those who do not, have no way to get an edge in the market. In this article, we will teach you all you need to know as a beginner to get started with your own forex trading strategy.
What Are Forex Trading Methods?
Before you can get started with currency trading methods, you need to know what they are, so here’s a simple description. Put simply, a forex trading method is a set of rules which helps you identify trade setups that are likely to be profitable and enter and exit your trades successfully.
This trading strategy may be referred to as a method or a system. All are the same thing. It should not be confused with a trading plan, however. Your trading plan is broader, encompassing your system, money management rules, trading schedule and more. You need both a plan and a strategy if you want to trade profitably.
Why Do You Need a Forex Trading Strategy?
Is an FX trading strategy really necessary? Why can’t you simply go with your gut, or use a set of loosely defined parameters to identify trade setups? Well, if you trade without a system for a while, you should discover the answer yourself. Without a method, you are exposing yourself entirely to the chaos of the market and you’re doing nothing to reduce the role of uncertainty in your trade outcomes. That means you will lose money over time.
An FX strategy capitalizes on patterns in price movements. It helps you find order in chaos, regulate your emotions, and stay focused on your goals. It also reduces your reliance on luck and gives you an edge. For all of these reasons, it is indispensable if you want to win trades consistently.
If you’re looking for a forex trading strategy for beginners, it helps to know there are three basic types of analysis: fundamental analysis, technical analysis, and price action. Let’s take a look briefly at each in turn. This will help you explore trading methods online.
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Using Fundamental Analysis to Trade Forex
First, we have fundamental analysis. This is where you look at how different real-world economic and geopolitical factors might influence the value of a currency pair. Through this analysis, you might conclude that the price is likely to rise or fall.
A simple forex trading strategy which is popular for beginners is to trade the non-farm payroll report. You can also try trading other economic reports and news events. Keep in mind that when you trade based on fundamental analysis, your decisions should be based not just on what you expect to take place, but how you expect the market to respond. As you can imagine, this can get to be quite complex.
Making Use of Technical Analysis to Trade Forex
A lot of forex trading methods that work fall under the umbrella of technical analysis. This is where you place technical indicators on your charts to try and get a handle on what’s going on with price. Some common technical indicators include moving averages, MACD, Parabolic SAR, Bollinger bands, and Ichimoku.
There are tons of indicators you can use. A lot of trading platforms even let you add custom indicators of your own. Technical systems can be very simple or very elaborate, but in general, you want:
- The minimum indicators on your chart to provide you with actionable insights (no clutter)
- Confluence (more than one indicator telling you the same thing about price)
Technical analysis may seem overwhelming when you get started with it, but a lot of systems only require several indicators. Start with those and see if you find something you like.
Price Action for Forex Trading
Wouldn’t it be cool if there was a forex trading strategy with no indicators? There is, and it’s called price action, or sometimes, candlestick patterns. This is where you look for patterns in how the bars or candlesticks on your chart form. For example:
Inside 4 bar: This is where you have a series of four inside bars in a row, each contained by the previous one. It is a form of consolidation, and often signals an impending breakout in either direction.
Pinbar: This is where a candlestick forms with a flat body and an extreme high or low, which you can think of as the pinbar’s ‘nose’. Like Pinocchio’s nose, the pinbar’s nose is deceptive. Price will likely move in the opposite direction of the nose points. Look for this formation at swing highs and swing lows. It usually signals a reversal. So, if you see a pinbar protruding upward at a swing high, price may be about to drop, and vice versa.
Price action is awesome because it’s incredibly simple. If you want, you can trade the patterns with zero indicators on your chart whatsoever. But you can strengthen this strategy by using a couple of moving averages or other simple indicators for context and confluence. A forex trading strategy using price action is one of the best choices for novice and advanced traders alike.
Other Techniques for FX
Let’s briefly talk about a few popular systems you might stumble across while looking for an example of a forex trading strategy:
One-minute forex trading strategy: This is one of the most well-known forex trading scalping methods. You put the 50 and 100 EMAs on your one-minute chart and add Stochastic 5, 3, 3. It can be used to buy or sell. As an example, if you want to buy, you have to wait until the 50 EMA is above the 100 EMA. When price returns to them and the Stochastic passes 20, you potentially have an entry. Set a tight stop loss and expect to rack up about 8-12 pips on a successful trade.
Forex trading strategy 10 pips per day: With this method, you are aiming to make 10 pips each day that you trade. Once you make your 10 pips, you close out until the next day. Usually, this takes the form of a simple moving average crossover system with the 5 EMA and 12 EMA. With the buy setup, you want the 5 EMA to cross the 12 EMA, and then look for RSI to surpass 50. At that point, enter, with your stop located 2 pips under the low of the bar that preceded the crossover. Just be mindful you do not overtrade with this method.
Forex trading hedging strategy: With a hedging strategy, you open two opposing positions to protect yourself from risk. If you’re careful with the timing, you can do so profitably (rather than having your loss neutralize your win).
Forex trading correlation strategy: This is where you look at the interrelationships between FX pairs and use that information to your advantage while you’re trading.
Now you have some basic forex trading strategy examples. Research on forums and websites and even in hard copy books at your library and you will discover there are hundreds upon hundreds of different trading methods out there just waiting for you.
Planning Your Exits
When you’re searching for the best forex day trading methods, you need to remember that a trading method needs to do two things – help you enter potentially profitable trades, and help you exit them at a profit.
Let’s talk about what it means to have a forex trading exit strategy. This is a set of rules which tell you when to close your trade. Entering trades is only half the battle. If you exit at the wrong time, you’ll lose money. There are a number of different approaches you can take. Here are some common options:
Set a fixed target price and stop loss: Some people, for example, might always shoot for a profit that is the same size as the price bar pattern they’re using, or they might always aim for 10 pips, etc.
Use support and resistance: You might set a take profit just before a relevant line of support or resistance and protect your stop from being prematurely triggered in a similar fashion.
Base it on volatility: A target price and stop loss which are appropriate in an extremely volatile market may not be in a less volatile one and vice versa.
Trail your exits: You also have the option of trailing your exits as price moves so that you can ride a long wave of profits.
Usually, each trading method you learn will include both entry and exit rules. If the exit rules are not specified, choose your own. You also will find that you can often adjust the exit rules to your liking and get great results. Someone else might use trailing stops with a method where you choose to use fixed stops and target prices, and you both are able to profit.
How Do You Find the Right Forex Trading Method for You?
You know how sometimes you sit down to order at a restaurant and the menu is huge? At first, you’re thrilled at having so many options—but then you find that you simply cannot decide what to eat.
To avoid analysis paralysis with forex trading methods, here are our suggestions:
- Go with your gut. If fundamental analysis intuitively appeals to you, check into those types of trading methods. If you find yourself drawn to technical analysis, try that. If price action delights you, look into it.
- Think about your lifestyle. For one trader, scalping may be a great fit, but for another, it may simply not be feasible for scheduling reasons. Will you be able to trade around your day job? Will you have to trade overnight? Does the method fit with your psychology? Will it allow you to make the most of your strengths?
- If you like to keep things simple, go right to price action. It’s elegant and reliable. You’ll find fewer choices and distractions and can pick it up pretty quickly.
- Think twice as a novice before you jump on forex trading strategy scalping methods. Why? Because the small timeframes are far more volatile and unpredictable, and it’s easier to learn swing trading methods first.
- Run short backtests on a bunch of different profitable forex trading methods. When you spot something that feels promising, run a longer backtest.
- If you start getting solid results in backtesting with a strategy, focus on becoming an expert with it. Don’t keep testing dozens of methods. You’ll spread yourself too thin. Just get really, really good at one thing.
- Don’t forget to demo test before you go live. You can fail with even the best forex day trading methods if you skip this crucial step.
Caution: A Forex Trading Strategy Doesn’t Stand on Its Own
Remember, a trading method is not the only thing you need to be successful as a trader. Even if you have a fabulous method which you know how to use, you will only get profitable results if you manage your money wisely and you have the commitment, discipline, honesty and dedication to trade. So, after you find a trading system you like, make sure that it’s integrated with these other key ingredients in a recipe for success.
Choosing the Right Forex Trading Strategy Can Help You Become a Profitable Trader
Once you have a powerful FX trading method and you know how to use it reliably, you’ll have one of the most vital components of your trading plan ready to go. Unite it with a solid money management method and smart trader psychology, and you can turn forex trading into a reliable stream of income. Who knows? There might even come a day when you can hand in your resignation at your day job and take up forex trading fulltime.
As one final bit of advice, it is helpful to know going into this process that you will not become an expert with a trading method overnight. Even relatively simple methods sometimes can take months or years to really master. You not only need to learn to spot ideal setups, but you also need to develop a nuanced understanding of context.
That can be a challenge. So be ready to put in some hard work. For forex strategies to deliver excellent results, they require testing, and often ongoing customization and adaptation. But if you are ready to go the distance, you can get amazing results.
Forex Trading Methods: