The Forex (foreign exchange) market is a global, decentralized market and comprises banks, commercial companies, central banks, hedge funds, investment management firms, and retail investors and brokers. It is the largest financial market in the world. The basic facility of Forex is to trade currencies in order to, hopefully, make a profit; these transactions are made by traders, who speculate on the strength of a particular set of currencies. Thinking about a profitable Forex strategy is the first step to start trading.
How to Get Started with a Successful Trading Strategy
If you’re new to Forex trading, then making a trading strategy before you begin is a great idea. To start, consider the investment you have available, your timeframe, the current state of the market, and, crucially, how your personality may affect the type of strategy likely to work best for you. Many trading beginners use a demo trading platform to allow them to experience and hone their skills before investing in the ‘live’ market.
It’s important to also consider position sizing, risk management, and how to exit a trade. The four trading styles below have remained consistently popular choices so maybe worth thinking about in terms of identifying the best forex strategy for consistent profits that best suits you.
Scalping
Scalping moves are very short-term trades – sometimes held for mere minutes. This is a fairly advanced style that can be used to quickly generate small profits; it can be stressful and requires significant self-discipline. Scalpers will often need to spend many hours at their screens while being ready to act quickly. This type of strategy requires market volatility to work effectively, and traders will seek out things like overlapping markets or sudden breaking news events and then move swiftly to make multiple small but profitable trades. A profitable Forex scalping strategy involves reacting at the moment the market shows any sign of shifting.
Day Trading
Day trading is the style that most beginners use. It’s a way of ensuring that live trades aren’t affected by any major market fluctuations overnight. Day traders exit their trades before the day’s end, with these trades often only lasting for a few hours.
Traders will need to be able to analyze the market effectively in order to be in the best position to make profitable moves; day trading strategies tend to be concerned with regularly occurring, small price movements. When choosing a broker for day trading, ensure they can achieve excellent trade execution speed and are able to trade directly from graphs.
Swing Trading
Swing trading is all about short-term price patterns and their potential profitability. Trading positions are normally held for a few days, with a trader checking bars about every half hour to an hour. Many traders use technical analysis to interrogate trends, and moving averages to determine the best positions to enter and exit trades.
Swing traders are advised to use a daily chart for at least 3-6 months to help analyze the market and check the direction of any present trends.
Positional Trading
This style of trading is concerned with generating profit from significant shifts in price and is usually a long-term position. Traders using this style need to have a broad and in-depth knowledge of the markets and how they operate and require a lot of patience. Positional trading usually necessitates checking end-of-day charts, and traders will usually focus on specific sectors in order to benefit from longer-term trends.
For the best chance of success using a positional trading style, it is key to consider long-term market trends, have a specialism in one or more financial markets, and to set up a trailing stop loss to protect any profit generated.
Once you’ve decided on the style of trading, the level of risk you wish to take, and the time you want to allocate to trading, it’s time to consider trading strategies. Some of the most popular are listed below:
Daily Chart Strategy
This strategy is made up of three key elements: trend location (identifying long drawn out moves in the market); staying disciplined, in order to keep your capital back for the larger opportunities; and using larger stops and less leverage.
1 Hour Trading Strategy
The currency pairs likely to provide the best potential for profit in this strategy are EUR/USD, USD/JPYGBP/USD and AUD/USD. In terms of buying, traders can enter a long position when the MACD histogram goes beyond the zero line. For selling, short-term positions can be entered when the histogram drops below the zero lines. Traders using this strategy only need to check the market every hour, making this an ideal choice for those unable to watch the Forex for significant periods of daily.
Weekly Trading Strategy
Traders often favor this strategy as it provides somewhat more stability and flexibility. When employing this strategy, it’s common for traders to use price action trading patterns, such as haramis and hammers. This is a great strategy to deploy for traders who have only limited time to dedicate to monitoring the markets: checking positions once daily is usually sufficient.
Trend Following Strategies
There are various trend-following strategies that you may wish to use, such as the Donchian Trade System. The basics of this system are to consider buying if the market value goes above its prior 20 days high, and selling if the price drops below the prior 20 day low.
5 Reasons That Traders Lose Money
Sadly, the majority of traders lose money on the Forex and end up throwing in the towel – around 80-90% of traders aren’t successful. However, by bearing in mind the following 5 things, you can drastically boost your chances of bucking this trend.
Overly Aggressive Trading
Beginners often make the mistake of trading too aggressively or trading against trends in an attempt to ‘beat the market,’ and this is often catastrophic, especially if the trader is starting out with only a small amount of capital. In order to resist this temptation, traders just starting out should make it their priority to keep the value of their initial investment rather than gaining on it – this latter goal should come second. Aggressive trading always means exposure to larger, more frequent risks, and this should be avoided until traders have built up a solid market knowledge.
Too Little Start-Up Capital
It’s tempting to start trading with very little initial capital – especially if you are trading to try to make a fast profit or to resolve debt issues. However, to mitigate risk and have the best chance of making a profit on your investment, $1000 is considered to be the smallest viable start-up capital to have at your disposal. This also guards against the emotional reactions (and subsequent mistakes) that having a very low initial investment can precipitate.
Not Accounting for Risk
Risk management is absolutely vital to successfully trade on the Forex. Protecting your investment should always be your first priority, and keeping this in mind will help you to manage risk and make better risk management decisions.
Types of risks that are frequently encountered on the Forex include:
Currency risk -associated with the propensity of currencies to fluctuate
Interest rate risk – this risk is linked to market volatility and concerns sudden jumps or dips in currency interest rates
Liquidity risk – This is the possibility of incurring a loss due to the inability to buy or sell an asset quickly enough
Leverage risk – associated with margins and sustaining greater capital losses than anticipated
Stop-loss orders are a good way to help manage risk, as well as using sensible lot sizes. Remembering to exit a trade if something feels off will help, too.
Resisting Greed
By aiming for a reasonable profit, rather than trying to aggressively get every last pip from a trade, you are more likely to make better buying and selling decisions, such as holding out for too long on a trade. Try to remember that new opportunities will regularly present themselves.
Indecisiveness
It can be very tempting, especially for new traders, to switch positions back and forth as the market swings – or to switch as a result of anticipating a change. Frequent switching can lead to an increased risk to your start-up investment – it’s best, in this case, to choose a course and stick with it.
Does the Timeframe of Trades Matter When Looking for Consistently Profitable Strategies in Forex?
The most successful Forex traders know the right time to buy and sell, and, crucially, when it’s the right time to take a risk.
The principle Forex timeframes are long term, medium term, and short term. Some traders will use all three in their overall strategy, while others might use one long-term and one shorter-term time frame to weigh up potential trades.
Long-term moves tend to fall under the positional trading style and have a trend time frame of weekly, and a trigger time frame of daily. Medium-term positions are geared towards a swing trader strategy, with daily and 4 hourly as their trend and trigger time frames respectively. Short-term positions include day trading and scalping, with buying and selling often taking place within 5 minutes to 4 hourly time frames.
Shorter positions (from about 5 minutes to an hour) will prevent any exposure to overnight shifts and risks, with the opportunity to make quick profits. This might be perfectly suited to your trading style. However, longer charts with some increased risk and the odd incident of staying up all night to watch the market could work better for you. A consistently profitable strategy, therefore, will be the one that suits your circumstances, your personality, and the way you feel comfortable trading.
Scalping, with its short timeframes, could be the best option if you’re looking to make a quick profit. However, scalping must be undertaken with care to avoid the build-up of lots of small losses, and the racking up of commission fees.
Look again at your trading style and the strategy you’ve decided to pursue. Matching your trading strategy to the time frames you plan to trade within is likely to serve you well. For example, a swing trader could make unwise decisions based on trends viewed on a shorter time frame chart (maybe covering the period of a few hours), whereas, for this trading strategy, a longer time frame, such as daily, is more appropriate to judge trends and analyze risk.
Where multiple timeframes are used, traders will analyze a currency pair through the lens of different timeframes to identify both long-term trends and to pinpoint the perfect place to enter a market.
Can a Trader Build a Consistently Profitable Strategy in Forex by Trading With Only Major Currencies?
With more than 180 currencies in circulation, plus 1500 different types of cryptocurrencies, there is certainly no shortage of choice when it comes to choosing which pairs of currencies to trade-in as part of your overall strategy.
The most popular currencies usually combine the Euro, the US Dollar, the Japanese Yen, the British Pound, the Australian Dollar, the Canadian Dollar, and the Swiss Franc. While it is very possible for experienced traders to make a profit by analyzing the markets in order to trade in minor and exotic pairs, along with the major currencies, for the beginner, to remain consistently profitable will usually mean sticking to the major currency pairs.
The Euro and US Dollar pair is considered to be extremely liquid and is traded globally. This pair has a tendency to be very volatile and major multiple shifts can happen throughout the course of a day.
The US Dollar and Japanese Yen pair are very difficult to predict: a swing trading style is usually best to use when trading with these currencies.
The British Pound paired with the US Dollar can be difficult to predict due to its sensitivity to the news and to the prevailing political situation. Long-term trading is the best strategy to use with this pair.
The US Dollar and Swiss Franc currency pair is considered to have a good flow, and is not as volatile as some of the other pairs; its comparative predictability makes this the best pair to trade for beginners. Day trading and short-term trading are often the best styles to use with this currency combination.
A minor currency pair is any pair that does not include the US Dollar. These minor pairs are often characterized by high liquidity and short-term volatility; short-term trading is likely to be the safest course of action with these currencies.
Exotic pairs are any currency combination that includes a developing country’s currency. They are significantly more challenging to trade profitably. The flip side of this riskiness is that these pairs can yield significant gains for traders with sufficient Forex knowledge and understanding of the developing country’s political, social, and economic landscape. For that reason, traders resident in one of these countries is usually best placed to use these pairs.
So, to conclude, it is certainly possible to build a consistently profitable strategy using just the major currencies; just as it’s feasible to be profitable in trading minor or exotic pairs – the key is in choosing the trading style and strategy that works for you and consistently applying it. It’s also vital to have a sound grasp on the fundamentals of the market, and on the possible volatilities of the currency pairs, you are considering trading in. Finally, knowing and being confident in managing the risks will play a significant role in a trader’s ability to maintain profitability. All of these factors combined can help determine the success or otherwise of a trader’s strategy, rather than the choice, in and of itself, to trade only in the major currencies.
Can Carry Trading Be Part of a Consistently Profitable Forex Strategy?
In the Forex market, a carry trade is defined as a scenario in which a trader borrows or sells a currency that has a low-interest rate to buy a different currency that has a higher interest rate. The difference in these interest rates is known as the interest rate differential. Effectively, carry trading means borrowing money at a cheap rate from a country that has a low-interest rate, and then investing it in a country’s currency that has a higher interest rate.
In Forex, at the end of a business day, a trader’s position will be closed, and subsequently re-opened the following day, with the overnight interest differential then added to the trader’s account. This is known as ‘rolling over.’
Leverage carry trading can also be a useful Forex strategy – this is attractive as traders don’t require a large investment sum as leverage carry trading allows for trading on a margin: a comparatively much smaller amount.
Risk management needs to be carefully attended to for any trader undertaking carry trading positions, as depreciation or appreciation in the market can drastically affect the profitability of trades. Similarly, carry trading in the currencies of countries with developing or small economies carries the more obvious risk of market fluctuations and volatility. Stop-loss orders can be a helpful instrument to apply to help mitigate some of these risks.
In terms of profitability, the carry trade strategy is the only one that has the potential to give traders a profit on their very first day of trading on the Forex. However, to yield significant profits, carry trading should be considered as part of long-term strategies – for example, if, after a year holding a position, a trader had only achieved break-even, they would still potentially make profit from the interest earned over this time period.
To conclude, as with trading exclusively in only the major currencies, carry trading can absolutely form part of a consistently profitable strategy: but the key is a trader’s ability to read the market to determine the optimum conditions to initiate carry trading positions, their personal trading style, and the capital they have to invest.
What’s Next?
To get started trading on the Forex market, it’s vital to learn how to trade properly and to understand the terminology and fundamental concepts. You may wish to undertake some training; alternatively, there are a number of in-depth guides available to help steer you through the process.
Next, as discussed above, decide upon your trading strategy. As well as considering which would suit your personality and startup capital, also consider your lifestyle: if you’re only able to keep a close eye on the markets at certain points during the day, then this needs to be factored into your decision, too. Stop loss and price action trading are going to probably be your best bets if this is the case.
The next stage is deciding upon a broker. A regulated broker may be more expensive but is a much safer choice in terms of keeping your funds safe. Your broker will probably give you access to some form of a demo account, which you should familiarize yourself with – this is perfect training for the real thing.
Once the broker is in place and you’ve spent some time on the demo account, you are all set to begin trading on the Forex for the first time. It’s important to bear in mind that even the most successful traders will make losses on trades: as you learn the ropes, it is best to limit your exposure to risk in the early days and keep set reserves in place. It’s also a great idea to regularly review your strategy to see how well it’s working for you and to make adjustments as necessary.
Some traders decide to try trading on the Forex for a living. This is certainly achievable, but traders considering taking this step need to be clear that, in the vast majority of cases, making a profit needs to be played as a long game, and many traders sustain regular losses along the way.
In conclusion, whether you are considering day trading on the Forex now and again, or are thinking about investing significant capital and attempting to earn a living from the market, then the importance of patience, self-discipline, and the facility to learn from mistakes should not be underestimated.
Also, Read Some Interesting Information About Best Forex Brokers For Beginners.