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Most Effective Forex Trading Strategies

forex trading strategies

Forex Trading Strategies Talking Points:
  • Brief Introduction to the Forex Trading Arena
  • What is Considered an Effective Forex Trading Strategy?
  • How to Mitigate Risk with Forex Trading Strategies
  • Specialist Trading Activity in The Forex Market
  • The Merits of High-Frequency Forex Trading
  • Should you Develop your Own FX Trading Strategy?
  • Putting Together Effective Forex Trading Strategies
  • What Factors Affect the USD in Forex Trading?
  • Forex Trading in the Age of Cloud Computing Technology with Algorithmic Systems

Brief Introduction to the Forex Trading Arena

The global forex market is a hive of activity. This decentralized market runs 24 hours a day, 5 days a week. Forex markets start trading at 5 PM local time in New York City on Sunday, and they close at 5 PM in New York City on Fridays, only to continue operations 48 hours later. These hours of operation will vary according to a forex trader’s location. A worldwide network of decentralized exchanges and brokers operates across multiple time periods, with several overlapping sessions across time zones.

Forex trading activity is typically busiest when New York and London trading sessions overlap between 1 PM and 5 PM UTC time, Tokyo sessions and London sessions trade between 8 PM and 9 PM UTC time, and Sydney sessions and Tokyo sessions trade between 12 AM and 7 PM UTC time. The most popular currency pairs to trade include combinations of the USD, GBP, AUD, CAD, JPY, GBP, and CHF. The best times to trade these currencies are during overlapping sessions between the major global forex markets.

During periods of high trading volumes, forex traders tend to see tight spreads. This reduces the forex trading costs for traders. Spreads represent the difference between bid price and the ask price; the tighter the spreads, the closer they are together. The most effective forex trading strategies hinge upon a variety of factors, notable among them the choice of major, minor, or exotic currency pairs, the hours of operation, volatility, liquidity, and leverage considerations, et al. We will introduce you to a list of highly effective forex trading strategies to enhance the profitability of your trades. Be advised that no forex trading strategy is fool proof; currency trading is inherently volatile and prices can whipsaw wildly at any given time.

What is Considered an Effective Forex Trading Strategy?

First and foremost, it should be pointed out that forex trading is ideally (not exclusively) suited to day traders. The forex market is a fast-paced trading arena where minuscule price movements in the exchange rates between currency pairs can have an outsized impact on profitability. An in-depth understanding of the factors affecting currency pairs is necessary to successfully implement forex trading strategies. Due consideration needs to be given to your level of expertise - novice, intermediate-level trader, or expert-level forex aficionado. Your short-term and long-term objectives should be assessed to determine how best to achieve your forex trading strategy.

There is no doubt that forex trading is laden with exciting opportunities for traders. The markets are fast-paced, reacting to news, geopolitics, and important macroeconomic calendar events. Before you select a forex trading strategy, it's important to pick a reputable forex broker with a powerful trading platform. The trading platform should be highly responsive to the financial markets, reflecting real-time price updates between currency pairs. Instant executions of trades are sacrosanct. Trading platforms slow to react to trader actions and requests can adversely affect your profitability. Top-tier forex brokers are attuned to high-frequency trading activity with higher leverage to boot.

When considering your options vis-a-vis effective forex trading strategies, an all-encompassing approach has to be adopted. True to form, forex traders love the hustle and bustle of real-time forex trading, replete with the high liquidity and volatility of top-tier currency pairs. The majority of forex traders prefer short-term sessions of trading over long-term market watching activity. This unique dynamic presents myriad opportunities to the savvy forex trader. While a great many forex trading courses, tutorials, webinars, seminars, and guides are readily available across the World Wide Web, they are largely esoteric in nature, and difficult for a newcomer to the forex scene to understand.

Many of the most effective forex trading strategies are also the least understood, since they aren't as popular as the ones being propagated. Sometimes, a forex strategy may be highly effective on its own, but completely ineffective when integrated with other forex trading strategies. A distinction needs to be made between trading forex and investing in forex. From the outset, it should be known that trading is a short-term activity designed to yield short-term profits on daily trading. Investing in forex is a long-term proposition where short-term price fluctuations are largely ignored, in favor of long-term price appreciation. When it comes to gauging effective forex trading strategies, our focus tends to be on day trading activity over the short-term.

How to Mitigate Risk with Forex Trading Strategies?

Any effective forex trading strategy has a built-in risk management component. Indeed, risk is the double-edged sword which makes trading forex such a potentially lucrative, or risky proposition. One has to gauge the risk-reward ratio with all currency pairs trading activity. Of all the forex trading strategies that really work, there is a definite risk/reward element. We can easily identify multiple forms of effective forex trading strategies with high-risk/reward ratios such as position trading, while scalp trading requires a significant investment of time, and frequency of trading activity.

With position trading, you adopt a long-term strategy predicated on fundamental factors. Position trading takes place over a period of weeks, or even months, and is ideally suited to dedicated traders who understand the macroeconomic elements affecting the currency markets. While there are a few trading opportunities with position trading, minimal time investment is needed and there is a high risk/reward ratio. Scalp trading by contrast a.k.a. forex scalping strategies focuses on frequent, incremental profits. Traders have to be extremely busy with forex scalping strategies, opening dozens of positions throughout the course of a trading day, typically through an algorithm with preset functions. Timeframes range from 1 minute to 30 minutes with forex scalping.

Mention is often made of the restaurant syndrome in established financial enterprises. This defines investors who are unaware of all the risks entailed in a new business venture. Since the majority of new restaurants fail, the risk/reward ratio is often unfavorable. In the forex trading arena, there are many risks to navigate, but traders have multiple forex trading options available. This allows for failure in one trade and success in another. The variety of options available among major, minor, and exotic currency pairs can serve as an effective risk mitigation strategy. Owing to the sheer size and scope of the forex market – $5 trillion – $6 trillion daily, there is tremendous liquidity and room for returns.

forex trading strategies

The above-listed currency pair, GBP/USD can be traded using the swing trading forex strategy. This speculative FX trading strategy requires traders to be on the lookout for trending markets and range bound markets. As you can tell from the above chart, the GBP/USD was range bound between 1.54090 and 1.57000 between July and early September. With swing trading, forex traders select upper limits and lower limits, and these positions can be entered into over the short-term, or the long-term, depending on your approach to forex trading. Most forex traders engage in swing trading activity over the course of a few hours. If you adopt a longer term approach to swing trading, then you would seek to profit off trending activity across several points on the chart.

Specialist Trading Activity in the Forex Market

There are clear distinctions between specializing in trading specific currency pairs such as the GBP/USD, USD/EUR, GBP/JPY, USD/CAD et cetera, and specializing in trading the actual trading method a.k.a. the forex strategy. With short-term trading activity, it's all about mastering the art of the trading method, not the market. Over the long-term, it's important to assess the impact of fundamental factors, and focus your attention on a specific market such as a currency pair over time. Given that the fundamental factors are unique to the specific currency pairs being traded, tremendous attention must be paid to them. While fundamental factors may be absent over the short-term, they tend to play an outsized role in the assets being traded. As a specialist, it is important to keep this in mind. Technical and fundamental factors must be assessed as part of a comprehensive forex trading strategy.

The jury is out on diversification. On the one hand it presents as an effective risk mitigation strategy by preventing asset concentration in a specific currency pair, or set of pairs. If markets move against you in a concentrated portfolio of forex trades, it can be detrimental. However, too many currency pairs can work against one another and generate profit/loss performance that mirrors the overall markets. The goal is to harness your knowledge, understanding and prowess of specific trading strategies to outpace market returns. A caveat is in order: Forex trading is a high risk proposition and traders can lose their capital, particularly when leverage is employed.

The Merits of High-Frequency Forex Trading

A rational approach to forex trading is needed at all times. It is impossible to accurately call every trade all the time. Therefore, one has to accept that the objective of a forex trading strategy is to minimize the effect of losing trades and to maximize the potential outcomes of your winning trades. With every losing trade, it's important to take stock of the reasons why the trade soured. Use a journal to write down the conditions and the outcomes of your trades.

Where there are areas for improvement, implement the changes that are needed. Be advised that intra-period volatility is more important than what happens over a period of time. There can be wild price movements within a 5 minute trading session, but hardly a blip on the radar over the course of 4 hours. High-frequency traders understand it is these micro price movements that are seized upon for profit potential.

To derive maximum yield from high-frequency forex trading strategies, it's important to implement risk mitigation and profit maximization measures. These come in the form of stop loss, and take profit orders. By calculating the right amount of risk that you're prepared to take, and no more, you can effectively guard against downside price movements in your chosen forex trades. The inclusion of tight stop loss orders in your forex strategy makes it impossible to trade effectively. Put differently, the spread is minimal and trading is extremely limited.

Rather than working off such a limited band, it's better to widen the gap with bigger stop loss orders to generate the desired profits. This allows you to withstand the whipsaw pricing of volatile forex pairs. If prices don't move far enough within their trading band, then notional stops can be implemented and the trade will be closed out within short order.

Should you Develop your own FX trading Strategy?

Forex trading strategies are carefully constructed through intensive theoretical research, practical application, and statistical analyses. A combination of technical and fundamental analysis is employed to develop a functional forex trading strategy. As a newcomer to the scene, the worst strategy is no strategy, since this is akin to emotionally-based trading which is bound to fail. All forex strategies must be approached from a professional perspective, and there are no shortcuts to long-term success in forex trading. Therefore, you should stick to tried and trusted forex trading strategies since these have yielded the types of results that successful forex traders bank on.

The manner in which you implement a trading strategy is important. Your forex trading strategy should address several key issues, notably your forex trading objectives, your timeframe, your budget, and the steps taken to learn from your mistakes, among others. The most successful forex traders understand that emotionally based trades are problematic. There should always be sound reasoning behind opening a forex position, whether its technical analysis, fundamental analysis, or both.

What is the Best Currency Pair to Trade?

This is one of the most frequently asked questions in forex trading. And indeed, it forms a vital part of your overall trading strategy. Straight off the bat, it can easily be said that the forex majors are the preferred currency pairs to trade. For one thing, they are universally popular so they don't lack liquidity, and there are generally tight spreads available. Recall that a forex major includes the USD as one of the currencies in the pair. It could be the base currency or the quote currency. Forex major pairs include the likes of the GBP/USD, USD/JPY, USD/CAD, NZD/USD, AUD/USD, USD/CHF, and USD/EUR. For starters, your forex trading strategy should focus on one of these pairs.

As your confidence, knowledge, and insight into forex trading grows, you can branch out to minor pairs and exotic currency pairs. You will want to decide upon the frequency of your trading activity as well. If you are a day trader, you will close actual positions before the day's trading activity is over. If you prefer longer term trading activity, then you can hold your positions overnight, for days, weeks, or months. Forex traders must also decide about the timing of trades. Some traders trade the news, and others trade after the news. When developing a forex trading strategy, all of these issues should be factored into the equation.

It is said that if you don't know where you're going, any road will take you there. Much the same is true with forex trading. You need a blueprint – a strategic plan – regarding your pre-stated objectives. It can be a little difficult defining goals as a new trader, but it is easy to implement checks and balances along the way to right the wrongs that take place, and to monitor your progress. These types of metrics will serve as guardrails to keep you on track, perhaps even readjusting your trading strategies to meet your predefined objectives. Several powerful trading tools and resources are available to guide you, including stop-loss orders, and limit orders to lock in profits.

Successful forex traders implement these risk mitigation strategies with their chosen currency pairs. Without a highly effective forex trading strategy with clearly defined goals, it's impossible to know if you are succeeding. Always set your objectives before you enter a trade. It's best to be conservative, not overly ambitious on every trade, that way you can lock in profits on multiple positions. The synergistic effect of small profits on multiple winning trades results in bigger overall daily profits for day traders. Experts understand that it is quite possible to generate big profits from a few lucky trades. But this is the exception, rather than the rule.

Putting Together Effective Forex Trading Strategies

Forex trading strategies come from the head, not the heart. Avoid knee-jerk reactions to trading activity and stick to tried and trusted techniques, methodology, and theory. The right mix of knowledge, insight and self-discipline is needed to implement an effective FX trading strategy. It takes mental fortitude to act without compunction. The goal in all instances is to accumulate profits here and there, with more substantial winning trades than losing trades.

By locking in more profits than losses, day traders can claim the spoils of victory. While you're undergoing this intensive learning process, it's important to be cognizant of the reasons why winning trades are winning and losing trades are losing. Make notes, take heed, and learn from your actions.

Your budget and the way it is allocated towards individual trades is sacrosanct. As a rule, no individual forex trade should make up more than 2% of your portfolio. This means that you could effectively place 50 trades of that same value across multiple different asset categories, guarding against downside risk. As your experience grows, and your knowledge of forex trading improves, you can gradually up that percentage to 4%. That means you could have 25 times that amount of capital invested in multiple trades at any given time. Diversification is the most powerful and effective risk mitigation strategy across all asset categories, not only forex.

Only you know what makes you tick vis-a-vis budgets, investment horizon/trading horizon, trading style, preferred assets, trading methodology, objectives, et al. Your trading strategy has your fingerprint on it, although you can change forex trading strategies as you evolve, or as needed. Indeed, it is true that there isn't a single best practice forex trading strategy for all situations, for anyone, or for everyone. It depends on the market, the assets, and the individual.

What Factors Affect the USD In Forex Trading?

As the world's reserve currency, and the most heavily traded currency, the USD always takes center stage in the forex trading arena. The United States is the world's #1 economy, followed by China at #2, and Japan at #3. The United States Dollar (USD) is affected by many different factors such as interest rates, quantitative easing, quantitative tightening, inflation expectations, employment numbers, GDP, trade balance, et al. One of the most keenly watched economic indicators is the NFP data. Non-Farm Payrolls are reported on the first Friday of every month at 8:30 AM Eastern Standard Time. When expectations are exceeded, the dollar strengthens. When expectations are not met, the dollar weakens.

The US Federal Reserve Chairman serves an important role in the global economy. When the Fed and the Federal Open Market Committee (FOMC) determine that monetary policy should be tightened or loosened, this directly affects the USD. A tightening of monetary policy means that less dollars are circulating in the economy due to a reduction in supply, or an increase in interest rates. Either way, this strengthens the USD as a currency. If quantitative easing takes place, then interest rates decline, and the Fed buys bonds to pump money into the economy. This weakens demand for the USD, and weakens the USD in trading pairs.

There are hardly ever strictly linear relationships with any given economic decision. More often than not unexpected consequences can arise over any given a cycle.

*Trade forex with caution. Conduct your research and practice forex trading in demo mode before you trade for real.

Forex Trading in the Age of Cloud Computing Technology with Algorithmic Systems

Nowadays, it's all up there in the cloud. Major hedge funds have developed powerful forex trading algorithms to capitalize off minuscule imbalances in cross currency rates, economic indicators, or market news. By injecting huge capital into forex trades, even the slightest price movements (pips) can generate outsized profitability. While many banking institutions are trying to play catch up with the powerful hedge funds, it's not going their way. For individual day traders, swing traders, and position traders, access to cloud-based algorithms in computing technology is growing. That is helping to develop functional forex trading strategies with powerful tools.

Xtrade is one such example of how forex traders can benefit from algorithms, forex strategies, and cloud-based systems. Autochartist Market Alerts use algorithms to process real-time forex data, and generate rebounds, or breakouts. These take place over 15 minute granularity levels with trading recommendations being passed on to clients. This makes it much easier for you to use the power of big data and cloud-based computing technology to formulate your own effective forex trading strategy.

Machine generated AI, funded by massive investments from the private sector are facilitating highly efficient forex trading systems available to the mass market of retail traders. A caveat is in order: Just because forex trading is available to anyone, anywhere, doesn't mean that everyone, everywhere is protected against losses. On the contrary, there is no guarantee of success in this volatile trading milieu.

Trading CFDs involves significant risk of loss. Trading FX/CFDs involves a significant level of risk and you may lose all of your invested capital. Please ensure that you understand the risks involved.