Understanding trading strategies and indicators
What is a trading strategy?
A strategy is a list of personalized rules that a trader sets for their work. Any strategy is meant for successful trading.
Main types of trading strategies
All trading strategies can be divided into short-term and long-term ones.
Short-term (intraday) strategies include pipsing and scalping. As a rule, they are used on M1 and M5. Both strategies are based on carrying out a large number of trades in one trading session. These two strategies are usually considered difficult because they require considerable strain and cause additional stress to the trader. Trading news can also be considered a short-term strategy. However, in this case, the trader makes only one entry a day and, most often, the profit from such a trading session is locked in by the end of the day. At the base of all these strategies lies a most simple principle - breaking out the ranges and moving from the breakout to the width of the range.
Strategies based on price patterns (Head and Shoulders, Triangle, Gartley Butterfly, etc.) are normally considered long-term, though often traders call them mid-term. In such cases, traders usually work on M15, M30, H1 and hold their positions from a day to a week. The classical understanding of long-term strategies is long-term investing (from a month to several years). With such strategies, we normally work on H4 and higher.
In this post you can find examples of top-rated trading strategies.
What is a Forex indicator?
An indicator is a technical instrument that allows the trader to find their way in the current market trend. Practically, it is the trader's helper in forecasting further development of the price. Trading platforms feature multiple indicators, and each trader can pick up the one that suits their style best.
Types of indicators
Popular types of indicators are trend indicators and oscillators. Trend indicators show the direction of the developing trend. Oscillators normally reflect the strength of the trend at the present moment. Such indicators are attached to the price chart of the instrument, being reflected with it on the screen.
More information about forex indicators you can find in this post.
Strategies and indicators
Let us discuss an example of a strategy that allows for using indicators. In pic. 1, you can see a popular scalping strategy on M5.
The essence of the strategy is the analysis of the night price range in the Asian trading session (00:00 till 09:00 terminal time). At the opening of the European session, the market tries to break out the range, formed at night, from above. At 10:20, it manages to do so. From the moment of the breakout of 1.1101, an order to sell opens. Take Profit is set as the width of the range - near 1.1092. Stop Loss is at the upper border of the range - 1.1111.
The indicator that helped make this trading decision is a popular trend indicator Moving Average (MA). One MA is used with period 20 (as quick) and the second one - with period 50 (as slow). If the quick MA crosses the slow one from above, the trend on the market is descending, and only selling is valid in this situation.
As we can see in pic. 1, such an approach will bring you a profit from this order in one hour.
To make the signal more trustworthy, it is advisable to take into account the values of an oscillator (such as the MACD). At the moment of the trade at 10:20, the oscillator was moving below zero directly down, confirming the strength of the trend for a breakout strictly from above.
Closing thoughts
In this article, we have seen just one of a great number of strategies that use Forex indicators. All strategies feature their signals that must be confirmed by a minimum of two pairs of indicators. The strategy described reflects the author's opinion and cannot be taken as guidelines for trading on high-risk financial markets, including Forex. If this strategy is applied to practice, each trader must realize that they assume all risks of financial losses.
We wish successful trading to everyone!
This article was submitted by Dmitriy Gurkovskiy, Financial Expert and Author at RoboForex Blog
