Identifying the best strategy in the forex market
A trading strategy is a list of rules and conditions by which a trader makes trades in the currency market. Each trading strategy has its detail and nuances that one needs to know and understand. If understood correctly, a trading strategy will work efficiently.
Today, the choice is just vast, and beginners have trouble making the right choice. They have to spend lots of time searching for and testing various strategies until they find the one they manage to understand up to the tiniest detail. This topic has, indeed, been created for helping beginners in choosing a strategy.
Quite often we hear about "trading systems" and, logically, beginners have a natural question: what is the difference? A trading system is simply more complicated than a strategy, it has more indicators, entry conditions, nuances and details. Of course, it is harder to master.
Strategies in the Forex market are of the following types:
These are basic types, and all strategies originate in them. Remember that trend or flat strategies may or may not include indicators. In other words, there are tactics of trend detection that use indicators, and there are ways of detecting the trend direction by simply drawing lines on the chart. Similarly, in flats, you may or may not use indicators.
Algorithmic strategies are absolutely universal. They can work both in trends and flats and are not bound to any instrument. This means that a strategy meant for gold in Forex will work equally well for currencies.
Indicator trading strategies in Forex
These are strategies based on indicators. These may be standard indicators found on any trading platform: various oscillators, Moving Averages, volume indicators, etc. There are also strategies based on user indicators created by traders. As a rule, such trading strategies are simple to learn, at least the majority of them. They have not as many rules and conditions, there are clear directions of use, and you do not have to act on your own.
Some indicators and their application in trading:
Such trading uses a clean chart, with just lines on it: trendlines, support/resistance levels. Basically, they are drawn by beginners only for the sake of easier perception. More experienced traders understand everything about the price just as it is. Non-indicator trading looks like a most interesting topic to me, and I am sure that beginners should master at least the basics to maybe include those techniques in their collection later.
Main types of non-indicator trading:
- Working with breakaways of/bounces off support/resistance levels. These levels, in turn, can be divided into horizontal and trend ones.
- Working with classical reversal and trend continuation patterns. These are Head and Shoulders, Inverted Head and Shoulders, Double Bottom, Double Top, Diamond, Triangle, Flag, Pennant.
- Elliott wave analysis
- Candlestick analysis. Various candlestick patterns and combinations.
I have enumerated the most popular types of analysis. Yes, this is analysis, not strategies, each point cannot be called a strategy. Trading without indicators, you need to master these types.
I advise to study the following topics to beginners:
- How to trade by trend lines.
- How to trade in the overbought/oversold areas.
- How to catch a trend reversal? 5 strategies.
- Building algorithmic trading systems.
These methods are quite simple yet dangerous. They can be divided into two main types:
Martingale method is, basically, multiplication. For example, there is an order open for 0.01. A Stop Loss is triggered, another one opens with a volume twice as big as the first one.
Unlike Martingale, orders are never multiplied or closed here. For example, there is an order open for 0.01, there is a slump by 100 points, and another order opens in the same direction with the same volume. If the price goes back by 50%, the overall position will reach zero, and if the price continues going in the same direction, profit will be growing.
These are just several words about the methods. When creating strategies based on them in Forex, there might be variations. For example, you can unite Martingale and Averaging, doubling the volume not by 2 but by 1.5, and then with each open order you will need a smaller pullback. However, these methods and their combinations are rather dangerous and I would not recommend beginners to start with them. They can, indeed, bring a stable profit but you should realize that it will not be large because the working volume will be small against the deposit, and if you increase it, you might lose everything.
Best strategy in Forex
Beginners might ask: which strategy is the best? I say that it is the one that you understand perfectly, customize with time, supplement if needed, and test successfully. This is what each beginner should be aiming at.
Searching for, choosing, and testing your strategy
Before you start choosing your strategy, you need to realize how you would like to trade. There are several types of trading:
- Intraday (including scalping): you open several trades during the day. People who trade intraday try not to transfer positions for the next day.
- Short-term trading can also be called "intra week", i.e. trades can last several days.
- Medium-term trading: trades can last from a week to several months.
- Long-term trading: I would call it investments in currency because trades can last for years here.
For trading intraday or scalping, non-indicator trading will be a bad choice. In this case, select an indicator system customize it, test and experiment on a demo account. If you aim at calmer trading, you should not doubt and start learning a non-indicator strategy.
The best place for choosing strategies is various forums for one main reason - live communication with people who share the same interest (trading in our case). On a forum, you choose something g of interest to you and start studying. Read not only the rules but also the comments of users as they may content important answers and questions. Also, on a forum you can ask questions to the author and get an answer fast, unlike on websites or blogs. Also, nowadays many shoot videos with Forex trading, which might improve your understanding of chosen strategy.
Start testing only if you are sure that you have realized well what you read, including all the details. Then start trading on a demo account, and as soon as there are stable results, switch to a real account.
By Dmitriy Gurkovskiy, Chief Analyst at RoboForex