An in-depth look at trading strategies and the indicators involved
What is a trading strategy?
A trading strategy is a predefined set of rules that a trader has developed to manage his trade. Development of a trading strategy gives the trader the following advantages:
- It removes emotions from trading. A trader using a strategy knows exactly what to do depending on the market movements. A trader who does not have a strategy tries to make decisions when the market is open and is emotionally attached to positions. He may panic and hesitate when the market moves against him, as he does not have a prepared answer.
- Saving time. Building a trading strategy is a hard work. However, once the rules are developed, they can be easily automated to free the trader from having to watch the chart all day long and have more time to develop a further strategy.
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 technical 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.
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. Indicators help traders to find signals for their forex trading strategy.
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.
Pic. 1
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.
Pic. 2
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.
