Basic forex trading strategy

Basic Forex trading strategies for beginners.

The number of Forex trading strategies for beginners and advanced traders is probably as large as the number of traders themselves. Given all the factors that are taken into account.

when constructing a trading strategy, this is not a surprise. The following parameters have to be looked at when creating a trading strategy: market and economy peculiarities, analysis instruments and theories, and real skills of beginner traders .

For a trading strategy to be considered simple, the following key criteria must be met: the concept should be clearly understood and it must contain enough information so that any trader is able to apply it in practice.

There are also more complex preconditions for a trading strategy, which include the following: does the strategy need permanent scrutiny, analysis, time, and money? This article delves deeper into this matter as we explain simple Forex trading strategies that work.

To begin with, there is one important issue that needs to be pinpointed – a significant error in the thinking of beginner traders that affects their perception of trading strategies.

Forex newbies usually picture the Forex market as impersonal. What they see is graphs and news pieces that have influence over the market, and they tend to forget about other traders.

This is a problem for it makes traders perceive the market as a place where they have no authority. This is a major misconception which should not be shared, because the market is steadily changing and the traders' activities absolutely do influence the market.

So, in order to perform outstandingly in Forex, a trader must be ready to do more and have a competitive advantage against other traders.

Virtually, there is no such trading strategy that can be applied to any market condition, every price detail, or any case that you confront. This is why it is crucial to become competent at one of two of the following options.

First, you might want to become an expert in one strategy and use it whenever applicable; second, you opt for mastering a small selection of strategies and apply them in a number of various cases.

Despite being the wisest ones to follow, these options have their flaws. The first one demands that a trader is extremely patient; the second one requires that you are able to hold your emotions and are not caught unaware by complex cases and conflicting signals.

This article outlines three simple Forex trading strategies that might be used in different markets, are easy to apply, and are detailed enough to be implemented.

Each of the strategies requires different amount of time spent on it, degree of capitalisation, and level of mental control. The strategies are: the carry trade strategy, the simple trend following strategy, and the simple breakout strategy.

If you are a newbie to trading, it's important that you don't just cram and copy these strategies, but comprehend the basic principles they rely on, test them thoroughly, and see where to improve them in order to align them either with your current market or your own trading principles.

Breakout trading.

One example of a beginner Forex strategy is breakout trading. It does not demand a lot of time, but can be difficult to tackle for those traders who are not patient enough and cannot concentrate on long-term results and tend to focus on immediate outcomes instead.

First step: setting.

Before even looking at a chart, each trader must first know for certain what he or she is looking for. This means that you must be sure the market conditions are right before starting trading. Knowing what you are looking for enables you to go quickly through many charts without missing any important data, no matter how complicated or simple the Forex trading strategy is.

To start using a breakout, you need a ranging market. This means a relatively narrow horizontal price corridor with relatively low volatility. In this corridor, the bears and the bulls have almost equal strength.

Various methods are used to distinguish a ranging market. The Forex strategy for beginners described here applies a 200 period simple moving average (SMA) on a daily chart. The number 200 has been selected because it is roughly a number of trading days per year, so it means you are seeing a yearly average. Use the market and its average daily volatility to set a price range – for instance, it might be 50 pips on either side of your 200 SMA.

A breakout signal will then be the price closing above or below the daily range.

Second step: entering.

This strategy has simple entry rules. If a candle originates on one of the sides of your 200 SMA, yet breaks out of range on the other side, you must enter in the direction of the breakout. Look for at least 50-60 pip skyscraper candle.

Third step: exiting.

Exit conditions are as important for a trade as entering conditions. This applies to any Forex trading strategy revealed, simple or difficult.

Always stick to your 200 SMA for a hard stop. Hard stop is a stop of no debate and hesitation. If the price comes back to it, you should know it was a false breakout. The market is still raging, and the bulls and bears still continue at this price level.

The worst case for you would be losing 50-60 pips. The best case scenario will be if the breakout develops into a trend.

If you manage to track a stop at 50-60 pips behind the price, this will move you away from the SMA 200 to a profit.

This simple Forex strategy is great due to its logic, simple use, and easiness of management. If you master it, you will only have to quickly look at your charts once a day using the breakout strategy.

This strategy's weak point is that it would not work in times when markets range a lot, for instance, during summer. Another drawback is a static range. You might notice false signals by the strategy is you look back and test it, but on the other hand, if you follow its strict exit rules, you will still receive profits from it in the long term.

Forex traders usually discuss this issue a lot. You might choose to tighten the entry conditions – this will reduce the total number of your trades but will improve your winning rate. The same applies to making the exit rules stricter – by doing so, you will face fewer losses but will also miss some profitable trades.

Trend following.

Every financial investor must comprehend market trends. Trend following is one of Forex's simplest strategies. Usually, the market heads in the same direction for some period of time. However, it is important for traders here to be quick at identifying and certain at entering the market when seeing a trend, so that they are among the first to benefit from it.

First step: setting.

To tell a ranging market from a trending one, traders in this strategy usually apply a 200 exponential moving average (EMA) to the hourly chart. Candles closing near the EMA, as a rule, indicate a range and mean that we have to stop. Candles that close quite far from the EMA mean there is a trend here and tell us to continue. Similarly to the previous strategy, traders are looking for a breakout.

Second step: entry.

For this strategy, Bollinger bands are applied to see the entry points. Bollinger bands, which are a dynamic standard deviation, confirm in this strategy if the market is ranging. They also assist in seeing a pull back – the best place to enter a trending trade.

If you see the uptrend in the market, which means both the price and Bollinger bands are higher than 200 EMA, search for a buy signal shown by the price hitting the lower Bollinger bank, which is also the end of the pullback.

To the opposite, a sell signal is shown when the market is in a downtrend and the bands are below EMA. At the same time, the price is hitting the upper band, demonstrating the end of the pullback.

Third step: exit.

To see when to exit from either trade, look for the price hitting the opposing Bollinger Band – the lower in the downtrend and the upper in the uptrend. When you follow these moves, you will be able to capitalise on these trend moves without losing time on the pullbacks.

This strategy is a simple Forex trading strategy that is characterized with sound logic. On the other hand, it also has its weaknesses just like any other trading methodology.

Compared to the previous strategy, this one is more constant for it applies to hourly charts. It can also bring great results when used in trending markets, but with ranging markets this strategy might cause losing trades.

To sum up with the two strategies, take a look at how the second strategy builds upon and applies the elements of the first one.

Carry trade strategy.

The third one of the three simple Forex trading strategies for beginners explained in this article differs a lot from the other two. The first two strategies are performing better in the environment of high volatility and trending market, while carry trading prefers ranging markets and does not depend on the absence of volatility. In addition, this 'set-and-forget' strategy is good for the long run, for it requires very little time to manage but takes a while to start bringing.

To get the most out of carry trading strategy, you need to look for currency pairs with low volatility and the highest interest rate differential. Bigger differentials usually mean bigger swaps. Then you should trade in the direction of a positive swap, i. e. sell the currency with a lower interest rate or buy the currency with the higher interest rate. This will allow acquiring significant profits in the long run with the help of a positive swap.

The economic theory from the fundamental analysis textbook further backs the logic of the carry trade methodology. This theory stipulates that a currency with higher interest rate draws more investors and appreciates relatively to the counter currency in the long run through their financial input.

The strategy's downfall is that the trades might be influenced by short-term price swings. This is why traders should be tolerant and accept that they may be positioned negatively for long time periods. Moreover, carry trade methodology needs tough money management and considerable capital, given that such trade might last for at least a few months.

So, these three simple Forex trading strategies are quite simple to follow, and they are to some extent different from each other, which means they can be used by various types of beginner traders.

It is worth noting once again that the above mentioned example strategies blend different principles, apply different tools, and follow different rules. Although they are good to start with in Forex, they should not be considered perfect. They could be amended and perfected to some extent, and they probably would not bring you dramatic profits.

So, if you are set to prosper in Forex, make sure you think for yourself and create your personal strategies. And a simple Forex strategy should only be applied to begin with.

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Simple strategies.

Submitted by Edward Revy on January 28, 2007 - 07:22.

Simple Forex strategies — simple to use, easy to try out.

This collection of Forex trading strategies and techniques is dedicated to help traders in their research and developing of workable trading styles and trading systems.

Attention all traders: trading strategies are posted for their educational purpose only. Trading rules may be subject to interpretation. Planned risk levels may be increased dramatically under extreme market conditions. Use the ideas and/or modify them to suit your trading style, but only at your own risk. We recommend testing your trading system on a demo account before investing real money.

Simple trading systems are good for skilled beginners and intermediate traders, but may not suit more experienced traders. Either way, do not skip those strategies as they will preserve consistency in your learning progress. Advanced strategies were all at some point simple, but later were improved by traders. So, learning the basic ideas behind simple strategies will help you in the long run to advance in your own strategy making.

We hope you enjoy staying with us!

Edward Revy and my best Forex strategies Team.

As you read comments, you'll see that when traders asked me to recommend any particular strategies on this website, I did so. However, from that time all simple strategies have been sorted and moved around, so the old numbering in my answers can be irrelevant for simple strategies. Another point is that every time a new strategy is added, it can be much better than those I recommended to try out months or years ago. So, just take you time and explore our great strategies collection!

Simple Forex Strategies:

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Simple Forex Trading Strategies for Beginners.

The Forex market is hugely liquid, with a vast number of participants. It is also a well-established market. As you might expect, this combination of popularity and time has resulted in traders devising countless strategies.

As a newcomer, the sheer volume of trading techniques available can be daunting and confusing. Some strategies are very complicated, with a steep learning curve. So beginners may find it better to start with a simple Forex strategy.

After all, the simpler the strategy, the easier it is to understand the underlying concepts .

There will be plenty of time to add complex actions after you have mastered the basics. Regardless of whether you adopt a simple or complex strategy, remember that your overarching mantra should always be to use what works.

New traders are generally unable to devote large amounts of time to monitoring developments. For these newcomers to Forex, simple strategies offer an effective but low-maintenance approach.

This article will introduce some simple Forex trading strategies. You can also pick up new strategies from our free webinars.

Three beginner Forex trading strategies.

The first two strategies we will show you, are fairly similar because they attempt to follow trends. The third strategy attempts to profit from interest rate differentials, rather than market direction.

But first things first – what is a trend?

To put it simply, a trend is the tendency for a market to continue moving in a given overall direction. A trend-following system attempts to produce buy and sell signals, that align with the formation of new trends.

There are many methods designed to identify when a trend starts and ends. And many of the simple Forex trading strategies that work have similar methods.

Trend following can produce large profits. In fact, there are traders who have produced outstanding track records using such systems.

But there are also some drawbacks to these strategies:

they are difficult to stick with large trends can be infrequent the conditions that signify the potential beginning of a trend, are not frequent.

This means that the strategy tends to generate numerous losing trades. The theory is that these losses will be offset by more infrequent but larger winning trades.

That is a hard pill to swallow in practice.

Also, once the trend breaks down, you tend to give back a healthy amount of your profit. You may have heard the phrase, " the trend is your friend ". But you may not be so familiar with the full expression, which adds "until the end".

The end comes when the trend fails and this can be very trying on a trader's psychology.

One big issue with a trend-following system, is that you need deep pockets to properly use it. This is because having a large amount of capital, reduces your chances of going bust during an extended drawdown.

So, trend following is useful as a Forex strategy for beginners to understand, but it may not be ideal for less wealthy beginners.

Now, let's break down our strategies.

The first strategy attempts to identify when a trend might be forming. It looks for price breakouts.

1. Breakout.

Markets sometimes range between bands of support and resistance. This is known as consolidation.

A breakout is when the market market moves beyond the boundaries of its consolidation, to new highs or lows. When a new trend occurs, a breakout must occur first.

Breakouts are, therefore, seen as potential signals that a new trend has begun.

But the trouble is, not all breakouts result in new trends. In Forex, even such simple strategy must consider risk management. By doing so, you seek to minimise your losses during the trend break-down.

A new high indicates the possibility that an upward trend is beginning, and a new low indicates that a downward trend is beginning. So how can we get a feel for the type of trend we are entering?

The length of the period can help determine the highest high or the lowest low.

A breakout beyond the highest high or lowest low for a longer period suggests a longer trend. A breakout for a short period suggests a short-term trend.

In other words, you can tune a breakout strategy to react more quickly or more slowly to the formation of a trend. Reacting more quickly allows you to ride a trend earlier in the curve but may result in following more shorter-term trends.

So let's looks at a reasonably long-term breakout strategy. The buy signal is when the price breaks out above the 20-day high. And the sell signal is when the price breaks out below the 20-day low.

This is very simple, but there is still a major drawback. Namely, new highs may not result in a new uptrend, and new lows may not result in a new downtrend.

So we are going to experience our fair share of false signals.

Using a stop-loss can help alleviate this problem. To keep things really simple, here's an extremely basic rule for exiting trades. We are going to take a time-based approach. You simply close your position after a certain number of days have elapsed.

This time-based exit side-steps the issue of things becoming tricky when the trend begins to break down. Once you enter a trade, hold it for 80 days and then exit.

Remember, this is a long-term strategy .

If you find these parameters do not yield enough frequent signals, they can be adjusted to whatever suits you best. For example, you can try using hours instead of days for a shorter strategy.

Backtesting your results will give you a feel for the effectiveness of your choices. MetaTrader 4 Supreme Edition offers backtesting, along with a large selection of other useful tools.

2. Moving average crossover.

Our second Forex strategy for beginners, uses a simple moving average (SMA). SMA is a lagging indicator that uses older price data that most strategies and moves more slowly than the current market price.

The longer the period over which the SMA is averaged, the slower it moves. Often, we use a longer SMA in conjunction with a shorter SMA.

For this simple Forex strategy, we are going to use a 25-day moving average as our shorter SMA, and a 200-day moving average for the longer one.

In the chart above, the 25-day moving average is the dotted red line. You can see that it follows the actual price quite closely. The 200-day moving average is the dotted green line.

Notice how it smooths out the price movement?

When the shorter, faster SMA crosses the longer one, it indicates a change in the trend. When the short SMA moves above the longer SMA, it means newer prices are higher than older ones.

This suggests a bullish trend and is our buy signal.

When the short SMA moves below the longer SMA, it suggests a bearish trend and is our sell signal.

Rather than solely being used to generate trading signals, moving averages are often used as confirmations of overall trend. This means we can combine these two strategies by using the confirmatory aspect of our SMA to make our breakout signals more effective.

With this combined strategy, we discard breakout signals that don't match the overall trend indicated by our moving averages.

Here's an example. If we get a buy signal from our breakout, we look to see if the short SMA is above the long SMA. If it is, we place our trade.

Otherwise, we sit tight.

3. Carry trade.

Our final strategy is essential to know. It's a type of trade that is widely used by professionals too, so it is not purely a beginner Forex strategy. Best of all, it is easy to implement and understand.

The essence of the carry trade is to profit from the difference in yield between two currencies. To understand the principles involved, let's first consider someone who physically converts currency.

Imagine a trader borrows a sum of Japanese yen. Because the benchmark Japanese interest rate is extremely low (effectively zero at the time of writing), the cost of holding this debt is negligible.

The trader then exchanges the yen into Canadian dollars and invests the proceeds in a government bond, which yields 0.6%. The interest received on the bond, should exceed the cost of financing the yen debt.

But there is a drawback.

Obviously a currency risk is baked into the trade. If the yen appreciated enough against the Canadian dollar, the trader would end up losing money. The same principles apply when trading FX, but you have the convenience of it all being in one trade.

If you buy a currency pair where the first-named (base) currency has a sufficiently high interest rate, in relation to the second-named (quote) currency, then your account will receive funds from the positive swap rate.

The amount yielded is correlated to the amount of currency commanded, so leverage is an aid if the strategy pays off. As noted earlier, though, there is an inherent risk that you end up on the wrong side of a move in the currency pair.

So it is important to carefully select the right currencies .

Inertia is your friend with this strategy and ideally you are looking for a low volatility FX pair. It's also important to note that leverage will end up magnifying losses if you get it wrong.

The Japanese yen has long been popular as the funding currency because Japanese rates have been low for so long, and the currency is perceived as stable.

The strategy works well at a time of buoyant risk appetite because people tend to seek out higher-yielding assets. The action of traders implementing the strategy can itself support the strategy because the more people using the strategy, the greater the selling pressure on the funding currency.

This simple Forex strategy has been successful.

But, there's a current problem. The global low interest environment, has narrowed interest rate differentials. When risk appetite collapsed during the credit crunch, many fingers got burned as funds flowed into the safe haven of the Japanese yen.

With the Fed signalling its intention to tighten monetary policy in the future, we may yet find the carry trade coming back into favour.

Final thoughts.

We hope you have found this introductory guide to Forex trading strategies for beginners useful. After all, anyone can follow these guides.

Just bear in mind that the examples we have shared primarily aim to get you thinking about the principles involved. Don't follow a strategy without first testing it out.

Feel free to put your strategies to the test with our risk-free demo trading account. And don't forget to regularly check our Education section for more free insights and best practices.

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Basic Strategies.

Submitted by Edward Revy on May 26, 2009 - 20:14.

Basic strategies - where the education for all beginner traders starts.

Basic strategies use simple chart pattern recognition rules and one or two basic indicators. By learning to recognize and trade simple patterns, novice Forex traders will be able to make a much smoother transition to more advanced trading systems and methods.

We start from the very basic Forex trading strategies that will help beginner traders to identify entry and exit points and foresee market turns; and we will gradually advance to more advanced Forex trading systems.

Before we start: two words about Stop Loss orders – they should be set either in fixed amount of pips (you may try to use 20-30 pips with those simple Forex systems) or, if chart permits, slightly over the last highest/lowest price swing point.

Attention all traders: trading strategies are posted for their educational purpose only. Trading rules may be subject to interpretation. Planned risk levels may be increased dramatically under extreme market conditions. Use the ideas and/or modify them to suit your trading style, but only at your own risk. We recommend testing your trading system on demo account before investing real money.

Edward Revy and my best Forex strategies Team.

Basic Forex Strategies:

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