Forex Trading Strategies

Would a great general go into battle without a strategy? No, and nor should you go into the market unprepared. Sound forex trading strategies are what separate the pro’s from the losers. You may win a few battles in forex without a solid game plan, but the war will almost certainly overcome you. If your goal is to be a market grizzled veteran, still standing, still growing your wealth long after your adversaries' corpses have rotted and returned to the earth, you’re going to need to develop a profitable forex trading strategy, and you’re going to need to develop the courage and resolve required to stick to it.

OK so maybe that was a bit much, but if you’ve ever blown a forex account trading willy nilly, you may have indeed felt like dying. You had a few big wins, bragged to your friends and family who were of course sceptical and then you lost it all, they won’t laugh at you, but they will pity you and you will lose some respect. If that’s what you’re looking for, you may as well keep betting your salary on the Rugby.

As traders we are here to win, not every battle, maybe not even most battles, but win the war. To do this we need a solid forex trading strategy.

Types of forex trading strategy

Exactly what type of forex trading strategy will work for you will depend on your profit goals, risk appetite and how many hours you have in the day to trade with. From long term trend-following down to scalping 5m charts there is a forex trading strategy to suit anyone and everyone.

Forex strategies: trend-following

Trend-following means riding trends in the market. Trend-following trading strategies have been employed successfully in the stock market for over 100 years and by far the most tried and trusted method of beating the market. A good trend can last months or even years and trend-following is as passive as trading gets, bordering on boring investment.

Trend-following strategies require very little time out of your day and are the ideal forex trading strategy if you are trading part-time and don’t have much extra bandwidth after work. Trend traders can use indicators such as moving averages or simply trace and follow price action with rudimentary tools such as trend-lines.

Forex trading strategies: swing trading

Swing trading is a medium-term forex trading strategy that seeks to capitalise on larger swings both in-line with and counter-trend. Swing traders are rarely in the market for more than a few days at a time and good swing traders can make serious profits with tight stops and massive reward profiles.

Swing trading essentially involves picking tops and bottoms so can be risky for newer traders, but if you are patient and careful you will have no issues. Lots of new traders start out swing trading without even knowing it. Swing traders will use price action as well as reversal indicators like RSI, Stochastics and MACD.

FX trading strategies: scalping

Scalping is essentially just swing trading on much lower time frames, where a swing trader will focus on 4H, 1H and maybe 30M charts, a scalper employs surgical precision on 1m to 15m charts to capture regular daily volatility.

Scalpers generally need to employ much more leverage than swing traders or trend-followers as their stops are a lot tighter and they need to increase their size to make bank from smaller movements in the markets. This is fine if your stops are respected, but if the market gaps violently against a scalper, they can find themselves in a world of trouble.

Though it’s worth exploring scalping with a little money to see if you have a knack for it, this stuff is generally best left for the cream of the crop – professional scalpers essentially turn the market into their own personal automatic teller machine, extracting profit day in, day out, executing hundreds of trades in a different month.

Backtesting your strategies – auto vs manual

Once you have settled on a type of forex trading strategy and appear to have found some kind of pattern that gives you an edge, it’s important to backtest this strategy to see how it performs over time and in a wide range of market conditions – it is very easy to find a dip-buying strategy that performs well in bull markets or a strength-selling strategy that works well in bear markets – neither of these approaches in isolation will be robust enough to perform well long term.

When it comes to backtesting, there are two approaches, manual or automated. Manual involves scrolling back through your charts, manually highlighting and logging trade signals and results, and then analysing hypothetical performance for a string of trades. The problem with this approach is it is extremely subjective, you will no doubt skip a few losing signals without even intending too. It is also very labour intensive, if you like spreadsheets then go for it.

Automated backtesting eliminates subjectivity entirely and is much more accurate. The problem here is you need to learn to code. On the other hand, Tradingview’s Pine script could likely be taught to a 4-year-old and there are a host of step by step tutorials out there. If you’re serious about your trading, do yourself a solid and learn basic Pine.

Irrespective of what approach you take to backtesting, remember results are always hypothetical, just because x trading strategy worked last year doesn’t mean it will work this year, the future is uncertain. Having said that, while every profitable backtest doesn’t mean success going forward, every unprofitable forex trading strategy will almost certainly be unprofitable in backtesting, history doesn’t repeat but it rhymes more oft than not.

Sticking to your guns

Though finding a profitable forex trading strategy might seem daunting, this is actually the easy part – traders from all around the world share their strategies freely to anyone who will listen. This may seem odd to give away forex trading secrets like this, but only a small fraction of traders will ever read these secrets, an even smaller fraction will decide to employ them, and an even smaller fraction will have the courage and resolve required to stick to their forex trading strategy.

If you’re having trouble sticking to your strategy, you have likely not done enough backtesting, or you’re probably trading too aggressively. Cold showers or ice baths can help with resolve.