Types of forex strategies

2023.12.07 2019.08.29 Types of forex strategies

Oleg Tkachenkohttps://www.litefinance.org/blog/authors/oleg-tkachenko/

Types of forex strategies and description of categories

What is a forex trading system? It is an algorithm of consecutive actions with a basic set of its elements, eventually leads to the desired result. Forex trading strategies may aim at different goals: conservative trading with minimum risk, quick profit and so on. And even the profit may not always be the goal of a Forex system, because the excitement and pleasure in trading is already a positive result. From this review, you will learn about profitable Forex strategies and how they are built, how to minimize risks. You will also learn the examples of zero-risk forex trading strategies.

What is a Forex system?

Forex trading system/strategy - is a number of rules, systematic trading algorithms, following which should result in positive outcomes in the end. Building a trading system means developing a plan of action in a particular situation, which ultimately must yield profit with the minimum acceptable risk. Forex strategies are based on the following points:

• Input trading parameters: trading assets (currency pair, CFDs for stock market instruments, commodities, cryptocurrencies), timeframe.
• Choosing a particular type of trading strategy (based on the period of trading, risk level, indicators used and so on)
• Rules of entering/exiting trade
• Risk-management rules (calculation of lot size, maximum number of trades managed simultaneously, etc) 
• Psychological and behaviour factors (trading psychology, influence of outer factors, actions in case of force majeure). 

Based on a complete Forex trading system, one can develop an automated expert advisor and trading system.

Types of forex strategies

There are many categories by which you can range winning Forex systems. There are some of them:

• Scalping, short-term, middle-term, long-term trading strategies
• Forex technical trading strategies and forex fundamental strategy
• Manual and algorithmic trading
• Trading strategies, employing one indicator, a few tools or based on combined indicators
• Strategies, based on the type of operating: channel trading strategies, forex trend strategies, session trading, wave approaches and so on.

Some of these groups will be described later.

Best forex strategies types for beginners

The most profitable Forex trading system must simultaneously take into account both technical and fundamental factors, that is, be combined.

1. Forex trading strategies, based on fundamental analysis

Fundamental analysis is an assessment of the market situation based on the analysis of economic information: news, statistics, economic data, geopolitical factors, etc. A safe forex strategy that works is usually based on:

• Publications of economic data on the economic state of a country or a particular industry. Major fundamental indicators include the interest rate and the discount rate of the central bank, GDP, inflation rate etc.
• Analysis of financial statements of individual companies, their management and development plans.
• Assessment of the geopolitical situation and identification of major world trends

You can study the trading according to fundamental analysis in this article on the example of how to enter trades after the publication of the U.S. Non-Farm payrolls report.

2. Forex trading strategies based on technical analysis

Technical analysis is a set of tools to analyze and forecast the forex market, based on the assumption that the market is cyclical and everything repeats. Analysis of price action in the past periods lets traders make assumptions about price movements in future periods. The best Forex trading strategies are based on the following tools of technical analysis:

• Forex Indicators. A simple forex strategy for beginners may apply one or several indicators. If there are a few indicators, there are two types of trading strategies: using the same indicator with different periods (for example, 5 moving averages), or employing several tools of different types. For, example, you may combine trend indicators and oscillators.
• Forex key levels or trading horizontal levels. Support and resistance levels, Fibonacci levels, levels with round numbers. These forex trading strategies are based on the behaviour and psychology of the majority. They are rather efficient, but institutional investors also get use of.
• Graphic analysis or candlestick analysis. It applies price patterns to trade.  a price pattern is a recognizable configuration of price movement  that is presented in the chart by a particular candlestick formation.

Flaws of technical analysis:

• Market noise. It is random factors, affecting the price, that doesn’t have a certain origin and distort the final indicator values.
• Lagging and repainting     
• Market volatility that gets the indicator formula describing a trend to stop being non-unique.

You can learn more about indicators and technical analysis in this section

3. Trading strategies for the forex market based on digital filters

Digital indicators and filters can be grouped into technical analysis in some way with one difference. If technical indicators are based on mathematical and statistical formulas, digital filters use spectral analysis. One of the methods of such analysis is the ATCF system, which is described in more detail here. Its advantages:

• Dozens of indicators are based on it. They, combined with classical indicators, help to develop an optimal low risk Forex trading strategy or a zero-risk forex trading strategy.
• The digital indicators eliminate the problem of lag and market noise.

Digital filters are mainly employed in middle-term and long-term trading strategies.

No-loss Forex Trading Strategies

According to the risk level, trading strategies come into two groups: high-risk trading strategies and low-risk forex strategies. The more is a potential profit, the higher is the risk. A trader needs to find out an appropriate risk/return ratio that would correspond to his/her psychological state and targets. A balanced trading portfolio, as a rule, consists of 5%-10% of aggressive (high risk) trading forex trading strategies, 10%-20% of conservative (low risk) trading strategies, yielding a return, comparable to bank deposits, and 70%-80% of forex strategies with medium risk.

Qualitative indicators of the strategy risk assessment:

• Total profitability, profitability for individual periods. In a balanced strategy, the performance for all periods is roughly equal.
• The number of winning and losing trades. If the ratio is 50/50, or losing trades are more numerous (one successful trade covers a few losing ones), the strategy won’t yield any profit in the long-term period.
• The value of the maximum drawdown
• The value of the account load (the share of traded funds and free funds)

High-risk forex strategies include:

• Martingale. It implies doubling the positions size if the prior trade is losing. It results in deep draw-downs and the deposit loss. Some strategies suggest increasing the position volume by a coefficient (1.1, 1.2, and so on)
• Pyramiding. The following position is opened with a double volume if the prior one was profitable.
• Locking in. Opening of oppositely directed positions and closing the losing one afterwards.

Important! These strategies are not recommended as beginner forex trading strategies, and brokers sometimes limit their application.

Below, I’ll describe zero-risk forex strategies (low risk trading strategies).

Safe Forex Trading Strategies

1. Trading strategies based on arrow indicators

One of the problems of technical analysis is the interpretation of of indicators or a lag in decision making. Until the trader understands whether there is a signal or not, time will be lost. In order to reduce the risk of signal interpretation errors, combined tools, arrow trend indicators, were invented.

• Arrow trend indicators (buy sell arrow indicators) are the indicators that show trading signals (entry points) by arrows or dots in the chart. In     the settings of arrows, you can also configure a sound alert about a     signal.     

One of the modifications of this kind of indicators are the indicators that change their color at the trend reversal (different colors of the indicator dot or the columns of a graph bar).

Arrows have a drawback, they repaint signals. Therefore, to develop a no-loss forex strategy for risk free trading, you need to add filters to these indicators, like oscillators, important levels, price patterns and so on. You can learn more about such trading systems here.

2. Trading with price channels and level breakouts

Trading with levels breakout or the price return to the middle of the channels can be called the best forex strategy for beginners. The matter is only how to identify the channel borders. A no-loss forex trading strategy is based on the following points.    

• Price pull-back. Without fundamental drivers, financial market is generally stable. It means that there is an ample amount of buyers or sellers, the price will inevitably reverse, that is, the price is moving within a channel. Channels can be built with Bollinger bands,     moving averages and so on. It is important to configure the indicator variables to accurately identify the channel borders. A     trade is entered at time of price reversal. Confirming, supplementary indicators are stochastic, MACD and so on. 
• Channel breakout. As soon as the market goes out its usual state of equilibrium, a new trend starts emerging. If the price break through the level or the channel border, you may enter a trade in the trend direction. It is important to distinguish between the channel     breakout and the inertial correction

In this article, you can read about the best trading strategies for the forex market using channel breakouts and price pull-backs, as well as about general principle of channel trading with important levels.

3. Profitable forex strategies using a few indicators of the same type

The indicator is based on a mathematical formula that describes a process based on statistical model analysis. All indicators are different and it cannot be said which one is better. The application of several indicators in a strategy involves several problems:

• The more indicators are used, the more confusion there is. They may send opposite signal, which increases the risk of an error.     
• It is not clear, which indicator should be considered primary, and which is supplementary, confirming tool. 
• When     you are optimizing it, you have to go through dozens of parameter     combinations for several indicators, comparing them with each other.

Forex trading strategies that work apply a single indicator but for a few times. The strategy suggests you, instead of long search of appropriate parameters, attach 5-10-15 indicators of the same type with different periods to the chart, for example, 10 stochastics or 10 moving averages. If indicators form a tight bundle and then go apart, you may enter a trade. This bundle will be an entry signal.

You can study the examples of such forex strategies with a detailed description of entry and exit rules here

How to create a Forex trading system

Before you develop your trading system, you need to set your target, estimate the resources you have and the market situation. Answer the following questions: 

• What is more important for you, high profit or low-risk trading?
• Do you understand all the conditions of entering and exiting trades? If a trader employs an indicator based on the general rules of coincidence of a series of factors, this strategy will inevitably fail. It is important to understand how the indicators work, their work principles, rather than the number of indicators. If don’t clearly see it, you’d better start with simple consecutive Forex strategies; it is a simple profitable forex strategy.
• Do you have a trading plan?
• Can you test different strategies for the forex market?

How to create a new Forex strategy?

• Make up an idea that will be based on the market analysis and the knowledge of the operating principle of technical indicators.
• Select a group of indicators of technical analysis, determine the timeframe and trading assets, you are going to operate with.
• Think carefully about risk management rules and add filters to the forex trading strategy
• Test logically justified trading strategy in any way: MT4 simulator, or any other trading simulator. Perform stress-tests: verify the forex trading performance of your strategy with different assets, simulate a force majeure and so on.

After your own trading strategy is complete, test it on a demo account and try improving it on cent accounts. When you develop a low-risk forex trading strategy, you need to keep in mind that market is changing all the time and may not be always predictable. Apart from force majeure, it can be affected by different factors; for example, a large trading capital may make all the attempts to trade according to technical analysis come to nothing.

You can learn more about how to develop your own forex trading strategy and the example of the beginner forex trading strategies based on standard indicators here. I would also recommend using a constructor, creating automated trading systems according to inputs, entered by the trader, for example, System Creator.

And, finally, there a few recommendations:

• Study the basics of forex trading as thoroughly as possible. Do not rush to develop a new forex trading strategy, get familiar with what has been already created. By testing several dozens of strategies offered on the Internet, you will understand what types of forex strategies suite you more and are more interesting for you.
• Constantly monitor the trading chart and the trades entered. Even the best forex trading systems may be losing, and they also need optimizing.
• Diversify risks: operate with different instruments, combine technical and fundamental analysis, combine short-term and long-term trading strategies.

Don’t be afraid to go ahead and risk. I wish you successful trading!

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