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Forex strategies

Whatever you do in life, you cannot be successful unless you have a plan to guide you on your way, and the same applies to $orex tradingu cannot hope to be successful without having some clearly defined forex trading strategy, from which every other decision then flows, and this was the classic mistake that I made when first starting out. I had no plan, and no forex strategies to speak of, but like you opened a forex mini account with a market maker, because they provided free charts and commission free trading, along with a very simply forex platform that a child could use, with a one click operation to open and close trades. With no strategy in place, other than to take some profit when I thought appropriate, I simply started trading long and short on various currency pairs, with no stop loss or money management rules in place, and very soon I started losing money. My forex strategy then started to write itself, which became something along the lines of – any trade that was losing money I would leave in place until it became a winning trade ! Needless to say I waited a long, long, time for some of these trades to reverse, and I was only able to do this having had the luxury of investing a significant deposit into my online account. Some of the positions were open for years, and even using my forex mini account, were thousands of dollars down before recovering. However, where I was lucky, without realising it at the time, was that in trading these very long timescales and also with stops, I had managed to avoid the worse excesses of the market makers in terms of stop loss triggers, and price manipulation. This of course was counterbalanced by the cost of these positions which were ticking up interest charges each day. A salutary lesson, and one which taught me many years ago that without a plan, which is clearly defined before you enter the market, then you will fail – short and simple. In addition, do not turn a short term losing trading into a potential long term winning trade, and pretend that this is your new strategy – it will not work – I was lucky, but only because I had plenty of trading capital in my account. Most forex traders fail for two reasons – insufficient trading capital, and no trading strategy, in that order.

Your forex strategies can be as simple or as complex as you like, but you must write them down into a simple plan which you then follow and execute each and every time. Keep the rules simple, otherwise you will not follow them, and don’t deviate from the plan, as you will then be trading on emotion, fear and greed, which is the way your $orex brokerts you to behave. This is why the forex trading platform has your profit/loss flashing at you constantly – the broker wants you under stress as you are more likely to lose. ( cynical? – no, just a statement of fact!).

Now there is also another very important reason for developing your forex strategies early which is simply this – your forex broker may not allow you to trade using the forex strategy you have chosen, so as I mentioned, when analysing your forex broker, you need to match your forex strategy to your forex broker very carefully before investing time, effort and money in your $orex demoount or your forex platform. All this could be wasted if you find out later that you cannot use your chosen forex strategy. I am writing another site which will cover all my own forex strategies, which I have developed since my own, less than creditworthy start, but below are one or two that are the most popular, and I have tried to advise which brokers will allow each, to get you started, but you will need to check. Do remember, that the answer you get from customers services when a prospective client, may be very different from the answer you get when querying a live trade once you have an online forex account, so do not be surprised if the two responses are different once you are up and running!

Forex scalping

One of the most popular forex strategies for forex traders is forex scalping, which involves trading in very short timescales and taking a few forex pips on each trade. At first glance this strategy seems simple and straightforward, and indeed in many ways it is, however, the chances are that you will lose most of the time using this strategy for several reasons, as follows :

  • Stop losses have to be set tight, otherwise the profit loss ratio fails, and a series of small and continuous losses will wipe out the occasional profit
  • You are at the mercy of the broker, who will take out your stops, if and when appropriate, if you are using a market maker
  • Your charts will probably not be good enough to make this strategy work as they will not be close to the interbank liquidity pool
  • You will constantly be battling the spreads, either fixed or variable
  • Your market maker broker will probably not allow this form of trading

If you propose to use this forex trading strategy, then you need to choose a forex broker who will allow scalping, as many do not, and in my view the only broker to consider for this strategy is an ECN broker. A market maker broker will not, and even if they do will either stop you out by manipulating their prices, or alternatively put you on a manual execution service which will be slow and with spreads widened when markets are volatile. In addition their forex charts will be poor, and not reflect the interbank market, so you will always be trading at a disadvantage, and lagging well behind the real price action. Most novice forex traders fail to grasp this concept at all and continue to lose money every day. So if you decide to use this forex trading strategy, then choose an ECN broker, and pay for decent charts – it will reward you in the long run, and avoid you battling against both your broker and the market. This also applies when choosing your forex demo account, as this will allow you to test the forex platform and speed of execution, which should be excellent.

Forex hedging

Another very popular forex strategy amongst traders, and one I use myself all the time. Naturally there are many different ways to hedge a currency trade from the simple to the more complex. Simple hedging strategies involve using currency correlation between pairs such ash the eur usd and usd chf, where a move higher in one, is mirrored by a move lower in the other by a similar number of pips. In this case the two currency pairs correlate inversely, and therefore in order to hedge the position we need to open positions in the same direction and for the same number of contracts, so either long in both, or short in both. In this way as one contract moves out of profit, the other moves into profit.  Other strongly correlating currencies include the usd dkk, and gbp usd, and there are several others, all of which correlate with one another over various timescales. This is a simple forex hedging strategy, there are many others involving other markets such as the cad jpy and crude oil which correlate positively. However, here again we run into problems with our choice of forex broker as an increasing number have now banned hedging strategies in the same account, so you will not be able to open a hedge on the eur usd and usd chf for example. The reason?

  • You are less likely to lose, so less profit for the market maker broker
  • Your forex trade will not have a stop loss as it hedged, so the broker cannot stop you out
  • Hard for the broker to trade against you

If you broker does not allow hedging in this way, then there is a reason, and again if you propose to use cross currency hedging as your principle strategy, then you need to choose your broker and forex demo account with care, otherwise once again, you will have wasted your time effort and money. If you are proposing to use the above simple strategy, then again I would propose you use an ECN broker with a separate charting platform and news feed.

Trading the forex news

Trading the fundamental news is another popular strategy, but one that is also subject to many of the same problems outlined above. In this case the strategy is based on the fact that the forex markets react to the latest fundamental news on release, such as the NFP, GDP or CPI data. The problem is that at such times, your market making broker will deliberately increase the spreads on your feed to prevent any short term scalping, making the trade almost impossible as a result. In addition, with very large moves possible, and whip sawing in the market, any stop loss orders are likely to be triggered either legitimately or otherwise, so you will be at the mercy of both the forex markets themselves as well as your forex broker. If you plan to use this strategy then again I’m afraid an ECN broker is your only option with a good charting package direct from the interbank liquidity pool to give you a realistic picture of the market.

Now of course there are hundreds of other forex strategies for you to consider, but the key points to realise from the above simple examples are as follows :

  • 1. You must have a forex trading strategy before you start trading
  • 2. Your forex strategy will dictate the type of forex broker you choose
  • 3. Your forex strategy should be tested in your forex demo account to make sure it is supported by your forex broker

So, having looked at the decisions you have to make in terms of your forex strategy and the forex broker you use, finally let’s look at the issues surrounding your choice of forex demo account.