Strategy

A forex trading strategy

A forex trading strategy, or methodology, is a set of rules that define what conditions should be met for a trader to trade an fx pair.

Image by Michal Jarmoluk from Pixabay

It is a trading method that is part of a trading plan, designed to achieve a profitable return.

The strategy should contain at least the following:

  • strategy name;
  • description;
  • time-frame;
  • an entry trigger;
  • an exit trigger;
  • position size;
  • stop-loss;
  • profit target.
Example of a basic Fx strategy:

Strategy: Breakout

Description:

  • Mark high and low of previous session.
  • Wait 30 mins after open of present session.
  • When price breaks high or low, place order at break plus spread.
  • Stop-loss 20 pips, target 20 pips.
  • Only trade if high and low is within 50 pips from each other.
  • Time-frame: H1 (One hour)
  • Entry trigger: Break of high/low plus spread.
  • Position size: maximum exposure 1% of trade account size.

(Note: this is an example and not a suggested strategy)

Calculate your risk

Position Size Calculator widget is provided by DailyForex.com – Forex Reviews and News

You can choose a trading strategy once you have decided on the type of trading style you want to use.

Trading styles are broadly classified as:

  1. Scalping – making repeated profits on small price changes (usually minute charts)
  2. Day trading – entering and exiting trades during the trading day, before the market closes (trades could last hours)
  3. Swing trading – trading short-term price patterns but not bound by market close (Hour or 30 min charts with trades held for days)
  4. Positional trading – long-term trend following (End-of-day charts)

Within these trading styles, the trader can pick from as many choices as there are traders. A good place to start is to Google the different styles and read as much as possible.

The first step will probably be to decide which trading style and strategy suits your personality, the time you have available to trade and the size of your trading account.

  • A scalping strategy will not suit a trader who trades after work, but will suit someone who sits in front of the screen and is able to trade continuously. Scalping seems the easiest because it offers multiple opportunities in a short time, but it requires quick decision making and long hours in front of the screen.
  • Day trading strategies requires less screen time but also a presence from the trader, although it allows for leave-and-return screen time.
  • Swing trading strategies are more based on the actions of the market and chart patterns than time frames. It can require more or less screen time, depending on the time the trader has available.
  • Positional trading strategies are often used by after-work traders and are based on trend following.

When you have chosen your preferred style, the trader can search for a specific trading strategy. There are as many trading strategies as there are people who trade, people who are learning to trade and people who fake it till they make it.

A good start is to Google the trading style + strategies. So, an after-work trader could search for “positional trading strategies”, while shorter term traders could search for scalping, swing or day trading strategies.

It may be advisable for a trader to have multiple trading strategies to make continuous trading possible. For this purpose, the trader should have a strategy for each of the three market conditions, namely trend, range and breakout.

A trading strategy is not a guarantee for success, but it is a way of gaining an edge and managing risk.

It distinguishes traders from gamblers.