Many traders always lose money but don’t know how to become profitable, sometimes they win sometimes they lose. They always look for forex trading strategies that work and try to copy the success, but they usually find that the reality is cruel.
Sometimes they want to study more technical methods such as the indicators, candlestick patterns, chart patterns, Fibonacci and so on to optimize their forex trading system, but they can’t find useful information. There only a few simple description for these methods.
They also have no interest in any paid course. They just reject them instinctively.
So this site tries to do something for them. Traders can find many forex trading strategies and many basic knowledge in details about indicators, candlesticks, chart patterns and so on here.
If you are a beginner and don’t know about forex trading strategies or just want to find some inspiration to do some optimization, then you can keep reading. The below words talk about some simple and common specific skills.
Forex Trading Strategies
Forex trading strategy is also called forex trading system. It defines the entry rules, exit rules and risk management rules( someone calls it money management). These rules could be very simple or complex, sometimes it may have no relationship with trading, for example, buy in sunny day and sell in rainy day.
In fact, every trader has his own specific trading strategies. It may be subjective, it may be mechanical, or it may just based on the traders’ feeling. And the trading time frame is also different, scalpers may use M1 charts, long-term traders may use daily or weekly charts, intraday traders may use M5 charts.
However, profitable strategies are all based on their trading logic, in other words, their trading concepts. This article talks about most used swing trading and trend following only. In fact, many specific strategies such as price action strategies, breakout strategies, candlestick strategies and so on could be classified as swing trading or trend following.
Trend Following Strategies
Trend following is a trading method or trading idea. Trend followers think that there is market trend in a certain period(the market will keep rising or falling in this time). They won’t predict the specific points like analysts, they choose to follow the trend when it appears(they use many methods to judge the market trend). So in most case when they enter, the market often has begun to move for some distance. They never demand to enter the market when the trend just start. They never predict how long the trend will last, how far the trend will go. In most case when they exit, the market has moved backwards for some distance.
Trend following focus on following not forecasting. It is a reaction to the price movements, so this kind of strategies are always hysteretic. Traders always enter the market till the obvious trend appears(how to define the trend rely on their own rules). And for any trend indicators, sooner or later, they will show the entry signals. Traders will never miss a big trend.
The below chart shows two different trend entry signals.
The USDJPY dropped from 111.44 to 103.57. If you use MA cross as entry signal, then you may sell around 106; but if you use the 20 day low as the signal, you may sell around 109. Have you seen that ? When the real trend appears, all the indicators will show the signal. You can capture this trend by any methods, the only difference between them is sensitivity. As the old saying goes, there is only two kind of signals for trend following—fast and slow.
On the other hand, trend following will suffer many small losses in congestion zone. Before the real trend appears, traders will never know if the current signal is true. For example, trend follower use the 20 day high(low) as the entry signal. They have to trade every appeared signal, unfortunately, most of them are fake. They will suffer many losses, which may make traders doubt if their strategies still work. Traders may even give up their strategies finally. If they do not trade a signal just because of their doubt or fear, while this signal is real exactly, it may be a deadly mistake for them. They may will not have the opportunity to offset their losses.
In most case, when trend followers exit, part of their floating profits will disappear, sometimes their profitable trades will even turn to losing trades.
The below chart shows a MA cross trade.
Traders bought in the blue circle and sold in the red circle. When this trade ended, traders found that all the floating profits had gone, they even suffered small loss. Unfortunately, this kind of trades are so common for trend following. It’s also one of the important reasons why traders give up trend following.
1. Low Winning Rate And High Reward Risk Ratio
Trend following requires traders to lurk on the road. That is to say, for example, if the price wants to rise to $15, it must rise to $11 first, the only thing traders need to do is lurking at $11. As for if the price will keep rising when it reach $11, nobody knows. The price may reach $11 for many times in range market.
However, some data shows that 70%-85% of the market is in congestion zone. The losing trades in the congestion zone leads to the low winning rate directly. It’s a big challenge for those traders who do not have a strong heart.
The below chart shows a congestion zone. The 20 day high breakout will suffer 6 losses.
But once the real trend comes, traders will get huge profits, especially when they choose to add position. The real trend usually bring at least 3R even 10R+ profits. Trend followers should try best to capture every big trend, the losses in the congestion zone could not be avoid.
Many traders try to optimize their trend following strategies. The first choice they usually make is to change the signal threshold. For example, they may change MA60 to MA100, they may change 20day high to 50 day high. But traders must be clear that there is no perfect solution. The bigger threshold could filter some false breakouts, but it brings another problem at the same time—entry and exit are usually too late, the profits in the real trend market will be much less. If the threshold is too small, traders will suffer much more losses in the congestion zone, and it’s more easily to be affected by market noises.
Other traders choose to add filters for their strategies. For example, they may require that the ADX index must be more that 30 when the MA cross. The appropriate indicators could improve trading systems, they usually could filter some false signals and decrease the equity curve retracement. But on the other hand, it may cause the total profits decline.
2. Market Diversification
Trend following strategies work well in volatility market, but terribly in range market. Nobody could predict the future volatility, so the behaved well strategies in history may still come into the terrible situation. In order to capture more volatility market and also improve the stability of trading systems, trend following strategies are usually required to trade at least several markets at the same time.
See the below charts. They were in the same time period.
The previous market was in obvious uptrend, but the latter GBPUSD was in a big congestion zone. If traders traded GBPUSD only by using trend following strategies during this period, they had to face their unavoidable losses. But if traders also traded GBPJPY at that time, things will totally be different. In general, the more market traders trade, the higher probability it will be to capture the trends. Of course, trend following requires that those markets could not be strong related. They usually keep the same movement paths, this kind of combinations could not work well.
Swing Trading Strategies
Compared with trend following , swing trading is used more widely. Sometimes it requires traders to set the exit goal price—usually swing highs and lows. Swing trading could based on channel model, chart pattern model, Fibonacci model, candlestick pattern model and so on. It also could be used in any time frame, but most in H1, H4 and daily charts.
This article will take the channel model as swing trading examples.Swing trading works not only in trend market, but also range market. Swing traders try to buy at the range bottom and sell at the rang top. The range area could be regarded as horizontal channel.
See the chart below.
It was a obvious range market. The price moved up to range top B from the bottom A, then dropped to bottom A from top B. It always repeat the movement A-B-A-B. The ideal swing trading was to take a long position from A. When the price moved up to the top area B, then exited this long position and took a short position instead. When the price dropped to bottom A, exited this short position and took a long position instead. Traders could continue trading as long as the range market kept. And they could always make money!
A kind of cross-range swing comes from the above horizontal channel. The price also do some repetitive movements.
The below chart shows the simplified movement model.
It has 3 horizontal ranges—AB,BC and CD. In the range AB, the price rebounded from bottom B to top A, then the price begun to drop. When it dropped to B, it did not rebound again(here it was different from the above horizontal range), however, it continued dropping and stopped at C. Then the price moved up again and stopped at range top B. As expected, then it dropped to D directly from top B area.
In fact, the price was always repeating the movement— AB-BA-AC, which means a good swing trading opportunity. For swing traders, their mission is try to capture the AC swing. In the real trading, traders could use the previous highs(lows) or Fibonacci extension to set the potential goal price, or in other words, the potential location of C.
Besides horizontal channel, swing trading is also available in inclined channels.
See the chart below.
The market was in obvious down trend. The price moved to the lower channel A and rebounded to the upper channel B, then it dropped to the lower channel A again. The price was always repeating movements A-B-A-B, It’s also a good trading opportunity for swing traders. In the real trading, at least 2 highs and lows needed to determine the upper and lower channel.
Besides the above swing channel, there are some other channels, for example, combined with indicators.
The below chart shows a Envelope channel. A MA plus a fixed percentage formed the upper channel, and this MA minus the fixed percentage formed the lower channel. All the parameters could be defined by traders. Here the base line was MA14, and the percentage was 0.2%.
2. Bollinger Bands channel
Bollinger bands is similar to the envelope indicator, they all plus or minus a certain range based on a MA. But for Bollinger bands, it plus or minus N standard deviation. The default parameter is 2 standard deviation.
Some beginners are always impulsive, they often trade just according to their temporary feelings, and hardly do deep research to their strategies. They enter the market once the price hit the bollinger bands, because they see so many true examples that once the price hit the bollinger channel and then it begins to reversal, they think they find a superexcellent strategies. However, when they really trade with this strategy, they suffer too many losses and doubt if it really works.
Some smarter traders will wait for a pullback once the price hit the channel, while others may use technical methods to confirm each other. For example, first, they may require that it must be at least H1 chart to filter unnecessary noises. Second, when the price hit the upper channel, there must be a obvious bearish signal such as dark cloud cover, bearish engulfing, evening star etc. On the contrary, when the price hit the lower channel, there must be bullish signal.
The below chart shows how candlestick patterns combined with bollinger bands channel.
A dark cloud cover pattern formed in the circle 1, and run through the upper bollinger bands channel, which was a confirmation to the channel. It was a sell signal. A bullish engulfing formed in the circle 2 near the lower channel, it was a buy signal. There are also some other red circles in the chart. But they are not good entry signals.
For the above swing channels, the best trade is to buy at the lower channel and sell at the upper channel. But the market is not always so perfect, sometimes the price reversals before it reach the opposite channel. It’s a challenge to swing traders in that case.
They must realize what the problems their strategies may have. For example, what do traders do if the original channels do not work? How to know if it still works? What if the price does not reach opposite channel and then begins to reversal? Traders who want to be successful must think about these question carefully and get their own answers.
For trend following strategies, there are two basic entry skills. One is based on breakout, another is based on the pullback after the breakout. Most methods are developed from the two basic skills.
1. Candlestick Channel Breakout
Candlestick channel breakout has been used for many years, the famous channel is Donchian Channel. It’s based on the candlestick highs and lows—buy when the price break out the N day highs, sell when the price break out the N day lows. It’s almost the simplest entry signal. The biggest advantage is that traders will never miss any trend, and even if traders miss a entry signal, they can also quickly join in it in the latter market. In fact, there is a easy understanding truth in channel breakout— it may not form a trend once the price break out the N day highs, but if there want to be a trend, the price must break out N day highs. Many trend following strategies based on this truth. But with the development of the market, simple N day highs(lows) breakout seems to be no longer as effective as before.
There are still some ways to do optimization.
1) Breakout delay
It requires that the price must be a certain higher than the channel highs. For example, the price must be at least 20 pips higher than the channel highs, or must be 2% higher than the channel highs. Here the breakout price could be real-time price or close price, it all depends on traders.
2) Time delay
It requires that after a certain time the breakout signal still works. For example, the first breakout signal appears on Monday, the optimized entry signal requires that 3day later(on Thursday), the price is still higher than the channel highs. These optimization could filter some false breakouts. Because if it is false, the price will drop to below the channel highs quickly.
3) Other technical methods confirmation
This kind of optimization has too many choices. For example, it could require that ADX indicator must be more than 20, or it must be a long candlestick breakout. In general, these optimization will filter some noises, but at the same time they may reduce the profits when a profitable trade end. Those optimized trading systems usually be more stable.
2. Volatility Channel Breakout
Channels could be more things, not just the candlestick highs and lows. Volatility channel is one of them. It’s a certain deviation from the previous candlestick close price(traders could also use highs, lows, open price and so on), and this deviation usually measured by ATR indicator. For example, the previous candlestick close price plus 2ATR forms the upper channel, the previous candlestick close price minus 2ATR forms the lower channel. When the price break out the upper channel, try long position; when the price break out the lower channel, try short position. These can be used in H1, H4 and daily charts.
This kind of channel has too many variations. Traders could change the parameters as they like to form their own systems. They can change the candlestick close price to MA, they can change the ATR to a certain percentage or standard deviation. For example, when the MA combined with standard deviation, it forms a Bollinger Bands channel.
Traders could add more methods to filter invalid signals, no matter these methods are subjective or quantitative. For example, traders may require that the price must be in a small range before a breakout.
The below chart shows a Bollinger Bands channel breakout entry.
It requires that the Bollinger bands must be convergent, and there must be at least 3-5 sideways candlesticks. Then find out these candlesticks high and low, draw R/S line passed them. Once any continuous candlesticks breakout the R/S line, that’s the entry signal.
3. MA Indicator
MA is the most popular indicator, someone use it to judge the current market trend, someone use it to design entry and exit strategies. It’s widely used in history. And like some other classical strategies, the simple MA strategies such as MA cross strategy seem to be no longer work any more in today 2017. But if traders optimize them appropriately, for example, choose some filters, take some add-position measures, there is still opportunity to be profitable again.
The below chart shows a simple single MA entry.
It’s the H4 chart. If 3 continuous candlesticks all closed above the MA120, then take a long position; If 3 continuous candlesticks all closed below the MA120, then take a short position. But this kind of original entry may lead to too many invalid signals in range market as the chart shows.
Traders could add some filter rules by using extra indicators such as ADX. For example, the new entry rules may like this: when the 3 continuous candlesticks all closed above the MA120, the ADX must be more than 30 at the same time.
The below chart shows the improved strategy entry signals. Most invalid signals was filtered, and only 5 signals left. The parameters can be self defined by traders according to the market volatility and time frame.
Change this signal a little, it can be used to trade swing. See the chart below.
The new long position entry rule:
1) ADX must be more than 30
2) MA60 move upwards
3) The close price drop to below the MA60, then rise back to above the MA60 soon
Here traders could develop more their own strategies based on this rule. They can change the close price to low price, they can define the trend judgement rule 2 again, for example, change single MA60 to MA10, MA20, MA60. There are too many things can be done, but be clear that it’s not a mechanical trading system, different traders will have different performances.
In fact, you may have realized that it’s a pullback strategy. More and more traders prefer this kind of strategies. Traders could set small stop loss, which means higher reward to risk ratio in the same condition. It could be an add-position entry or a re-entry in trend following strategies, It could also be a entry of swing strategies.
4. Fibonacci Retracement
Like other kind of strategies, there are many methods could be used to develop this kind of pullback strategies. Here are some simple tips for reference:
1) If there are some continuous bearish candlesticks
2) If there are N day low
3) How do the indicators behave?
4) What’s the relative locations of candlesticks and R/S?
In many case, traders like to use Fibonacci to judge the pullback.It is a magical number. Its basic rate is 0.236 0.318 0.5 0.618 .0764. It’s often used to find out the R/S line, of course, it has great values when combined with candlesticks, and it could be used in any time frame.
In general, 0.318 0.5 0.168 are the most used Fibonacci retracement rate. Traders should focus on how the price moves when it reach those rates. They should also be clear that the price may will not reach those places, for example, the price may stop moving at the area between 0.382 to 0.5.
Some traders may read the candlesticks and indicators to decide if they will enter the market, while some other traders do not care any signals, they just set the sell limit at the 61.8% retracement point. It’s all OK. These methods are all strong related with their whole trading strategies and their trading logic.
5. Candlesticks And Chart Patterns
However, there are some traders prefer pure candlesticks and their patterns. They usually use simple charts combined with trendline or R/S line to trade. They think the price action itself has reflected all the things, when some significative candlesticks and patterns appear at some specific important places, it usually indicate that the market may changed, that’s a good trade opportunity. Candlestick movements could also form many chart pattern such as flag pattern, triangle, head and shoulders. There usually be huge price waves when these patterns formed, and traders could catch big fish if they cast a net here, so this kind of strategies is also popular.
The below chart shows a hammer appeared at an important R/S line. The price began to rebounded after that candlestick. In fact, it was the same with pinbar, which was called by price action trader. The previous highs and lows could used to set goal price.
If traders want to use those methods, they need to know more about the candlesticks and patterns. For example, the morning star:
1) What is the basic definition? Does it have any variations?
2) What does it mean when it appears at different places? For example, in uptrend, down trend, range bottom, or previous low?
3) How to combine it with other technical methods such as trendline, R/S line?
4) Is it a trading signal or just a alert signal?
The more traders know about them, the higher winning rate they will have. But the chart pattern is different from candlestick pattern. It’s formed by many candlesticks, not two or three . The most used chart patterns are continuation patterns and reversal patterns, which was loved by many manual traders.
The below chart shows a flag pattern. Most traders will wait for a breakthrough, but some traders prefer enter the market in advance. They will predict the possible direction of the breakthrough and think they can get more superiorities in that way.
The above words are just about some common entry strategies. Traders should understand the logic behind each trading strategy and choose a suitable trading idea such as trend following, swing trading, arbitrage and so on, then begin to develop their own systems.
A trading system is not just entry, in fact, many traders overrate the importance of entry, traders should also spend much time on researching how to exit a trade.
There are several exit strategies for reference.
1. Based On Timing
This kind of strategies rule the exit time without considering how the price changes. It has two kinds of meaning.
1) Traders enter the market just because they think the price will move as they expect. But if the price did not move as they expect, nor did it hit the stop loss, maybe it’s time for traders to consider exit. The market did not move as they expect, it means that traders may have done wrong trades. Then timing exit is an option. In this case, traders may suffer some losses, but it’s still less than the losses they suffer when the price hit the stop loss.
The rule could be like this: If the price did not rise 5% in 5 days (the day entering the market was regarded as the first day), nor did it hit the stop loss, then exit when the 6th day opens. This exit strategy usually used in short-term trading, which last for several days.
2) In this case, traders will never care if the price moved as they expect, they just wait for N day and then exit. For example, the rule says 20 days later exit, as long as the price did not hit the stop loss, then traders will have to exit 20 days later no matter how many profits they get. In fact, some intraday trading strategies include this kind of timing exit. Traders usually hold their position till the market closes if the price did not hit the stop loss. The potential exit time is when the market closes. Sometimes this kind of strategies work much better than other exit strategies.
2. Based On Goal Price
In general, swing traders prefer setting a goal price for their trades. It could help traders to protect their profits better. In fact, for most traders, it’s also hard to bear the huge floating profits disappear . The equity curve of this kind of strategies is also relatively smooth. Once the goal price set, the risk reward ratio also fixed, it is different from trailing stop.
But this is also the biggest weakness. The market trend may still keep when the price hit the goal, if traders exit at this time they will not get more huge profits. Second, in many case the price reversed before it hit the goal, traders may never see it reach the goal.
The goal price could based on a certain money, for example, exit the trades once get $1000 profits or 10% profits. It could also based on chart. This article will discuss the later one.
1) The previous highs and lows
In general, the obvious previous highs and lows will be regarded as goal price. Risk reward ratio will also be considered, those trades whose reward-risk ratio less than 1 usually is not allowed. It’s the most common and reliable exit strategies.
2) Fibonacci extension
It’s usually used like this: choose the first swing as 1, the end of second swing as the start of the third swing. Then use the Fibonacci extension to calculate the possible third swing end. The commonly used extension ratio is 1, 1.618 and 2.618
The below chart shows a 1 Fibonacci extension. AB was the first swing, BC was the second swing, CD was the third swing. CD is as long as AB, that is 1 Fibonacci extension. Once the price dropped to D, traders could choose to exit the market.
Some traders also choose to measure the movements by using chart patterns such as head and shoulders or rectangle pattern. But in more case, these patterns are used as entry signal.
As the above words mentioned, traders who use the goal price must consider what to do if the price reversed before hitting the goal or the price still keep moving after the traders exit. Those question is even more important than entry.
3. Based On Trailing Stop
Trailing stop most used in trend following strategies. As the old saying: cut off the losses, let the profits run. This strategies will often suffer the disappearance of floating profits. And exactly because of this, traders could hold their position tightly so they will not exit too early.
Trend following strategies have the same essence—Sacrificing some floating profits to gain more possible huge profits, and set a threshold at the same time to prevent the floating profits disappearing too much. The commonly used methods including volatility stop, equity retracement percentage stop, channel breakout stop, MA trailing stop, support and resistance stop and so on.
1) Volatility exit
Volatility stop usually need the ATR indicator. The Turtle Trading Rules use 2ATR as the initial stop loss, and also use it to calculate their position, design the entry and exit.
The volatility stop strategies could be regarded as a channel. It may be like this: After entering the market, the current high price minus 3ATR forms the lower channel, the current low price plus 3ATR forms the upper channel. For long position, exit when the price hit the lower channel; for short position, exit when the price hit the upper channel. Note that in some case the price will never hit the exit point, so traders need to develop some assisted exit strategies such as timing exit.
2) Equity retracement percentage exit
It’s also a commonly used method. Some traders use the market price retracement, some use capital retracement, some use equity curve retracement, and some use the profits retracement. In fact, they all are the one thing. This kind of exit strategies use money to measure the exit threshold, while other strategies use technical methods .
The exit strategies may be like this: assume that this trade get 30% floating profits, the allowed money retracement is 30%. That is to say if there is only 30%*(1-30%)=21% floating profits left, then exit this trade. In this way traders will get 21% real profits.
Some traders prefer setting more retracement gradient to optimize their system. For example, if there are 30% floating profits, 30% retracement allowed; if there are 40% floating profits, 25% retracement only allowed; if there are 50% floating profits, 20% retracement only allowed. Traders could define them as they like.
3) MA exit
MA is a good trend following tool. Some traders like the MA cross, someone likes to wait the candlestick close price to break out the MA, someone prefers combining the MA with candlestick patterns, while someone likes to use indicators such as ADX, RSI. Some traders prefer using several different time frame to judge the market synthetically. Those strategies have their own characteristics, but they all combined with their whole trading ideas and logic.
The below chart shows a classical MA exit. When 3 continuous candlesticks closed below the MA60, then exit the trade. It could help traders to capture the trend, but in most case this kind of strategies will lost many floating profits.
4) Support and resistance exit
Support and resistance could also be used in trailing stop. In some case, it even may be the best exit strategy. The below chart shows a trailing stop combined with support and resistance.
The arrow 8 was the last entry, and the S-L 8 was the corresponding stop loss. The price rebounded soon and was higher than S-L 8, so traders exited the trades.
5) Other exit strategies
In fact, besides the above mentioned basic strategies, there are many other strategies based on all kinds of indicators or statistics. For example, the RSI strategies based on range market, the momentum indicator strategies, the intraday fixed pips strategies based on volatility statistics, the reversal strategies based on candlestick patterns, the across timing strategies etc. Traders should develop their own ways.
There are so many successful traders with different trading styles.
They all use strict risk management to be sure that they can still be alive even if suffer some big losses. In fact, risk management is not as complex as most traders think.
1. The risk for each trades should not be more than 5%, usually 0.5%-3%
2. Traders should know when to exit the trades (very important)
3. Trade more market as possible, of course, the market should be weak correlation.
4. Adjust trading size according to the money, for example, reduce the position size when the capital suffered 20% losses.
Here is an example—A risk management example. As said before, risk management should not be separated from the corresponding strategy, they are a whole.
After seeing many failures, we find that many traders do not have a strategy at all, they trade randomly and hardly summarize their trades. So when you begin to study and develop a forex trading strategies, you are on the way to success. It’s not a end, but a start.