Many new forex traders think the core of a forex trading strategy should be predicting where forex prices will go. Try it and you will lose, you will win if you trade in a different way so why is prediction not the way to make money? Let’s find out. If you are predicting you are in effect hoping or guessing which is not a way to make money in any venture let alone forex trading. You cannot predict the future and if you try, your predictions will be as accurate as your horoscope.

There is however a big market in people who say they can predict and many theories that say you can such as Elliot wave, Fibonacci and Gann. They argue that as human nature is constant so the markets must be as well. However if you think about it this logic is obviously not true, because if markets were predictable with science, we would all know the answer in advance and there would be no market.

Markets move based upon uncertainty and while human nature is constant, it is not predictable with science – trading is a game of odds not certainties. If you want to win you trade the reality of price change and don’t try and guess in advance.

For example if you see a market testing a level of resistance you do not simply enter a trading signal – if you do you are trading against the trend and you could be wrong. Instead you wait for prices to test resistance and wait for prices to turn back the other way. Sure you miss the turn – but you couldn’t predict that anyway, so there is no point trying!

How do you know when to trade.

The secret of correct market timing is using momentum oscillators. There are many you can use and three of the best are: RSI, ADX and the stochastic indicator. We don’t have time to go through exactly how they work here simply look at our other articles and make them part of your essential forex education.

The key advantage they give you with your forex trading strategy is they allow you to gauge shifts in price momentum. You can use these shifts, to allow you to trade the reality of a price change to achieve better market timing and more forex profits.

The forex traders who rely on prediction lose and are generally naïve or greedy traders who think forex trading is simply a walk in the park – its not and neither would you expect it to be. The real pro forex traders don’t rely on hope or guessing or attempting to buy market tops or bottoms they look at and trade the reality of price change.

The way to succeed in forex is simply to look at support or resistance and time your entry on shifts in momentum and you should not just do this with a view to these levels holding.
You also need to buy or sell breakouts of new market highs or lows. It’s a fact that most markets develop their best trends from these highs and lows and you need to learn to go with them and enter the market.

It may look like your getting in at good levels and its tempting to wait for the pullback – but these moves tend to not pull back and accelerate and offer the biggest profit potential. The market price is the right place and if you cut out prediction and trade the reality, you can have the basis of a forex trading strategy that can make big consistent profits.

Many forex traders don’t know where to begin when it comes time to implement a trading strategy. All the education in the world isn’t going to be of use without an example of what a trading system looks like. In this article, I’ll show you a simple, but effective, forex trading strategy that is constructed using some very basic tools.

Throughout my career in the forex industry, teaching thousands of traders how to profit, I’ve always suggested to start with a trend following approach to trading currencies. I do the same thing with my current clients. Naturally, I’m going to share a trend following approach with you.

I firmly believe in following trends in the forex market for one simple reason: they’re huge. Big trends in the forex market occur every year. You can usually identify them in the early stages and ride them for big gains. Trading trends in the forex market is by far the easiest way to make money trading currencies. I would even argue that it’s the most profitable way.

Trend Identification

The first component of this system is defining and identifying a trend. I need to define both upward and downward trends. To do this, I’m going to use two tools:

• 5 Day Exponential Moving Average (EMA)
• 20 Day Exponential Moving Average (EMA)

These two moving averages will help us to consistently and objectively define the trend. They work together like this:

• The trend is up if the 5 Day EMA is greater than the 20 Day EMA
• The trend is down if the 5 Day EMA is less than the 20 Day EMA

It’s pretty simple, but highly objective. There’s no arguing with the rules. Either the 5 Day EMA is above or below the 20 Day EMA and the trend is either up or down, respectively.

I like the 5 Day and 20 Day EMAs because they tend to work together pretty well during trending periods. You could substitute different parameters depending on the time horizon that you want to target. For instance, bigger parameters like a 50 and 200 Day EMA would lead to bigger, longer lasting trends.

Entry Points

To spot entry points, I like to use a Full Stochastic with the (5,3,3) settings. I prefer the Full Stochastic over the Fast or Slow Stochastic. The reason is that the Full Stochastic tends to be a little smoother when it comes to timing the turns of a currency pair.

The Full Stochastic generates buy and sell signals quite frequently. A buy signal is generated when the Fast Line, or %K, crosses above the Slow Line, or %D. A sell signal is generated when the Fast Line, or %K, crosses below the Slow Line, or %D.

To take entry points, I simply align the buy signals in the Full Stochastic when the EMAs are in an upward trend; I enter short positions when the Full Stochastic generates a sell signal during downward trends in the EMAs.

Exit Points

I use the moving averages to define exit points in the following way. If I’m in a long position, I’ll ride it as long as the 5 Day EMA trends above the 20 Day EMA. I’ll exit the long position as soon as the 5 Day EMA crosses below the 20 Day EMA. If I’m in a short position, I’ll ride it as long as the 5 Day EMA trends below the 20 Day EMA. I’ll exit the short position as soon as the 5 Day EAM crosses above the 20 Day EMA.

Stop Losses

Stop losses are a critical component of any forex trading strategy. In this particular strategy, using the 5 and 20 Day EMAs and the Full Stochastic (5,3,3), I like to reference the 14 Day Average True Range (ATR) for my stop loss. I’ll set my stop 1 to 2 ATRs away from my entry point. Using the ATR enables me to adjust my stop across different currency pairs, which display different volatility characteristics.

Currency Pairs

When I’m using this strategy, I like to stay diversified. I do so by not trading too many overlapping pairs. For instance, I would never be in the same positions at the same time:

1. Long EUR/USD
2. Long GBP/USD
3. Short USD/CHF
4. Short USD/JPY

These four positions are all short the U.S. dollar; they are all closely correlated. If the dollar suddenly rallied, I would be in big trouble. To combat this risk, I try to spread my positions across different currency pairs that move somewhat independent of one another. Applying a little common trading sense in this regard will go along way.

Summary

This is a good forex trading strategy that you can use, especially if you’re new to the forex market. It covers all of the essential elements of a trading system, such as entry points, exit points, stop losses, and diversification. It’s profitable over time, but has its limitations. All trading systems have advantages and disadvantages, which you’ll only discover after gaining some experience actually applying the systems in the market. A good way to gain experience is to paper trade any system for a few months.

Forex trading strategies are based on two analysis. The first is known as the Technical analysis while the second is known as Fundamental analysis. Traders depend on both these analysis to make the trades. It’s important to understand that all currency pair trades have their own trends, challenges, ups and downs. Its not one size fits all. Also by far the US$ is the most traded pair accounting for 28% of the total forex trade worldwide. It’s the next best safe investment after Gold.

Fundamental analysis for forex trading strategies

Fundamental analysis forms one of the forex trading strategies that are used extensively by the traders. Most traders are never purist. They will always combine the two strategies. The fundamentals are actually all the factors that enable the economy of the country to function. This means that business, government and climatic as well as regional issues affect the currency as a whole.

These forex trading strategies can’t however show a price trend or pinpoint exactly the value of the currency. It can tell you whether the currency would appreciate or depreciate in the coming months, but won’t be able to tell you exactly in which price band the currency would move.

Of course not every factor will affect the movement of the forex rates forex trading strategies. There are some definite factors that will move the forex either ways. For example when the gold prices rise, the US dollar weakens, since gold and US dollar have an inverse relationship. But the AUD dollar strengthens since its world’s third largest exporter of gold. So it can be seen that the same factor can affect the two forex in different ways. (more…)