Forex Market Trading Strategy

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What Is a Trading Strategy?

Most frequently, a trading strategy is a set of entry and exit rules, which a trader can use to open and close positions in the foreign exchange market. This rules can be very simple or very complex. Simple strategies usually require only a few confirmations, while advanced strategies may require multiple confirmations and signals from different sources.

Additionally, a trading strategy may contain some money management rules or guidelines. Some strategies (e.g. Martingale) can be centered strictly around position sizing techniques.

Pin bar Trading Systemize tools are usually charts, technical or fundamental indicators, some market data or anything else that can be used in trading. When choosing a strategy, you need to understand, which of the required tools you have in possession.

It is important to choose a strategy or system that is easy to follow with your daily trading schedule and that can be applied successfully with your account balance size.

Mechanical vs. Discretionary

Forex strategies that are traded based on strict mathematical rules with no ambiguous conditions and no important trading decisions to be made by the trader are called mechanical. A good example of a mechanical system is a moving average cross strategy, where MA periods are given and positions are entered and exited exactly at the point of the cross. When working with mechanical trading strategy, it is easy to backtest one and determine its profitability. You can also automate such system via MetaTrader expert advisors or any other trading software. The usual drawback of such strategies is their lack of flexibility before the fundamental changes in the market behavior. Mechanical strategies are a good choice for traders knowledgeable in trading automation and backtesting.

Strategies that retain some uncertainty and cannot be easily formalized into mathematical rules are called discretionary. Such strategies can be backtested only manually. They are also prone to emotional errors and various psychological biases. On the bright side, discretionary trading is very flexible and allows experienced traders to avoid losses in a difficult market situation while offering an opportunity to extend profit when traders deem it feasible. Newbie currency traders should probably stay away from discretionary trading, or at least try to minimize the extent of their discretion in trading.

trading strategy

Strategies

In this Forex strategy repository, you will find various strategies that are divided into three major categories:

  • Indicator Forex Strategies
  • Price Action Forex Strategies
  • Fundamental Forex Strategies

Indicator

Indicator Forex strategies are such trading strategies that are based on the standard Forex chart indicators and can be used by anyone who has an access to some charting software (e.g. MetaTrader platform). These FX strategies are recommended to traders that prefer technical analysis indicators over everything else:

Price Action

Price action Forex strategies are the currency trading strategies that do not use any chart or fundamental indicators but instead are based purely on the price action. These strategies will fit both short-term and long-term traders, who do not like the delay of the standard indicators and prefer to listen as the market is speaking. Various candlestick patterns, waves, tick-based strategies, grid and pending position systems — they all fall into this category:

Fundamental

Fundamental Forex strategies are strategies based on purely fundamental factors that stand behind the bought and sold currencies. Various fundamental indicators, such as interest rates and macroeconomic statistics, affect the behavior of the Forex market. These strategies are quite popular and will benefit long-term traders that prefer fundamental data analysis over technical factors:

  • Forex News Trading Strategy
  • Carry Trade Strategy
  • Forex Gap Strategy
  • Buy-and-Hold
  • Commitment of Traders Strategy

Testing Your Forex Strategy

It is very important to test your trading strategy before going live with it. There are two ways to test your potential trading strategy: backtesting and forward testing.

Backtesting

Backtesting is a kind of a strategy test performed on the past data. It can be either automated or manual. For automated backtesting, a special software should be coded. Automated testing is more precise but requires a fully mechanical trading system to test. Manual testing is slow and can be rather inaccurate, but requires no extra programming and can be done without any special preparation process. Any backtesting results should be taken with a grain of salt as the tested strategy might have been created to fit particular backtesting historical data.

Forward Testing

Forward testing is performed either on a demo account or on a very small (micro) live account. During such tests, you trade normally with your strategy as if you were trading your live account. As with backtesting, forward testing can also be automated. In this case, you would need to create a trading robot or expert advisor to execute your system. Of course, with discretionary strategy, you are limited solely to manual testing. Forward testing results are considered to be more useful and representative than those of the backtests.

Collected from: www.earnforex.com

 

 

 

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