3 Tips for Developing Effective Forex Strategies

When starting to trade in the Forex market, the first question should not be where or how to begin, but rather what the result must be and how to get there, i.e. what strategy to apply. Because of the potential risks involved in Forex trading, an effective strategy is essential to mitigate those risks.

An effective strategy is crucial in Forex trading. 

What is a Forex Strategy?

A Forex strategy is basically a roadmap that helps a Forex trader decide when to buy and sell currencies in the foreign exchange market. When analysing the market to develop a Forex strategy, technical and fundamental analysis should be used. Technical analysis focuses on price movements and historical data whereas fundamental analysis considers factors that may play a role in currency values such as interest rates. Your strategy should include:

• what currency pair to trade, 
• when to buy/sell,
• entry and exit techniques,
• portion size,
• how to analyse the market, 
• the type of analysis you prefer, and
• money management

There’s no one-size-fits-all Forex strategy, as different traders will have different risk tolerances and goals.

Follow These 3 Tips for a Winning Strategy

Developing effective Forex strategies can be broken down into three key components: 

1. Trading in line with the trend
2. Following bar patterns
3. Following the correct entry technique

Here is a closer look at each of these:

Trade in Line with the Trend

It is important to align trading with the current trend in the market. The best way to determine the overall trend is to look at the 50-period moving average (50MA).

The moving average (MA) is a technical indicator that smooths out price fluctuations by showing the average price over a set period – in this context, 50 days. So, the 50MA is a moving average that considers the average closing price of the last 50 days. It helps identify whether the general trend is an uptrend or a downtrend.

The goal is to compare the current price of the investment to the 50MA. If the price is above the 50MA, it suggests an uptrend meaning that the price has been generally increasing over the past 50 days. In this instance, it is advisable to be looking for buy setups only. If the price is below the 50MA, it suggests a downtrend meaning the price has been generally decreasing over the past 50 days, and a trader should only be looking for sell setups.

Follow Bar Patterns

Bar patterns are distinct, recognisable formations generated by the movement of price. Although bar patterns do not offer guarantees, they are helpful in showing clear patterns that Forex traders can use as guidance. Price patterns can indicate potential breakouts or reversals. It is advisable to become familiar with established high-probability patterns like inside bars, pin bars, and engulfing bars.

With time you’ll notice a tendency of currency pairs to exhibit specific patterns. Traders should be looking for price bar patterns in every configuration they plan to trade, regardless of the trading strategy.

Follow the Correct Entry Technique

It is important to not just enter a trade at the market price but to rather wait for confirmation and plan your entry based on your trading strategy. Two indicators that need to be considered are leading indicators and lagging indicators. 

Lagging indicators give historical data only, whereas leading indicators assist in predicting the market. These predictions ensure that traders can execute trades when the expected market conditions start to take form. Both are valuable when making entry decisions.

A simple entry technique is using a buffer between 5 to 15 pips above or below your initial entry price. This entry technique helps traders to become more accurate and avoid impulsive decisions and potential false breakouts. The optimal buffer size depends on the specific strategy and risk tolerance. Traders should test different buffer zones to see what works for them.

A second entry technique is to enter the market only during the major Forex sessions. Although this does not guarantee avoiding ranging markets, it could offer increased liquidity. Using this technique could avoid traders entering the market at the wrong time and getting trapped in a ranging market with the currency pair going nowhere with no profitability.

In Conclusion

No matter which strategy you choose, it’s important to do the necessary research and understand the risks involved. Developing an investment strategy that works for you and then implementing it with the right mindset, will ensure a higher chance of successful Forex trading.

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Interesting Related Article: “Forex Trading Signals: A Guide to Understanding and Using Them Effectively“