Dear friends, congratulations on moving to the third level of my course! I really hope that most of you are following everything from the first lesson. Fo those of you who accidentally got right to the block of trading strategies, I strongly recommend starting the course from the beginning. Believe me, there are ideas that you will not find anywhere else, and this half an hour that you spend on reading can bring hundreds of thousands of dollars in the future.
In this lesson, we will talk about the main types of trading strategies on Forex. I do not want to make separate articles about strategies that I am absolutely sure are inefficient, so we will talk about certain trading approaches in more detail and we will discuss the rest in separate lessons at this level.
You will probably agree that all the trading approaches can be schematically divided into profitable and unprofitable ones. I do not advise that you rush the evaluation of the success of a particular strategy, even if I say that it is completely unviable. The human brain is unique, so each of us can analyze every strategy, highlight the strong and weak points, discard the unnecessary things, and combine only the most effective aspects of a dozen different approaches in our own trading process.
For example, you can avoid using fundamental analysis, but keep in mind 2-3 important news items during which you often lose money. The older 3-screen strategy does not seem to be viable in the current market, but you can successfully use 2 timeframes instead of three.
I hope that my idea is clear. Now let’s analyze each approach in more detail.
FUNDAMENTAL MARKET ANALYSIS
Since our main trading assets are the national currencies of different countries, it is logical to assume that the main driving force that influences quotes is the respective national economies.
The euro-dollar rates are primarily influenced by the economic course of the countries of the European Union and the United States. If Europe is in a crisis and the US economy is on the rise, the EUR/USD chart will show a medium-term bearish trend—the price will fall. If a government pursues rigid monetary policy, injecting into the economy a large amount of worthless money, it stimulates inflation, and the price of the national currency will weaken with respect to all the world currencies.
In other words, a fundamental market analysis implies a deep understanding of macroeconomics and main international trends. The trader should monitor world news, analyze the press and the opinions of experts, and build a medium-term and long-term forecast for the development of the global situation.
In my opinion, followers of the fundamental approach could suggest the following theses:
- Short-term fluctuations in the market are mostly random, only medium-term trends can be predicted with a high degree of probability;
- competent fundamental analysis is well suited for investing; and
- the main source of information for successful trading is not a trading platform, but news reports.
In my opinion, such a look at the market is really great for medium-term investment, but is not very suitable for short-term investments, especially intraday intraday speculation.
Nevertheless, in the context of the forex market, this concept is understood as an attempt to quickly earn money due to the sudden price movement after the news is released. I will discuss what kind of news items these are in a separate lesson on fundamental analysis.
STRATEGIES BASED ON THE TECHNICAL ANALYSIS
In the following lessons, we will discuss various aspects of technical analysis in detail. Its difference from the fundamental analysis is that here we assume that the market is not chaotic and it does not rest on the intricacies of the world economy. In the market, you can see constantly repeating regularities, so-called patterns.
Having found and understood these patterns, you can earn huge amounts in the financial markets. The main problem is that the trader must be able to distinguish a truly working pattern from the randomness repeating several times. For example, if a car has not passed on a particular section of the road at 3 p.m. for all the time, it does not mean that it is safe to walk on it at this time. Another distinguishing feature of technical analysis is that, if, in the fundamental approach to the information we focus on the information flow from the press and the opinions of the experts, in this case our main data source is the trading platform.
The MT4 and MT5 terminals have a very large range of built-in tools that allow you to find regularities on the market. For some traders. only one tool, such as regular lines, is enough to find successful trade entry points. Others use a combination of indicators and oscillators to get a signal about the possibility of opening a position. I’m sure that the majority of readers are most interested in a technical approach, so let’s focus a bit more detail on a variety of technical analysis.
Indicators and oscillators that you see in your trading platform do not constitute a ready-made trading strategy or a money button. The indicator is a statistical tool that visualizes certain data for the specified period in the chart. The basis of most indicators is the Moving Average. Even if you do not want to deepen into the theory, I still do not advise you to skip a MA lesson that awaits you ahead. Moving Average is an ordinary line passing through certain points on the chart.
At this point, we will introduce two new terms: overbought and oversold. For our example, we will use the Moving Average as the main indicator. Moving Average is the midline which is smoothed according to the closing prices of 10 candlesticks. Moving averages constitute a separate lesson in which I will give the details of the mechanics of construction and methods of using the indicator.
In this case, if the price is above the moving average, we will assume that the asset is overbought. For the trader, this is a signal that it is necessary to look for the entry point in a short position to earn money on the basis of moving the price back to Moving Average. If the price is below the moving average, we will assume that the asset is oversold. For a trader, this is a signal that it is necessary to look for the entry point in a long position to earn on a return to the Moving Average A large part of the indicator strategies work on the basis of this principle.
Important! At the end of the strategy level, we will have a separate lesson on redrawing the indicators. This is exactly the reason why the indicators show excellent results on the history but, on the real market under the same settings, traders suffer losses.
LET’S MAKE A MINI-SUMMARY
For successful indicator trading, we should understand how the indicators and oscillators work, find the best combination of tools, as well as settings with which our trade will be profitable.
This is exactly what we will do in one of the following lessons.
TRADING WITHOUT INDICATORS AND PRICE ACTION
Price Action is a kind of technical analysis, in which the chart is the basis of analysis.
The main task of the trader remains unchanged — to find and use the periodic movements. To better understand what is being discussed, let’s recall the concept of the support and resistance levels.
The support level is an imaginary line below the current price at which the current price movement can stop and turn up.
The resistance level is an imaginary line held above the current price at which the current price movement can stop and turn down.
These definitions are not entirely correct, but I am trying to explain their essence in the most comprehensible language. At important price levels, bulls and bears are struggling and it results in a change in the balance of the market. If the number of long positions in the uptrend has dominance over short ones then, at the resistance level, the bears take the lead, and the volume of short positions exceeded the volume of the long ones.
I know several dozens of ways to determine the support and resistance levels, and this course will feature lesson devoted just to these concepts. Now, though, I will state only that the followers of the price action strategies see these levels just on the chart, without resorting to the use of indicators. Let’s get back to this topic in the corresponding lesson.
Candlestick analysis is a method of market analysis that does not use indicators. Unlike the classic Price Action, here we do not need to look at the whole chart, we need just pay attention to the last few candlesticks. Recognizing a certain candlestick pattern, we can guess the direction the price will move after the opening of the new candlestick.
In order to not spend too much time on it in this lesson, I will only say that modern traders rarely use candlesticks as the basis of their trading strategy, but this method can be successfully combined with the other techniques of technical analysis. For example, you are looking at a daily chart before the beginning of trade. When you see a familiar candlestick combination, you expect the day to close below the opening level (that is, the new daytime candlestick will be black). In this regard, today you are planning to open only short positions or open long positions with the reduced volume in order to reduce potential risks.
This method can serve as a good example of how you can combine different approaches when designing your own strategy.
AUTHORS’ TRADING STRATEGIES
As a part of the course, we will mention several strategies that I call the authors’ ones because they are named after the real people who invented them. As an example, you can use Gann methods, the approaches of Fibonacci, in honor of whom the whole set of technical tools in the MetaTrader platform (fan, grid, and others) are named.
In my view, such strategies have the following distinctive features:
- Each strategy often has an entire philosophy. To understand how to apply a strategy to the financial market, you need to understand more than just the indicator’s settings.
- Such strategies are very self-sufficient; they are rather difficult to modify and to combine with other approaches. There are certainly exceptions here.
- Most authors’ approaches were invented in the 20th century and were applied to stocks or other assets. Financial markets are changing very fast, and it’s hard to imagine that some kind of tool can work equally well both on the stock market of the mid-twentieth century and in the currency market in the 21st century.
Let’s move on to scalping, the most popular topic of many traders.
WHY DOESN’T SCALPING WORK IN THE FOREX MARKET?
Based on my experience, most of the newcomers who come to study trading are dreaming of becoming scalpers. Removing scalps from the market, quickly collecting small movements in prices, seems a great way to grow a trade deposit.
In my course, I have not made a separate article about scalping since I believe that this strategy is absolutely unviable on the forex market. Therefore, in this lesson, I decided to focus a little bit more on this method and to explain the reason for my negative attitude to scalping in forex to my readers. Despite the large number of author’s indicators and advisers allegedly working well on the tick chart, I believe that scalping is used most successfully in response to the market depth.
The market depth is a dynamic chart where the requests of all the participants of the exchange are displayed. A trader can clearly see all the pending orders for sale and purchase that are currently displayed on a particular instrument. With a quick change in the number of applications in one direction or another, the trader can understand that there is a change in the market balance right now, and the price is about to jump up or down. From this perspective, the trader instantly opens the deal, and in a few seconds he is ready to take the profit.
Scalping has always presupposed incredible tension, maximum concentration, and iron self-control. Yes, in due time, it really allowed some traders to quickly grow their account equity and become stars of trading. Unfortunately, now the situation has changed. Here’s what I think about scalping on Forex:
- There are no Depth of Market requests in forex that display the pending orders of all the market participants. Since forex is an over-the-counter market which does not have a central link, it is not technically possible to combine all the requests. The MT5 terminal does have a similar tool, but unfortunately, only your broker’s requests or the requests from a group of brokers can be displayed there. This volume is a drop in the ocean; it is not at all a representative sample that can be used in an analysis.
- Short-term movements on almost any trading instrument are poorly analyzed and that’s why so many traders are losing money on binary options, about which I will have a separate lesson. Most of the time, there is noise in the market. the majority of successful traders switch to more medium-term trades. I will talk about this in more detail at the end of this level of my course.
- When you make a lot of small trades, the total amount of spreads can exceed the amount of your profit. Remember that, in each trade, you have to take away several points from the profit that go to the broker as a commission for opening and closing a position. Recall the risk management lesson where we studied the detailed report from the MT4 platform. If the average profit per transaction is 5 points and the spread is 3-4 points, can this be called a successful strategy? I believe not.
- Scalping has died at the moment of development of the automated trade and the creation of HFT algorithms.
High Frequency Trading is the automated trading systems which are characterized by high transaction speed and the analysis of large amount of data. Such robots are able to make a huge number of deals in a few milliseconds, without actually leaving a place on the market for scalpers.
I will be glad to hear your opinion about scalping and to discuss different approaches to this trading approach in more detail.
VOLUME TRADING STRATEGIES
Volumes on forex is another issue that bothers many traders for some reason. Now, you know that there is virtually no data source in the world where you could see the volumes of trades of all the participants of the forex market. This makes trading on the basis of volumes unreasonable. Nevertheless, on my website there is good material from which you can learn about more or less reliable ways to get data on the movements of world currencies, which are actually the volumes (VSA and WTO reports). This kind of analysis is not suitable for short-term speculations, but it is intended for mid-term and long-term currency movements.
OTHER GRADATIONS OF TRADING STRATEGIES
In conclusion, it is worth to summarizing the classic gradation of trading strategies that may be helpful in determining your own approach.
- Trend, counter-trend, flat strategies
The trend strategy presupposes that, under no circumstances, will you open trading positions against the current movement. That is, if the EUR/USD price grows in the medium term, we are considering the possibility of opening a long position only. The main question here is only what to consider a trend. As part of your strategy, you must clearly state for yourself what you consider to be a trend and how to distinguish it from short-term price movement. I will explain some of the ways in one of the following lessons.
Counter-trend (swing trading) strategy involves earning on the price reversal, or opening a position against the current trend. In trader’s slang, there is a word, «swing.» which denotes a reversal. Of course, it would be great to know when the current trend ends and the opposite one begins. In real life, such a type of strategy is the trade from support and resistance levels. Probably the most common version of the entry point looks like this:
- The price approaches the support or resistance levels;
- There is a small rebound (immediately or after a false breakdown);
- The trader is waiting for confirmation of the reversal (for example, closing the watch candlestick below the resistance level or above the support level), and then opens the position, waiting for a break from the level and the turn of the current trend.
In my opinion, this trading principle is one of the most popular ones among traders. Nevertheless, every professional has his own small developments and small details which make his approach successful. We will discuss these developments in detail in the following articles.
The flat strategy presupposes trading within a price channel when the chart is moving within the range. This approach is a bit different from counter-trend trading; just the support and resistance levels here are the boundaries of the channel. The key difficulty of a flat is that the trading range is usually quite narrow and the trader has to trade in the conditions with not very good risk-reward ratio. We will analyze this point in detail in the indicator trading lesson.
- Long-term, medium-term, short-term strategies
The difference in approaches lies in the timeframe and the duration of the transaction. For example, for short-term trading, traders use the M5, M15 or M30 timeframes; for medium-term strategies use the H1, H4 timeframes, and for the long-term ones use D1 and more. At the same time, short-term trading presupposes the duration of one transaction from 1 minute to one day; medium-term trading from one day to one week; and long-term trading from one week or more. Of course, such gradation is very hypothetical.
- Manual, automatic, semiautomatic strategies
The manual strategy is fully executed with the help of hands: the trader analyzes the market, determines the entry and exit point, and establishes trade orders. In semi-automatic trading, trading advisors can be used to analyze the market and to give the trader a signal that a trade can be made. In automated trading, the trader creates a trading robot that fully follows the strategy built into it. The trader only monitors the robot’s statistics, ensures its performance and, if necessary, corrects the algorithm.
On my website, there are the materials about the creation of commercial robots and a small immersion in MQL language. If you are interested in this environment, I recommend visiting the official MQL community.
In the next lessons we will examine each type of trading strategy in detail. I’m sure that, by the end of the course, you will be well-versed in all trading approaches and you will be able to consciously develop your own trading strategy. Let’s move on!
Yours sincerely, Pipbear