It looks for price breakouts. Markets sometimes range between bands of support and resistance.
This is known as consolidation. A breakout is when the market market moves beyond the boundaries of its consolidation, to new highs or lows.
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When a new trend occurs, a breakout must occur first. Breakouts are, therefore, seen as potential signals that a new trend has begun. But the trouble is, not all breakouts result in new trends. In Forex, even such simple strategies must be used with risk management. By doing so, you seek to minimise your losses during the trend break-down. A new high indicates the possibility that an upward trend is beginning, and a new low indicates that a downward trend is beginning.
The length of the period can help determine the highest high or the lowest low. A breakout beyond the highest high or the lowest low for a longer period suggests a longer trend. A breakout for a short period suggests a short-term trend.
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In other words, you can tune a breakout strategy to react more quickly or more slowly to the formation of a trend. Reacting quicker allows you to ride a trend earlier in the curve, but may result in following more shorter-term trends. The buy signal is when the price breaks out above the day high, and the sell signal is when the price breaks out below the day low.
This is very simple, but there is still a major drawback. Namely, new highs may not result in a new uptrend, and new lows may not result in a new downtrend. So we are going to experience our fair share of false signals. Using a stop-loss can help to alleviate this problem. To keep things really simple, here's an extremely basic rule for exiting trades: We are going to take a time-based approach. You simply close your position after a certain number of days have elapsed. This time-based exit side-steps the issue of things becoming tricky when the trend begins to break down.
Once you enter a trade, hold it for 80 days and then exit. Remember, this is a long-term strategy. If you find these parameters do not yield enough frequent signals, they can be adjusted to whatever suits you best. For example, you can try using hours instead of days for a shorter strategy. Backtesting your results will give you a feel for the effectiveness of your choices. MT4SE offers backtesting, along with a large selection of other useful tools. Did you know that Admiral Markets offers an enhanced version of MetaTrader that boosts trading capabilities?
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Now you can trade with MetaTrader 4 and MetaTrader 5 with an advanced version of MetaTrader that offers excellent additional features such as the correlation matrix, which enables you to view and contrast various currency pairs in real-time, or the mini trader widget - which allows you to buy or sell via a small window while you continue with everything else you need to do.
Our second Forex strategy for beginners uses a simple moving average SMA. SMA is a lagging indicator that uses older price data than most strategies, and moves more slowly than the current market price. The longer the period over which the SMA is averaged, the slower it moves. For this simple Forex strategy, we are going to use a day moving average as our shorter SMA, and a day moving average for the longer one. In the chart above, the day moving average is the dotted red line. You can see that it follows the actual price quite closely. The day moving average is the dotted green line.
Notice how it smooths out the price movement? When the shorter, faster SMA crosses the longer one, it indicates a change in the trend. This suggests a bullish trend, and this is our buy signal. Rather than solely being used to generate trading signals, moving averages are often used as confirmations of overall trends.
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This means that we can combine these two strategies by using the confirmatory aspect of our SMA to make our breakout signals more effective. With this combined strategy, we discard breakout signals that don't match the overall trend indicated by our moving averages. If it is, we should place our trade. Otherwise, perhaps it's better to wait. Our final strategy is essential to know.
It's a type of trade that is widely used by professionals too, so it is not purely a beginner Forex strategy. Best of all, it is easy to implement and understand. The essence of the carry trade is to profit from the difference in yield between two currencies. To understand the principles involved, let's first consider someone who physically converts currency. Imagine a trader borrows a sum of Japanese Yen. Because the benchmark Japanese interest rate is extremely low effectively zero at the time of writing , the cost of holding this debt is negligible. The trader then exchanges the yen into Canadian dollars and invests the proceeds into a government bond , which yields 0.
The interest received on the bond should exceed the cost of financing the Yen debt. Obviously a currency risk is baked into the trade.
If the Yen appreciated enough against the Canadian dollar, the trader would end up losing money. The same principles apply when trading FX, but you have the convenience of it all being in one trade. If you buy a currency pair where the first-named ''base currency'' has a sufficiently high interest rate, in relation to the second-named ''quote currency'', then your account will receive funds from the positive swap rate.
The amount yielded is correlated to the amount of currency commanded, so leverage is an aid if the strategy pays off. As noted earlier though, there is an inherent risk that you could end up on the wrong side of a move in the currency pair. It is therefore important to carefully select the right currencies. Inertia is your friend with this strategy, and ideally you are looking for a low volatility FX pair.
It's also important to note that leverage will end up magnifying losses if you get it wrong. The Japanese Yen has long been popular as the funding currency, because Japanese rates have been low for so long, and the currency is perceived as stable. The strategy works well at a time of buoyant risk appetite, because people tend to seek out higher-yielding assets. The action of traders implementing the strategy can itself support the strategy, because the more people using the strategy, the greater the selling pressure on the funding currency.
But, there's a current problem. The global low interest environment, has narrowed interest rate differentials. When risk appetite collapsed during the credit crunch, many fingers got burned as funds flowed into the safe haven of the Japanese Yen. With the Fed signalling its intention to tighten monetary policy in the future, we may yet find the carry trade coming back into favour.
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We hope that you have found this introductory guide to Forex trading strategies for beginners useful. Bear in mind that the examples we have shared primarily aim to get you thinking about the principles involved. Moving average MA is a simple technical analysis tool that smooths out price data by creating a constantly updated average price.
That average can be taken over different periods of time — anything from 20 minutes, to three days, to 30 weeks or any other time period a trader chooses. Moving average strategies are very popular and can be tailored to any time frame, suiting both long-term investors and short-term traders. A common reason to create a moving average is to identify trend direction, as well as determining support and resistance levels. When asset prices cross over their moving averages, it often generates a trading signal for technical traders.
For example, a trader might sell when a price bounces off or crosses the MA from above — in order to close below the moving average. Price crossovers are one of the main moving average trading strategies. A simple price crossover happens when a price crosses above or below a moving average, signaling a potential change in trend. Other trading techniques use two moving averages: one longer and one shorter. When the shorter-term MA crosses above the longer-term MA, it's a buy signal, as it indicates that the trend is shifting up.