Building a Forex Trading Strategy
Forex was once a market only available to governments, central banks, commercial and investment banks and other institutional investors such as hedge fund managers. Today, anyone and anywhere can do forex trading. Includes currency futures contracts, option futures and a decentralized over-the-counter (OTC) market.
After a forex trader decides where and what instruments to transact, then build a forex trading strategy that will be used before trading capital risk. A successful trader must also determine the exit strategy and risk management tactics to use if the market is against a trading position. Here we look at how to build a forex trading strategy for the forex market based on directional trading.
We can use a directional and non-directional trading approach to categorize the many potential trading strategies. Directional trading strategies can also be called long-term trading trends. While non-directional trading strategies are on neutral market conditions (no trends) or sideways. Most investors are accustomed to directional trading approaches. Directional trading strategies can be translated into:
- Trend-following strategy
- MA Cross System
- Breakout System
Although this is not all, there are still many other approaches to forex trading. Like trading double tops, double bottoms and trend identification – ranging and much more.
This system is able to create a signal for traders to start a position after a certain price movement occurs. The system is based on a technical premise that once a trend has been established, it tends to continue rather than reverse direction.
Timing for traders on this strategy is very meaningful. If you are able to do entry at the beginning of the trend then your profit potential will be huge. Of course it must be followed by the right exit as well.
To be able to identify the beginning of a trend usually one of which is used is slope MA. If MA has slope increase, then it can be said the uptrend potency and vice versa slope decrease, hence can be said potential downtrend. The slope change from increased to decreased or vice versa, can be said early change of trend.
MA Cross System
The trading moving average (MA) cross system is one of the most widely used directional trading strategies currently in use. This system uses two MAs. The buy signal is generated when the short term MA crossed upwards with a long-term MA.
This system is vulnerable to false signals. Thus, traders should experiment with different time periods and make other backtesting before trading.
Generally, the parameter of the MA period used is 5 and 20. That is, the mean price of 5 periods (candle) must be crossed with the mean price of 20 periods (candle). You can specify stops at the lowest level or previous highest level.
Please do backtesting, according to your trading style. The MA period parameter used when corresponding to the timeframe, will be a potentially profitable trading system.
Breakout system is very easy to develop. The bottom line is a set of simple trading rules when prices move to a new high or low as an indication of a continuing trend. Therefore, this breakout system will trigger the position of the entry in the direction of the price to the new high or low.
For example, the breakout system may state that the trader must close all positions and open a long positions if the daily closing price exceeds the highest price for the last X days. The second part of the same breakout system will indicate that the trader has to close all buy positions and open a sell position if the daily closing price is below the X day low. The point is to decide how long you will want to trade.
Using a small timeframe (fast system) will detect market trends faster than slower systems. The drawback is the more false signals that occur at small timeframes.
It will be easier to use this breakout system, we can determine the critical levels of support and resistance more accurately than using only the highest or lowest level. Price boost after a breakout is usually more significant result.
Please try these three directional trading strategies.