Best Forex Strategies for Beginners
The Forex market is great for trading and this is why there are some many participants trying to take advantage. It is also a very well established market which means that there are lots of different strategies being tested every minute.
As a beginner it might be difficult to orientate in the several trading strategies so it is important to go step by step. Some strategies might be good for later on but could be too complicated for beginners. For this reason we have outlined in this article what are the best Forex Strategies particularly adapted for beginners. If the strategy is simple to understand than the chances of making profits out of it do increase significantly. Once you would have mastered the basics there will always be time for you to add a more complex strategy. At the bottom you should remember the mantra that you should always use what works best for you. If you are a newcomers to Forex you need a simple strategy that provide an effective but low-maintenance approach. Below you will find some useful suggestions in this sense.
Three beginner Forex trading strategies
The following two strategies are pretty similar as they are trying to follow trends. The third strategy will attempt to make a margin from interest rate differentials rather than market direction.
But let’s answer first a very important question – What is a Trend?
A trend is a tendency for a certain market to continue to move towards an overall direction. There are many different strategies that are trying to identify when a trend will start or end. Most of the most simpler Forex trading strategies works in this way. If you follow the trend correctly you can make very large gains: in fact the most successful traders have used similar systems. There are however some downside to consider with those strategies and the key ones are:
- they are difficult to stick with
- large trends can happen rarely
- the conditions that signify the potential beginning of a trend, are not always frequent.
So in a nutshell this strategy tend to generate lots of losing trades but the theory says that those losses might be offset by a fewer large winning traders. Although this is good on paper it is difficult to stick with it in practise. One big problem with a trend-following system is that you need large capitals to follow it properly. This will avoid that you are going broke if there is an extended drawdown. So although trend following is an easy to implement Forex strategy that beginners can understand, it might not be ideal if you don’t have a large investing capital to start with.
But let’s take a look how do we identify when a trend might be starting. The first thing to do is to look for price breakouts.
Markets tend to normally range between bands of support and resistence also known as consolidation. The breakout is when the market start to move beyond the boundaries of its consolidation creating new highs or new lows. So when a new trend is developing a breakout must occur first: for this reason breakouts are normally a strong signal that a new trend has started.
The problem with this is not all breakouts will result in new trends and although you might want to explore every opportunity you also need to minimise your potential losses. A new high indicates that there is the possibility that an upward trend is starting and a new low will indicated that there is the possibility that a downward trend is beginning. But how can you gather if a breakout will result in a trend or not? Well this is not easy however the length of the period can help determine if a trend is really forming or not.
Generally a breakout beyond the highest high or lowest low for a long period of time suggests a longer trend while a breakout for a short period suggest a short-term trend. In this way you will be able to tune a breakout strategy and act more quickly or more slowly to the formation of a trend. If you are reacting very quick you can ride a trend earlier in the curve but this might result in a short term trend strategy and the other way around.
Now let’s take a look at a reasonably long-term breakout strategy. The buy is if the price breaks out above the 20-day high and the sell is if the price breaks out below the 20-day low. So this is very easy to understand however there are some potential risks to consider. New highs might not necessary result in a new uptrend and new lows might no result in a new downtrend. So there will be situations where those are just some false signals.
If you are using a stop-loss you can limit the problem however you need to first determine when you are prepared to exit the trade. If you are going for a long-term strategy you might want to set that you will hold the position for 80 days and than exit. Of course you can adjust the strategy to whatever suits you best so for example you can try using hours instead of days for a shorter strategy. It is important to backtest your results so you can see how effective your strategy is.
2. Moving average crossover
The second Forex strategy for beginners that we would like to present today uses a simple moving average (SMA). SMA is an indicator that uses older price data and more more slowly compared with the current market price. Moving averages are normally used not only to generate trading signals but more as a confirmation to make our breakout signals more effective. The strategy therefore becomes a combined strategy where we can decide to discard breakout signals that do not match the overall trend outlined by moving averages.
But let’s do an example to make things a bit clearer. We might get a signal from our breakout and than we look to see if the short SMA is above the long SMA. If this is the case than we go ahead and place our trade. If it is not we sit tight.
3. Carry trade
The final strategy we would like to present in this article it is a very important one to know. It is used by professionals too and it is not just a beginner Forex strategy. The most important thing is that it is very easy to implement and understand. Basically with the carry trade strategy you are making a profit from the difference in yield between two currencies. To better understand it let’s first make an example:
Let’s imagine that a trader will borrow an amount in Japanese yen. Because the Japanese interest rate is very low the cost of holding this debt is marginal. The trader than exchange the yen into Canadian dollars and make an investment into a government bond which will generate 0.6% interest. So in this case the interest that he will receive on the bond will exceed the cost of financing the yen debt.
So what is tough the risk of this strategy? Well if the yen appreciate enough agains the Canadian dollar than the trader will end up with a negative. The same will apply when trading Forex but the advantage if that all is being made in one trade.
Let’s say you buy a currency pair where the first currency has sufficiently high interest rate in relation to the second currency. In this case your account will make money from the positive swap rate. As mentioned earlier however there is a risk that you could end up on the wrong side of a move in the currency pair if the market moves against you. To make this strategy more efficient is therefore very important that you select the right currencies.
In this strategy the inertia will be your friend and to work best for you it is ideal that you select a low volatility FX. As you are using leverage you also need to consider that losses will be magnified if you get it in the wrong side.
It is not surprising to see that the Japanese yen has been popular in this strategy because the Japanese rates have been very ow for long time and the currency has been very stable.
So in this article we have seen some of the best Forex trading strategies for beginners. We hope you have found those useful. It is important when you apply a strategy is that you understand what are the principles involved and what are the potential exit scenario. It is also key that you test a strategy first before committing a large capital as drawbacks are likely to appear. This is why using a demo account can be a great thing and there are many trading platforms that do offer those so go ahead and work out what is the strategy that best works with your trading style!