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Effective Forex Trading Strategies

Effective Forex Trading Strategies

Table of Contents

Forex Trading Strategies for good returns

In the modern world, investments are plentiful. In many countries and nations around the world, business stock is freely traded between hands.  Small business relies on investment heavily; the easiest means of building funds is selling shares of the company.  Bigger businesses, such as banks, create investment opportunities by offering loans to small businesses and individuals in order to create a return on their existing money.

With the expanding horizon of investments with no slow down in sight, the forex market is becoming increasingly popular because of its high liquidity and 24 hour trading environment. One of the most popular methods of investing in this potentially lucrative market is by creating a hard Forex Trading Strategy to provide a strong rate of return for your investment.

This system is widely accepted as the base method of being a successful trader. Many currency experts would agree that a trading strategy with rules and a consistent return yield a greater rate of success than emotion based gut trading alone. The Forex Trading Strategies may incorporate a technical chart based set of rules, a news based set, or any combination of the two.  The only real important fact is to have a proven rate of return in a set of rules that can be easily repeated.

What is the best Forex Trading Strategies and how you can success in it! It is possible to average more than 10% per month trading currencies.

Many way to set Forex Trading Strategies

The methodology behind creating a sound trading strategies can go many ways.  The most common in the currency market is to build your Forex Trading Strategies from a technical analysis standpoint (patterns in charts and graphs). 

Back testing Forex Trading Strategy

Though news plays a very key role in movement of currencies along one another, price action and patterns is the base for trading in this market more than any other.  When creating a chart/pattern based Trading Strategy, many traders usually take a sound position of logic behind the trade, and then begin to write the rules by applying the logic to previous prices.  This is known as “back testing”.

In the example we will be using, the logic to our Forex Trading Strategy relies on the price action theory; a set trend has the tendency to continue to trend in the current direction until something stops it’s movement and causes it to consolidate or turn the other direction.

Moving average Forex Trading Strategy

We will attempt to create a trading strategy that will get in our trade at the first sign of a beginning trend, and get out of the trade the moment the trend shows signs of weakness. The “indicator” we will use is what is known as a “simple moving average”.  The simple moving average is created by the following formula:

Moving Average = (Sum of previous ‘X’ closing prices) / X

This formula is a very simple average of the past X number of prices (which can be changed to optimize the Forex Trading Strategy when testing). When this number is calculated for every bar on your chart and the points are connected, a very nice smoothed line appears that is essentially the average of the last X number of bars. 

This will be the absolute base of your Forex Trading Strategies. The larger the number plugged in for X, the smoother and straighter the line will be. By plotting two averages, in theory, a turn around in price (or trend) will cause the two average lines to cross, and signal a long or short trade.  Here is a picture of a 30 minute GBP/USD chart with a 10 period SMA, and a 50 period SMA with a few signals for our trading system, circled in white:

Forex Trading Strategies
Forex Trading Strategies Chart 1

The yellow line is the faster 10 period SMA, and the aqua line is our slower 50 period SMA.  We now have our basis for the beginnings of what appears to be a nice and solid trading system. The second step at this point would be to test our Forex Trading Strategy with past data to see how well our theory stacks up against semi-real market conditions. 

This is most effectively done manually, but for the sake of a quick and emotionless test, this set of rules will be coded into a MetaTrader 4 expert advisor, and automatically traded on the previous 2 years worth of market data with an initial deposit of 10,000 USD.

Forex Trading Strategies Chart 2

It seems that our trading system isn’t stable enough to be traded yet.  Trading 0.1 lots each time, over the passed 2 years, we would be down about 40% of our account (with a 73+% rate of failure).   Much optimization and a set of money management rules will need to be put into place in order to turn such a Forex Trading Strategies profitable and worthy of trading. 

Though only one type of system was outlined, the basic methodology of creating a technical trading system remains typically the same.  Though success stories in the forex market differ from method to method, many experts would agree that the key to steady success in the fickle world of currency trading would be a well developed Forex Trading Strategies.

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