Devising A Profitable Forex Trading Strategy

Last Updated July 23rd 2021
17 Min Read

All You Need To Know About Devising A profitable Forex Trading Strategy

Interested in forex trading but don’t know where to start? You’re in the right place. We’ve put together a handy guide on how to devise a profitable forex trading strategy. 

Let’s make one thing completely clear: No forex trading strategy will guarantee success all the time.

And there is not one single forex trading strategy that works all the time for everyone. There is always a margin for error.

If you come across an article claiming their trading strategy always works, they cannot be trusted.

That said, traders without a strategy are essentially gambling. You need to have a strategy for two reasons:

  1. Avoid and reduce risk in your trades.
  2. To increase your potential earnings from forex.

While many strategies are very different, there are some general rules all strategies should at least loosely follow.

Before coming up with a trading strategy, you need to have a sense of what you are trying to achieve.

If you are not entirely sure what you’re trying to achieve, you cannot appropriately set goals for your strategy.

But that’s just the beginning. In reality, there is so much to consider and what actually makes a forex trading strategy profitable is quite debatable.

Let’s look at the most important things you need to set up a profitable forex trading strategy.

Without knowing the basics, your strategy will not work

trading strategies, know the basics

You cannot simply copy a trading strategy you found online and expect it to work. The person who introduced you to that strategy knows how to implement it. They know the inner workings behind the strategy.

You need to understand concepts such as price action. You need to understand how to use such techniques to find where the money is or where it might soon appear.

If you attempt to use the strategy you found in an environment where there is not much volume or liquidity, it is very likely it will not work properly.

When there is not much money to be made or a good point to enter the market, both long-term and short-term strategies can be inadequate.

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The simplest strategies work best

As is often said about many things in life, simple options often work best.

The more variables involved in your strategy, the more things can go wrong and get in the way of making your profit.

As you are likely a retail trader, this is especially true. You don’t have so many advanced tools at your disposal.

If you’re a beginner, you can easily get confused by the numerous tools and indicators on your screen.

Simple strategies also require less thinking, which means they are easier for you to focus on.

More importantly, the simplest strategies are the easiest to learn and most profitable. Beginners ideally should focus on these strategies as they present an opportunity to earn and learn at an early level.

Complicated strategies may also mean moving funds from numerous locations. Such strategies are known as forex arbitrage strategies. With each movement, there is a potential for things to change or to incur fees.

Complicated strategies can be stressful and make it harder for traders to predict the outcome of their trading activities. They also require an understanding of more complicated things. If you don’t understand them completely, you are increasing the risks involved.

Leave the more complex trading strategies to professionals. Keep these options off the table until you fully understand what each one involves.

How to decide what kind of strategy to implement?

what kind of trading strategy to implement

Most likely you will make your own strategy by copying others and shaping it to work the way you want it to.

This then depends on what kind of trader you are. Would you consider your approach to trading aggressive or careful?

Aggressive traders are looking to make profits now, while careful traders are more likely to take their time and prefer using long-term strategies. Essentially, how quickly do you expect to make a profit?

Further to the above, you also need to consider how much time - including looking at charts - you are able to spend actually trading. A lot or a little can make the difference between being a long-term or short-term trader.

Are you a scalper or a daytrader or one of the many other types of traders? For each type of trader, there are numerous popular trading strategies.

It is important to remember that as a forex trader, you are your own boss. No one is telling you how to trade. For some, this is liberating, for others, it can mean they are lacking a direction.

If you need more rules, you can try algorithmic trading, which can be a good choice for beginners.

You also need to think about how much stress you can take. Some strategies can be more difficult than others.

Long-term strategies work well when they follow a trend, but this can take a very long time, sometimes years and, to appropriately implement them, you need to be very, very patient.

Some strategies don’t work in certain environments. For example, strategies for long-term profits do not work well in short timeframes and vice versa.

You also should remember to use different strategies for different market instruments. What works for forex will not necessarily work for stocks or cryptocurrency.

Finally, whatever strategy you decide to use, it should have a growth plan and a size plan. You need to be thinking about how this plan will change as time goes by.

This is important because when you first implement your strategy, you may aim to gain something like 5% of your account with every trade.

As you become more successful, that 5% becomes a bigger sum of money. For example, 5% of £1,000 is £50, while 5% of £10,000 is £500.

Your forex earning potential has increased, but so has your risk. You need to always know the percentage you are willing to risk.

What are the most popular trading strategies?

most popular trading strategies

Trading strategies come and go while some stick around for the long run.

The main reason trading strategies become redundant or evolve into new strategies is due to the rapid pace in which technology is moving forward.

Many of the most common strategies used by forex traders require them to have a good understanding of trends.

Here are some of the easiest to learn and most profitable strategies in use today:

Moving Averages

In order to use this strategy, you will need to understand how moving averages (MA) work and the different variations of moving averages, such as the simple moving average (SMA).

Moving averages are worked out by selecting the closing prices of a particular time, ten days for example, and dividing them by that same number.

They are useful because with them we are better able to see trends and reversals as we are focusing on the average price over a period of time instead of the current price, which can fluctuate significantly in a short time frame.

When the current price is above the moving average, this is seen as an uptrend and when it is below the moving average, it is seen as a downtrend.

When the MA swaps from an uptrend to a downtrend, this is called a trend reversal. It is at these key points traders seek to buy or sell.

If a downtrend becomes an uptrend, this is seen as a signal to buy. When the opposite happens - an uptrend becomes and downtrend - this is seen as a signal to sell.

The MA is usually identified with tools or indicators that are displayed on charts.

It should be remembered that moving averages only show past prices. They do not give you the current price. Because of this, you cannot solely rely on them, especially in regards to sudden price decreases.

Traders that follow the moving average should also understand how to take advantage of trends and the pitfalls of following them too closely.

Fibonacci retracements

Most brokers offer you the ability to use Fibonacci retracement tools.

To truly take advantage of Fibonacci retracements, you also need to know that a currency pair is on an uptrend or a downtrend.

Traders who use this tool will look for points where the trend is momentarily reversed and will either buy or sell before the trend continues.

To use the tool, you have to draw the line on the graph retracing this dip in the trend. With this retracement, you are able to identify certain points - 38.20%, 50% and 61.80%.

These points are often seen as moments where the trend will likely continue, and so traders will set buy or sell orders at those moments in anticipation of them occurring.

If the instrument is trending upwards, it is a great opportunity to buy at a cheaper rate and sell later on as the trend continues.

If the instrument is trending downwards, it is a great opportunity to sell at a higher rate before the trend continues.

Before retracing the dip, ensure it has finished first by waiting for the trend to continue upwards or downwards as it should. This is vital because if it continues to follow the dip, the strategy will not work.

Ideally, you should not solely rely on Fibonacci retracements when making your trades. Your analysis may be wrong and it may benefit from additional tools to confirm what steps to take.

It is also highly advised that you place stop-losses above or below retracements just in case.

Channel pattern

Trading using a channel pattern strategy also requires a good understanding of trends. Most brokers also offer the ability to view channel patterns on top of charting software.

They can be used to measure downwards trends, upwards trends and when the market is stagnating.

A channel pattern attempts to identify the highs and lows of a trend.

Specifically, by placing a channel pattern on your charts, you can take advantage of the dips in the trend, as a trend is never completely straight up or straight down.

If an instrument is trending upwards, traders seek to buy at points when it momentarily dips down before continuing to trend upwards at which point they can sell.

The reverse is true for the opposite, a downward trend. When an instrument is trending downwards, traders seek to sell at the momentary dips upwards.

With Channel patterns, it is very important to spot the signs of a trend ending because this will mean that your channel pattern is no longer relevant. If you fail to spot a trend changing, it can result in losses.

Double tops and double bottoms

With this strategy, as with some of the others we have highlighted, you can make a profit both ways; if the market is on the up or if it's on the down.

Again, to properly implement this strategy, you will need to understand trends. This time, when a trend is about to blow out of steam and a new trend is about to emerge.

A double top is where an upward trend peaks twice before a trend reversal starts and a double bottom is where a downward trend bottoms out twice before a trend reversal starts.

Both instances are fairly common and in most cases, you will notice that the second top or bottom will never reach the same highs or lows and the first.

When a double top has taken place, it is a sign to sell the instrument. But before doing this, make sure you set a stop-loss, just in case the trend doesn’t break and instead continues upwards.

If the new trend continues down, decide on a point to sell, ideally two times lower than the stop-loss.

For a double bottom, you should look to buy an instrument before it starts to trend upwards. Again, you should place a stop-loss just in case the old trend continues instead.

You cannot rely solely on double tops and double bottoms. This is a strategy you can only really implement when one of the two specific scenarios takes place.

They are also great for identifying moments to change your strategy because a trend has ended and a new one has started.

These are just a few strategies people are using today and there are many other strategies out there. Before deciding which one to use, conduct a good amount of research and understand what you are about to undertake.

Knowing when you need to change strategy

when to change your trading strategy

Most obviously, you need to think about changing your trading strategy when you are losing money. But you should be careful when deciding to do this.

Though you failed on your first attempt, the strategy may still work. Perhaps a second time around could prove more successful. Or maybe it just needs some adjustment.

And sometimes you may have just missed the right opportunity to implement your strategy. This doesn't mean the strategy will not work, but the outcome may not be as big as you expected.

The primary thing you need to consider is your risk-reward ratio.

In other words, how much are you willing to risk to earn? Ideally, your risk should be small and your reward should be large, but it also depends on how much income you have.

They should never be the same and the reward should never be lower than what you are risking. The closer the two numbers are, the more risky the trade is.

A small price range should be considered risky. Don’t risk too much for too few pips. Instead, look for bigger rewards with less risk.

Think of it this way, why would you risk £50 for £5? Is it really worth your time and energy?

Many professional traders would never advise chasing a profit of only a few pips.

They would consider closing a trade with a gain of 50 or fewer pips a failure. To them, they may as well have lost money, and in a sense they have because they haven’t earned what they were expecting.

If the market becomes very stagnant, then the ups and downs of currency pairs may not be worth attempting to exploit.

The profits you can make will likely be minuscule and you are increasing your chances of losing money.

Strategies should change with the market.

The idea behind your strategy can stay more or less the same, but as the market becomes more volatile or less volatile, you need to reassess your goals. Specifically, at what price to buy or sell.

To do this, you should be looking at charts, watching the news and reading articles to get a sense of where the market is going.

However, there will be times where you will notice your strategy needs to change because certain things haven’t happened.

For example, if you set up a buy order, but after a few days your target buy rate is not met, it may be best to close it, reevaluate the market and come up with a new plan.

Not only was your previous evaluation of the market potentially wrong, but in those few days, conditions are likely to have changed.

Who knows? The market may even reach a lower rate than you expected, which means you can buy cheaper, increasing your chances of making a profit. Don’t miss that potential opportunity with outdated buy orders.

As you trade more you will see what parts of your strategy work and which don’t. Cut out unnecessary elements and streamline your approach.

If you realise that these aspects are too hard to follow or you don’t fully understand them, you should consider learning how to properly use them or just removing them from the equation.

The best way to do all of the above is to keep a journal of your trades to track your progress. This will allow you to properly evaluate the effectiveness of your strategy and make the appropriate changes.

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Key points

If you remember anything from this article, make sure it’s these key points:

  • You need to understand the basics. If you don’t know the basics of forex trading, you cannot appropriately implement a trading strategy.
  • Simple strategies are often the best. The fewer variables, the less likely things can go wrong. Focus on learning the easiest and most profitable strategies first.
  • Different strategies work for different traders. The strategy you put in place should take into account the type of trader you are.
  • Be open to adapting your strategy. Your strategy will not work in every environment, different times call for different goals.

Devise a profitable forex trading strategy with an education

devise a profitable forex trading strategy with an education

As we said at the beginning of this article, without understanding the basics of forex trading you cannot implement a profitable forex strategy. You cannot just pick up a random strategy you found online and start using it if you do not understand what variables are involved in making it work.

On top of that, you are not taking into consideration the trading style that will likely work best for you and you will not know how to shape that trading strategy to your benefit.

The best way to educate yourself on forex trading is to take our forex trading course.

It covers the following topics:

  • Foundation In Forex Trading
  • Mechanics Of Forex Trading
  • Advanced Analysis in Forex
  • Popular Trading Strategies In Forex

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Now you know more about devising a profitable forex trading strategy, you could be ready to take your interest to the next level. Understanding the forex market can take years of study. However, by reading this article today, you’ve taken your first steps towards becoming a successful forex trader. The next step is to choose the best Forex online trading broker to trade with.

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