A profitable Forex strategy is key to successful trading in the financial market. Some traders, especially beginners, think that intuition and luck and help them to continuously win the forex market. That is exactly the reason why they lose all of the initial investment. Forex trading, like any other business, consists of strict rules, uses certain algorithms and requires a set of conditions to open deals. Before developing a profitable trading strategy, investors define individual financial close, which will influence this set of rules and coordinates to risk and money management. Such factors as the initial investment, the size of the average trading position and depth of the stop-loss and take-profit orders have to be predetermined and executed thoroughly. Traders can start developing their own trading strategy only after defining those figures and restrictions.
As long as the forex market is full of different asset classes to trade on, every and each of them has a huge impact on the trading strategy. Therefore, traders have to know the key reasons influencing the price action. What is moving the markets? Why this currency is gaining strength vs others? Why the price of gold is rising? At the same time, it is extremely important to read charts as the technical analysis is an important part of the trading process in the financial markets. This article is aimed to explain how to build a profitable trading strategy, what are the most important part of the analysis and what are the main factors driving the market.
How to find the most profitable Forex strategy?
That's a million-dollar question. Forex Traders spend years if not decades to develop a stable and consistent strategy to provide profits. Financial markets are the fast-changing environment. Factors and Reasons influencing the price action always change. Those changes create sharp movements in different asset classes. Some of them are getting more expensive than others are getting cheaper. Before developing a profitable trading strategy, investors should realise what are the key factors influencing the market. This approach is called the fundamental analysis and it takes into account several factors coming from macroeconomics, geopolitics and dozens of different reports.
Another approach is based on the technical analysis which is a mathematical way to describe the processes coming in the forex market. The main idea is that every action has a certain cycle and all of those Cycles repeat itself from time to time. Using mathematical formulas might help not only to understand what happened yesterday but also to predict what is going to happen tomorrow. Those formulas are built-in technical indicators helping Traders to figure out the current market situation, describe trading conditions and make predictions about the future. Besides, technical tools can help to define exactly levels of resistance and support, price ranges where trends can reverse.
However, the most profitable trading strategy is always built on a combination of both types of analysis. It often happens that the technical background is built before a fundamental event triggers a strong trend. The most effective approach is always based on taking into account several factors, as many as possible. The thing is that in the smallest Factor in the equation can become huge driver insulin seeing sharp price movements. This is why it is so important to have a look at the same picture from different angles. Let's consider several methods analysing the markets and building a profitable trading strategy.
Profitable Forex strategies based on fundamental analysis
Speculators appeared at the same time when money was invented. What source of income could be easier than buying cheap and selling expensive? Of course, people used to trade goods even before, but they used a straight exchange of goods. Nowadays, with the technology revolution, the Foreign Exchange market became the most simple sector to start a fascinating journey in the financial world.
Have you ever thought why Forex brokers allow retail traders to enter the market with the lowest requirement for initial capital in the industry? Why they offer such high leverage to gain even on the smallest difference in the currencies exchange rate? The answer is simple, currencies are the most liquid goods among all financial assets. Imagine you had a rare ancient artefact or a real estate property, how long would it take to sell it? Weeks, if not months. Now, compare that with a speculative position for New Zealand dollar versus Japanese yen at the same volume. It would take milliseconds for you to close it and cash out. Liquidity is the speed with which you can exchange goods for cash.
What drives currency exchange rate?
The easiest Forex trading strategy is based on interest rate differentials. For example, the Bank of Japan has low-interest rates and it’s extremely cheap to borrow capital in Japanese banks and invest it a high-yield country like the United States. What is the main operation you need to do to complete the investment? Right, buy U.S. dollars for Japanese yen. And if the global market is expecting the U.S. Federal Reserve to raise interest rates (government bonds yields will follow), and the Bank of Japan is forecasted to stay pat, then such capital flows to buy USD/JPY would become more attractive. Those expectations allow currency speculator to follow trends and make money without investing huge amounts on a long-term basis. This easy Forex trading method is called carry trade and it’s based on the fundamental analysis.
Another example of the fundamental analysis as a simple currency trading strategy that works is news and announcements. Let’s imagine some of the leading countries’ leaders announce a trade war against another big country. Would investors be intended to invest in high-risk assets such as shares? Of course, not. They will prefer to save their money and put it in safe-haven assets such as gold or Swiss Franc, for example. Forex traders do not predict economic reports or their consequences. What do they make money from is just forecasting the markets’ reaction to any particular fundamental event.
What economic reports influence price action?Besides central banks’ meetings, there is a list of the most important economic reports that drive the market.
- Employment data (Non-Farm Payrolls report in the U.S.);
- Gross Domestic Product;
- Consumer and Producer Price Index (Inflation);
- Earnings, Retails Sales and Consumption;
- Industrial and Manufacturing production.
Successful forex Traders monitor all of those reports and data, making a conclusion about what currencies can gain strength vs others. The fundamental analysis is a powerful tool to predict the future of the Forex market. What's more, the strongest trends happen after the fundamental environment changes. The thing is that prices of assets including currency pairs reflect the supply/demand ratio. And this ratio changes on the back of an unexpected fundamental event, the market players are rushing to buy or sell the appropriate currency, influencing a dramatic change of the price. Predicting those changes is the essential factor to build a profitable trading strategy.
Profitable Forex strategies based on technical analysis
There are many ways to apply the technical analysis and its mathematical formulas to predict differential markets. The web is full of different trading strategies based on technical analysis and several indicators. Each of those methods deserves a separate explanation and in-depth review. Is a short description of the most simple approaches to use technical tools to predict the market. Forex Traders should always remember to keep an eye on the risk management roles and execute them correctly. Besides, every trading strategy has to be backtested on the demo account before applying into a real money account.If you like this article, you might also be interested in this Forex Currency Strength Meter
Among other simple Forex trading strategies that work, there is also a graphical analysis. It’s understood that following a trend is the most profitable trading approach. But how to determine a trend?Trend definition says:
- An uptrend is a sequence of higher highs and higher lows on a price chart;
- A downtrend occurs when price charts draw lower lows and lower highs.
Another useful tool to profit from quick and easy Forex trading is a trendline. You probably know that financial assets including currency pairs always move like waves. Forex traders can benefit from a price swing against the general tendency as it gives a brilliant opportunity to enter the market, selling at a high price or buying cheap. Trendlines also help speculators to determine resistances and supports, levels that are attractive to open a trading position.
Technical analysis works well as a secondary (sometimes even primary) method to build a simple Forex trading system. It’s based on technical indicators - a visual display of mathematical formulas that take into account many factors to predict further trend’s direction. One of the easiest Forex trading strategies using technical indicators is based on a Simple Moving Average (SMA). This indicator is shown on a price chart as a curve above or below the price. Its mathematical formula adds previous close rates for a given period and divides the amount by the number of days (bars).Below are two main rules of using moving averages:
- If prices remain above the moving average, then the market is in an uptrend;
- If a chart stays below the moving average, then downtrend conditions apply.
Moving averages also act as a support or resistance level, showing Forex traders when to buy or sell a pair during a bearish or bullish retracement, respectively. Another effective easy Forex trading method is based on two moving averages with different periods on the same chart. Trading signals occur when two MAs cross each other.
Among a wide variety of different trading methods based on several types of analysis, the most profitable strategies combine several layers and take into account as many factors as possible. The best way to find a profitable trading strategy is to follow or catch a strong trend. At the same time, traders should always remember about the money management and risk management rules, avoiding too much pressure on the trading account balance.