A good forex trading strategy is essential to becoming a good forex trader. With a good trading strategy, you’ll know when to enter the market and have a fairly good idea of the market’s direction. When you can predict the market’s direction, then you stand a much larger chance of making profits off your trades and becoming a successful trader.
There are a lot of things that usually go into creating a trading strategy, things that you probably don’t know all that well right now. Not to worry, however, we have a couple of simple trading strategies for new traders that you can begin to apply now before you learn more complex and sophisticated strategies. Let’s take a look at some of them.
The Pin Bar Strategy
For new forex traders, the pin bar is king, majorly because it’s an obvious pattern, easily identifiable on a chart. This is one of the easiest trading strategies to implement.
Here’s what a pin bar looks like:
You can notice that the market experienced a resistance (red line) but soon broke through. One of the basic rules when carrying out technical analysis is that former resistance levels become support levels when broken, though. As you can see, the market then found support at that level, forming a bullish pin bar in the process.
Here’s an example of a bullish pin bar on the GBPCAD daily chart
In this chat, the GBPCAD experience resistance after an extensive bullish run. After breaking through the resistance, it became a new support level and formed two bullish pin bars. After forming these bars, the market continued to rise for another 300+ pips.
The Inside Bar Trading Strategy
The inside bar strategy is another highly effective but simple forex trading strategy. Unlike the pin bar, however, the inside bar strategy is best used in a continuation pattern. That is, it’s best to use a pending order to trade a breakout in the direction of the major trend.
This is how an inside bar looks during a trend.
See how the first bar from the left is much bigger in size? It’s called the “mother bar” because it engulfs the inside bar completely. The real magic of this strategy, however, comes after a consolidation period. This is represented by the inside bar, on a break of the range of the mother bar.
Here’s an example of an inside bar formed on the USDJPY daily chart during a strong uptrend.
If you look closely, you’ll notice that the USD/JPY was coming off a strong rally when the inside bar was formed. These are the best inside bars to trade. This is because it shows a true consolidation period, which will often lead to the major trend maintaining its direction, which in this case, is up.
The Breakout Strategy
The Forex breakout strategy is perfect for beginners and can help you begin to make a profit quickly.
This strategy is a little different from the conventional breakout strategies because instead of simply trading the actual break on a level, you wait for a pullback and retest before entering the market.
The other major difference is that you are only interested in breakouts that occur in a wedge pattern rather than a horizontal level.
This is a good illustration of the Forex breakout strategy.
You’ll notice that the market has worked into a terminal wedge. This means that the pattern has to come to an end eventually. The opportunity to trade this pattern comes when the market beaks to either side and then retests that level as a new resistance or support, as the case may be. In the example above, the entry would come based on a retest of support turned into resistance.
Here is an example of the same breakout strategy but applied to the USD/JPY 4 hour chart.
You’ll notice that the market touched both the wedge’s upper and lower boundaries multiple times before eventually breaking the lower boundary and going lower. As soon as the bar closed below the support line, you’d have looked to enter the market when there was a retest of the former support level, now turned resistance level, which came in a few hours.
These are a few forex trading strategies that are perfect for beginners. They are easy to apply and can make you a decent profit.
Basic Principles for Forex Trading
Before you begin to apply these strategies, though, there are some fundamental principles that we have to mention.
Firstly, you have to manage risk to stay in the game. We do not recommend risking more than 5% of your capital on any trade, no matter how confident you are in your trading strategy. This will help limit the potential losses that you could make on your account.
Another thing you have to watch out for is leverage. We also don’t advise beginner traders to use more than 1:10 leverage. This will give you some breathing space as a new trader to survive market volatility without blowing your account.
Pre-2008, many brokers offered 1:200 or even 1:400 leverage. In the wake of the 2008 financial crisis, however, the US Commodity Futures Trading Commission introduced a regulation in 2010 that set the maximum leverage at 1:50 for major currency pairs and 1:20 for non-major currency pairs.
Here’s an illustration to show why it’s so important. If a trader deposits $10,000 in their trading account and ignores the two principles we’ve outlined above, and opens a long position on the EUR/USD with all the money in the account using a 1:50 leverage.
With this kind of trade setup, the pair only needs to decline by 2% for the trader to get a margin call and lose all their money. 2% fluctuations are not rare, and during major announcements, the EUR/USD can move by more than 2%. Potentially, this trader can lose all their investments within a single day.
On the other hand, if the trader took our advice and opened a long position with $500, which is only 5% of the capital, and used a 1:10 leverage. If there’s a 2% fluctuation in the market, the trader loses only $100, and the capital is safe. Depending on the situation, the trader can cut their losses or hold the position until there’s a reversal.
As you can see, the best strategies are almost useless unless you manage your risks and know your limits. As a new trader, your first goal is to protect your portfolio before looking to make profits.