Forex Trading Strategies For Beginners

Forex Trading Strategies For Beginners

Forex Trading Strategies For Beginners

The beginner trader may want a simple strategy to apply to Forex. One way to approach Forex trading is to start with a particular Forex pair. The major pairs (such as EUR/USD, GBP/USD, USD/JPY and USD/CHF) tend to be the most liquid and thus the trader may wish to start with one of these. The more liquid Forex pairs may tend to evidence more action, but it does not mean that are any less hard to trade, as Forex is a complex market. What this partly means is that moves can and do retrace from the traded direction. They may return to the desired direction and may not.

One simple Forex strategy is to trade on momentum. Momentum is the tendency for a pair to move in a given direction, even if it retraces, that is the pair is being pushed in a direction, until it moves far enough that it retraces or reverses or reduces its movement. One way to look for momentum is to trade at a time when there is greater liquidity (and trade a generally more liquid pair). Such times can include the run up to a major market sessions and during it.

One way to see momentum build is to look at a candlestick on the 5 minute chart. The trader may visually note that momentum is building, if the candle is being updated moment by moment (rather than every 5 minutes). The trader can extend this to see what the momentum is building to. For example, trends tend to have a beginning, middle and end. Picking the beginning of any move is problematic, as the beginning of moves can easily turn into something else. There may be an argument that as a move builds then it becomes reinforced to some extent by other traders, though this in and of itself can result in it changing as traders take positions against the move, for a wide range of reasons.

However the trader should not also get into a move when it ends, as is very easy to do. The problem with the middle part of a trend is that it tends to retrace, thus it can look like it is reversing or perhaps turning into a range. Nonetheless trends can have a pattern such that they begin with a volatile move which does not reverse lower than the start point, enters a more structured directional move with retracements and then ends with another volatile move which does not exceed the end point. While trends can then reverse backwards they may rather continue with a volatile move and may later enter a range (or may not).

So as momentum builds on a candle the trader can look at the candle as part of a group of other candles to see what patterns may be forming. This can involve multiple time frame analysis, whereby the trader looks at higher time frames and lower to get a sense of the context of the move. For example, on higher time frames are there patterns which might indicate that the lower time frames may be due for a reversal. This may not happen, as there is not really a time frame of reference which determines pattern formation and patterns can begin on lower as well as higher time frames.

So a strategy for a beginner Forex trader is to structure their trading by grounding it in market action, focusing on momentum and looking for patterns to indicate why this is happening. The trader can of course use a technical indicator, but actually technical indicators are prone to giving wrong signals, without revealing why the signal was wrong and thus while they can and perhaps ought to be used by beginner traders, should be used with knowledge and care.

The potential advantage of an indicator is that it provides structure in and of itself, and offers inbuilt rules for trading. The trader may wish to start with a popular indicator such as RSI or MACD, having studied how they are supposed to work, but be aware that they the signals generated can be wrong. The trader may wish to filter their trades with a moving average, perhaps starting with a simple 21 period moving average. The trader may be surprised at how often moving averages are respected to some extent, but this can be a consequence of the fact that many traders and programs are reacting to these signals at the same time (which is the case with all popular signal based indicators). It is the case in Forex that there are strong clear moves, but these can quite quickly change into something else, partly as there are many market participants who fade any move.