What Is The Best Forex Trading Strategy – What is the best Forex trading strategy? Of course, this is a question I get asked many times a day, and it’s a very important question. When you start trading, you must focus all your attention and energy on implementing one particular trading strategy and making it work. Most traders do not do this and end up falling victim to system bouncing. This guide explains the differences between the different types of strategies, their assumptions, when they work best, and what you need to know when choosing a particular Forex trading strategy. We will discuss the following trading strategies: #1 Follow Trend #2 Pullback #3 Reversal #4 False Out (#5 Macro) As you can see, each trading strategy and style tries to capture different market movements. I’m a big fan of specialization, so that’s another important point. Instead of trying to trade all the time, choose a certain market behavior and try to be the best in that area. #1 Trend Following Trading Strategy Trend following is the first approach most traders encounter, and sayings like “the trend is your friend” have been around for decades. Trend following, as the name suggests, is a trading style that requires traders to wait for an established trend before entering the market. Hence, trend following traders should wait patiently for the true trend to become apparent. The screenshot below shows some market movements that are commonly caught by trend following traders. Red zones mark market turning points, while blue zones indicate trend-following phases. Many hobbyists make the mistake of predicting new trends before they exist and jumping into them too soon. These traders think they are trend traders but in reality they are reversal traders. Next, there is a difference between early and late trend following. Since trend following traders must wait for the trend to be confirmed, the question becomes, “When will the trend be confirmed?” Early trend traders try to enter a new trend as quickly as possible, which can cause them to run into false signals too early. The advantage is that the potential reward/risk ratio is much higher. Late trend traders await further confirmation. Of course, sometimes it’s too late, but often the signal is stronger. The trade-off is that while the win rate is high, the reward/risk ratio is not as high. When it comes to trading tools, trend following traders have a wide range of options to choose from. Momentum indicators such as MACD, RSI and STOCHASTIC are often popular. In the screenshot below, the STOCHASTIC is plotted and one way to enter a trend after a trade is to wait for the STOCHASTIC to reach the lower or upper limit. Many traders make the mistake of thinking that this could be a reversal signal, but this is completely incorrect. A very high or very low STOCHASTIC indicates a strong trend. Of course, moving averages are also a popular trend-following tool. In the screenshot below, two moving averages work perfectly as a crossover signal. Each time the moving averages cross, a new trend begins. The great thing about a crossover system like this is that it takes time for the moving averages to cross, which doesn’t automatically move traders up or down. The Ichimoku indicator is another trend-following tool. It is similar to the moving average crossover system, but with a different premise. A classic Ichimoku entry is given when the price breaks out of the “cloud” with two Ichimoku moving in the same direction. #2 Trade Pullback Strategy Pullbacks are a different type of post-trade trend. Pulling traders look for established trends and trade during so-called correction phases. A correction is a price movement in the opposite direction of the main trend. In the screenshot below, the market is moving up and a pullback (correction) is a short period of time when the price moves sideways or against the direction of the trend. Prices usually move in waves of ups and downs, so trailing traders take advantage of this feature to time their trades. Pulling traders wait for prices to move in the direction of the trend or may also enter trades when the market is falling. The danger of the second approach is that failure is not favorable. The advantage, however, is that the reward/risk ratio can be greater. Markets don’t always recover. The example on the left shows a market where there was only a decline in price and no pullback. There were multiple pullbacks in the second and third phases, providing good entry opportunities for pullback traders. As you can already see, there is a lot of overlap between pullbacks and trend following trading, and trend following traders often also trade pullbacks as a natural progression. Of course, there are many ways in which chart retraction can occur. There are three examples in the screenshots below. Double Pullback Price returns to the level twice before the trend continues. The price of the dirty pullback broke above the previous high and made a deeper correction. Immediate bounce The price stopped at the breakout level and moved sideways for a while before continuing in the direction of the trend. Moving averages are also popular withdrawal tools. If the price is trending in the market and then returns to the moving average, a bounce trade is possible. Traders trade the price when it reaches the moving average or wait for the price to move back in the direction of the trend. As you’ll see when we discuss breakout trading, you can also trade so-called price formations like pullbacks. In the screenshot below, when the head and shoulders formation was formed, the price showed a clear downtrend. In this situation, the head and shoulders formation becomes a trend following pattern and can be considered a bounce. This is where the line between recovery and trend following blurs. #3 Reversal Trading Strategy A reversal is a turning point, and a reversal indicates the true origin of a new trend. Therefore, the reversal can be considered a very early trend after the trade. However, each trading approach has its own characteristics, so it is usually more effective to choose between classic trend following and reversal. The screenshot below shows a chart of different market phases and trend phases. Traders who follow trends usually focus on emerging or mature trends. Reversal traders begin to focus on the market when it enters a mature trend phase. This usually happens when at least two or three trend waves form. The danger of being a contrarian is that you trade prematurely and always with a contrarian mentality. Many unsuccessful reversal traders try to predict market reversals long before they happen. Greed is what drives traders here. Because they believe that the faster they can get to the absolute top/bottom and therefore get a much higher reward/risk ratio. When it comes to inversion tools, divergence is a classic confirmation. RSI divergence indicates an exhausted trend that is losing steam. When a mature trend causes a deviation in the RSI, a reversal can often occur. The RSI is usually a trend indicator, but it also works very well as a reversal tool if the RSI shows that the trend is losing strength. MACD or STOCHASTIC can also be used as reversal tools. I also consider myself a classic reversal trader or a very early trend following trader. As a trend follower, I’ve never felt comfortable following trends, but now that I understand that a reversal isn’t about predicting a change in direction before it happens, I’ve realized that trading a reversal… It’s become fun activity. way of acting. #4 Breakout Trading Strategy Breakouts can occur during trend following or when trading in the opposite direction. A breakout period is often a connection between two phases of a trend. A breakout represents a deviation from a consolidation pattern. As the screenshot below shows, consolidation patterns can occur at market turning points (reversal tops and bottoms) or during established trends. The screenshot below shows how a consolidation and a breakout connect two market phases. Consolidations can occur at turning points in the market, and breakouts indicate trend reversals. A breakout occurs as a trend-following signal when consolidation occurs during an established trend. The screenshot below again highlights this feature and it is clear how breakouts connect different phases of the market. As a trader, it is usually best to choose a specific type of breakout. Trying to trade every breakout can lead to poor results and confusion. Because each market phase behaves differently and requires different tools, signals and understanding. Breakout traders are traders of patterns that breakout traders usually look for
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