Learning how to trade and how to consistently profit from the Forex market is not an easy feat. Beginner traders are especially challenged by the vastness of new information.
It’s crucial for traders to become proficient in trading terminology and trading platforms. It’s also highly important to learn about the instruments they are planning to trade. Trading professionally requires time and effort. The biggest mistake traders make is to skip learning how to manage their risks and place oversized orders while they are still in the learning process. On the upside, most brokers offer free demo trading accounts, and you can develop as a trader without risking actual money.
Every trader is different and has a unique personality. Trading strategy needs to fit the trader in order to produce sustainable account growth. There are various fx strategies for beginners, and it’s best to test them all to know what works the best.
Most FX trading strategies for beginners are easy to understand and follow. But it doesn’t mean they are not the best. Trading should be effortless and easy once you have a trading system in place that fits you. After learning the ropes, the main difficulty most professional traders face is not the lack of technical knowledge, but challenges associated with human emotions. In this guide, we’ll focus on some of the best Forex strategies for dummies.
The first strategy on our Forex strategies for dummies list is the breakout strategy. It is a simple-to-follow strategy that can be used along with various indicators and other strategies. It’s worth mentioning that using many indicators simultaneously is not recommended as they can produce lots of controversial signals, leading to analysis paralysis.
A breakout occurs when the price of an asset breaks out from defined support or resistance levels. Increase in trading volume when price nears the breakout point usually signals the breakout will happen. Breaching significant levels need trading energy, and volume indicators help identify that energy.
These support and resistance levels can be determined by many indicators such as Fibonacci levels, Pivot Points, trend lines, and others. When the support and resistance levels are found, we simply overlay them on top of the chart and watch where they are located in relation to the price of an asset. Once a breakout happens, it signals that the market is in a volatile state, and we should take advantage of this volatility. Trade should be opened in the breakout direction, and stops are typically placed right outside the breakout level. For instance, when price breaks out from the support trendline, the support becomes the resistance trendline.
In the image below, we can see the EUR/USD chart, where the price has broken the support level. Take profit target depends on how volume changes. If volume decreases, it might be the sign that traders are not actively selling anymore and the trend might reverse or start ranging.
Moving Average Crossover
When leaning the beginners’ strategies in Forex trading, it’s important to note that some strategies like breakout strategies or patterns work in almost any market conditions. While, there are some strategies that you can only apply when markets are trending or ranging.
Moving Average crossover is a trading strategy that can be used in trending markets. Exponential Moving Average or EMA for short is widely used in trading. EMA puts more weight on recent price changes when calculating the indicator formula. For the crossover strategy, traders utilize two moving averages, one long-term and one short-term. Here, traders look at the crossover between these two moving averages. If the short-term EMA goes above the long-term EMA it signals a bullish run, while if the short-term EMA is below the long-term EMA it is a signal that we have a downtrend on our hands. This is more complicated than using one Moving Average, but still, it is a very simple Forex trading strategy for beginners.
In the image below, we are trading with the USD/EUR trading pair and are using the Exponential Moving Average as our indicator. As you can see, when the price went above the EMA, it started to rise and continued to do so up until it crossed EMA and went below it.
The next strategy on our list is Range trading, which works similarly to the breakout strategy but in this case, we are trading within these support and resistance levels. Every asset has its own support and resistance levels that can be calculated by different Forex indicators or using simple trendlines.
When Range trading, traders simply set support and resistance levels on the chart and trade as the price moves along. When the price reaches or comes really close to the support level, there is a big possibility that it will rebound. Usually, traders enter long when price nears support and get out of the active position when the price reaches resistance and vice versa. Stop loss orders are placed right outside significant levels. What’s great about range trading is that traders know in advance how much their risk to reward ratio is. When it comes to trend trading, often take profit targets depend on the strength of the trend.
Range traders typically use oscillators along with support and resistance horizontal lines. However, as mentioned above, incorporating various indicators can have negative impact and cause analysis paralysis.
When using this strategy, it is crucial to implement stop-loss and take-profit orders, as to not miss out on profits or suffer huge losses. There is always a possibility that prices continue to fall and break out from the support level, therefore having good risk management strategies is required. It’s vital to select an appropriate position size. Professional traders avoid risking more than 1-5% of their capital per trade. The more frequent trades you do, the less risky any single trade should be as risks are spread. When making more calculated and limited number of trades, trading size and risks can be higher, but not exceeding 5% of your trading capital. When a single trade becomes too significant, mistakes and human emotions increase.
In the image below, we are trading the EUR/USD currency pairs using the Stochastic Oscillator and simple horizontal trendlines. Our strategy tells us to only enter the trade when both Stochastic and trendlines give us similar signals. Stochastic oscillator is a range trading tool that shows overbought and oversold market conditions. The indicator displays 0 to 100% values and once indicator is above 80 (standard but can be changed according to your preference), the market is considered to be overbought, and it is expected the price to reverse. Similarly, when the indicator goes below 20, the FX pair is considered to be oversold and expected to reverse.
One of the oldest and simplest strategies to use, News trading is a Forex trading strategy where traders keep an eye on all kinds of news around the world. Forex market is closely attached to the geopolitical, economic, environmental, and other states of countries. What we mean by that is that whenever there is something major going on in the country, in most cases it has a great impact on its currency.
News traders are typically trading during significant economic announcements such as interest rate decisions, CPI numbers, Unemployment data, trade balance, building permits, etc. News trading is highly risky as prices change in a rapid pace, and it requires fast fingers and execution. Often, news can be positive for a pair, but send the volume downwards. That happens because some traders use hedging strategies to protect their long term positions from short term economic announcements. To trade the fast moving, highly volatile and unpredictable news announcements, traders are using Buy Stop and Sell Stop orders. Buy stop is placed above the current market price and only activates if price starts jumping up. The Sell Stop works similarly, but in the opposite direction. The main idea behind the news trading strategy is to catch a volatile move, no matter which direction it goes.
Trend trading is another simple Forex trading strategy that beginner traders can use in order to make profits. When trend trading, traders use indicators in order to find trends and the momentum direction of the market. This strategy works because Forex market likes to behave in a certain way, and it is expected that trends that took place in the past will repeat themselves in the future if the circumstances are the same. Because of this, traders learned what trends like to repeat themselves, what triggers these trends, how does the market behave when this happens, and how to spot these trends.
When trend trading, traders utilize different indicators that project trendlines on the chart. These trendlines are then used as a signal line, and when a price or indicator passes these lines, it signals that a trend has started and traders need to act accordingly in order to make profits. But when doing so, traders need to remember that if something occurs on a constant basis, it does not mean that it will occur every time. Therefore, it is important to implement good risk management system with correct utilization of stop-loss and take profit orders.
In the image below, you can see an example of Trend trading. In this case, we are trading with EUR/USD currency pair and are using Relative Strength Index indicator for determining trend lines. As indicated on the image, once trendline has been breached, prices started to rise, and once it came below the trendline, prices have then started to fall and an asset went to a downtrend.
FAQs on Forex strategies for beginners
Are Forex strategies for beginners useful?
Yes, beginner strategies are very useful. While expert traders trade with complex strategies, new traders can use beginner strategies as a way to learn how the Forex market works. These strategies can teach basics of Forex trading, and while they might not generate huge profits, they are certainly good enough to make some sort of profits that will leave beginner traders happy.
Can you make money from Forex strategies for beginners?
Absolutely. While more complex strategies, or the whole trading plan will generally generate more profits, beginner strategies are still effective for generating sufficient profits. But still, their main goal is to get new traders accustomed to the Forex market and teach them how the market works.
Are Forex strategies for beginners cost-effective?
If a trader uses a combination of different indicators, then yes, they are cost-effective. But if a trader is using just one indicator for the strategy, then this cost-effectiveness lowers as risks increase and traders need to implement good risk management into their trading activities.