Applying Strategies To The Forex Market
The success of a Forex trading strategy depends on a wide range of factors other than the strategy itself. This is part of the reason why Forex trading is hard and why traders may want a successful Forex trading strategy. The short answer is that there is arguably not, but there can be relatively successful ways to structure trading. For example, having a strategy in and of itself can provide a rationale for a trade and if adhered to can provide a way to manage the risk of a trade.
A strategy is in general based on past market behaviour and thus an entry, trade management and exit strategy (which is what strategies can provide signals for) is based on what may have worked in the past. This is one reason why traders may want to automate their trading as the robots will apply the strategy in a way which the trader may not be able to, incurring drawdown but perhaps working out in the end. Patterns are clear (after they have formed) and form at every time frames, thus pattern based trading can be a strategy to apply in the Forex market. Different strategies may work better in different market conditions.
A strategy which can be successful is news trading, as it fixes a time to trade and the trader's speculation on the data and its deviation from expected results points to the kind of market conditions to be expected at the time of release. However as with any strategy the market may not conform to the expected behaviour. So one good strategy is to expect that the market may not behave as expected. This is a rationale for trading without robots, as the trader will be able to apply their strategy but looking for clues building that it may not work. Some strategies may have such points as part of trade management, which are in essence when the strategy becomes invalid given the current market behaviour.
So a successful strategy is potentially one which structures the trade such that the trader is not buffeted by the complex moves in the market, but has the potential to exit based on certain signals. This can even be seen in news trading when a directional move, if it happens stalls. This can be a good exit point, as the market may continue but may also reverse.
With all this mind, let's break down what is a potentially successful way to approach Forex trading. Firstly, the trader will be trading a Forex pair. Forex pairs tend to have different behaviour in and of themselves. Some are more volatile, some have a smoother response to fundamental data, which is buffeting the pair throughout the session. So it can be helpful to trade a Forex pair on a demo account to get a feel for it. The trader may find that they prefer some pairs over others, or may find that some are more suited to different market conditions.
The problem with market conditions is that they can change. So the trader can look for signs of changes in the patterns traced out by a pair. One way of seeing momentum and direction is to use candlestick charts. By visual inspection, the trader can see if a pair is picking up in movement as well as the level of volatility, are there structured retracements happening or is there a volatile pattern, perhaps shows by equal and opposite candles or irregular movement.
Why can volatility be important is it not something to avoid. Volatility can be a sign of directional movement. Trends for example can begin from a volatile move. So volatility can be a sign of a market becoming untradable but can also be sign of more structured movement ahead. Trends tend to have a certain patterns in and of themselves but can begin from irregular movement. Trends are a trading pattern which require the application of rules, because they will tend to show retracements. Thus to trade a trend the trader will have to stay in despite signs of a move against the position. Because this move can indeed happen, the trader needs to have a trade management which allows them to exit after a certain point of retracement. A trend end though can show a pattern, where a retracement happens but it never recovers to the high or low, depending on the direction of the trend. Sometimes these patterns can eventually lead into a range.
While news trading is based on liquidity, there are other ways for a Forex trader to trade on liquidity. The idea is that changes in liquidity can result in changes in patterns. For example the lead up to a market session can be a time of trends but if can be volatile as well. Sharp reductions in liquidity after market close can also result in changes. In general the market can be a guide as to when to enter and exit a trade.
However the trader may wish to trade on indicators and follow signals which indicate when to enter and exit. When trading with an indicator, the trader may wish to apply the previous observations along with value level information. This is data based on what the actual value of the pair is. The reason for this, is that repeated patterns can happen around value levels, the big figure, halfway between and to a lesser extent other values within the big figure. The big figure itself can be very porous and attractive, resulting in moves which cut through it and reverse back up to it and beyond. It can also act as a floor and bounce the pair back up or down.
One of the random features of markets is that the unexpected can happen and for example a big figure, like a news trade can do a range of things seemingly at random. This is part and parcel of trading and why there probably can not be a most successful trading strategy as understood by following a set of rules, rather than a more complex set of strategies to apply to the market.
