Table of contents:
- 1 3 important basics in Forex trading
Here you can learn the best Forex strategy and test it daily in day trading and swing trading.
The foreign exchange market (Forex market) is the largest market in the world with a daily trading volume of over 5 trillion USD. All kinds of market participants can participate in forex trading. We traders have different intentions than a central bank or an international corporation and therefore we need a working Forex trading strategy.
In this article I will introduce you to perhaps the best Forex strategy, because it has been successfully traded for decades by big boys like hedge funds and investment banks. The good thing about it: We can trade it just as well! How to do this, I will show you now step by step.
To do so, it is necessary to first refresh the basics so that the important connections are understood correctly. Then I will show you the most common mistakes in Forex trading, so that you don’t lose money unnecessarily in trading. Afterwards it will go into detail and you will get to know my favorite Forex strategy.
3 important basics in Forex trading
If you want to trade foreign exchange with an online broker with the intention of making a profit, it is imperative that you understand how and where Forex is traded. Unlike the stock market, there is no standard/regulated exchange. Transactions in Forex trading take place over-the-counter, i.e. on the interbank market. Investment banks trade either on their own account or on behalf of their clients. Customers can be private investors, companies and groups as well as central banks.
You must have internalized the following basics:
- In FX trading, pairs are always traded (EUR/USD, GBP/JPY, NZD/CAD, …). If I want to buy the EUR and sell the USD, I go long EUR/USD.
- Prices are determined by supply and demand. Effects on other currencies are unavoidable.
- The Forex market is open 24 hours a day from Monday to Friday. So it is also traded during the night. A distinction is made between the Asia Session, London Session, New York Session.
If you have mastered this basic knowledge, you are already a whole step further than many a private trader in search of quick profits in trading.
Before we dedicate ourselves to the Forex strategy, here already the reference that there are different possibilities of the Forex trade. Traders can trade currencies as spot transactions, futures, swaps or options. We concentrate here on the most common form among private traders and online brokers: the spot transactions.
Popular errors in Forex trading
Less than 10% of all private traders actually make money with Forex trading. Often a lack of preparation, impatience and greed are the triggers for high losses. A profit trade is followed by two loss trades and the account melts.
Many beginners don’t even bother with strategies and setups, but of course they have to place an order (much too big) in the market immediately after opening a live account. The Big Boys will find what they are looking for…
A very popular mistake is to realize losses too late. Traders tend to fall in love with their positions, even if they are deep red. On the other hand, profits are taken too early. In sum, this leads to losses being higher than profits. Those who don’t change this, continuously lose money.
A functioning trading strategy helps of course, but there is much more to success in trading. Proper risk management must at least include determining the correct position size, as well as the entry and exit levels for a trade.
Finally, a mistake on the subject of attitude. The mindset of a trading beginner differs significantly from that of a professional trader. While beginners want to get rich as quickly as possible and consider which monster trade will allow them to make millions, professional traders have understood that the primary goal is to protect the account from large losses. Of course, losses are always part of it, because I can’t always be right with my trades. But I can only execute the next trade if I still have money in my account.
Deal with these trading mistakes and check your attitude so that you have a fair chance at all.
When do the prices of a currency rise or fall?
Simply put, prices rise when demand exceeds supply and orders are executed “market”. However, there are certain events in Forex trading that you need to pay attention to if you want to know where the journey in a currency pair is going.
In order to understand the concept, we need a sound basic knowledge of economics, especially about central banks. Central banks are responsible for the interest rate level of the respective country (or monetary union such as EU). The interest rate level in turn is responsible for investments, credit demand and savings in that country and thus determines the currency of the country.
Here is a small example:
Let’s assume that the key interest rate level in the US and UK is 1%. Now we have a rate hike in the USA to 1.5%. As the attractiveness of investing in the USA has increased for foreign/British investors, the money is transferred from GB to the USA. To do this I have to make a transaction in the foreign exchange market by selling GBP and buying USD. The GBP/USD forex rate will then fall.
Now it is important to know what the interest rate level is in a country whose currency you want to trade and what the monetary policy of the domestic central bank is. A good overview can be found on investing.com.
You can see that among the major central banks and currencies, you can find a high interest rate in New Zealand and the USA. In Switzerland, Japan and the Euro zone, on the other hand, the key interest rates are low or negative.
Of course, other parameters such as political situations or economic stimulus packages also have a significant influence on the supply and demand of a currency. But central banks are leading the way with their monetary policy.
With the knowledge we have gained so far, we are now setting course for what we believe to be the best Forex strategy for private traders.
Basic concept of Forex Newstrading
Now that we know that the key interest rate level (and the economic/political situation) stands for the attractiveness of a currency, we can say in general terms
“A currency rises when the Fed rate rises, a currency falls when the Fed rate falls.”
In practice, of course, it’s not so easy, because the market likes to anticipate interest rate decisions. But with proper preparation and a lot of practice you can “anticipate” the decisions and take advantage of them.
We now have to find out when a central bank will raise interest rates and when it will lower them. These monetary policy measures are of course not carried out arbitrarily, but in accordance with the economic situation of the economy.
Almost every central bank’s primary objective is defined as price stability. At the ECB, this objective is guaranteed if prices are “stable” in monetary union. This is the case when we have an annual price increase (inflation) of just under 2%.
If this target value is undershot, the central bank can initiate expansionary measures to boost inflation. The ECB, which has continuously lowered its key interest rate since the beginning of the financial crisis in 2008, serves as an example. If inflation is above 2%, the central bank can raise the key interest rate in order to slow down inflation. There are of course other instruments such as bond purchase programmes and money supply controls.
So what is the Forex strategy?
Every country publishes the latest inflation figures at least once a month. Before the event there is an expectation of the market, i.e. a forecast of how inflation will probably turn out.
Now there are five scenarios, how the result will be on these inflation data:
- The result is significantly higher than the expectation/forecast – the currency rises with high probability and high volatility
- It is slightly above expectation/forecast – the currency may rise
- The result is equal to the expectation – the currency – the development of the currency can hardly be determined
- It is just below expectations – the currency may fall
- The result is well below expectations – the currency will fall with high probability and high volatility
From these outlined scenarios a promising trading setup can be derived, which is the basis of a Forex strategy.
2 of 5 trading setups of this Forex strategy presented
I will now introduce you to two of five trading setups within the Forex Newstrading Strategy that can be traded on a daily basis. All other setups and information can be found in detail in our online course.
Use this Forex strategy as an idea and develop your own concept if it suits you.
1. trading setup of the Forex strategy
The first setup deals with the 10 most important central banks and their key interest rate decisions, which take place between 8-12 times per year. We want to consciously trade the currency whose central bank announces an interest rate decision.
Our setup is as follows:
At the weekend, when the markets are closed, we use an economic calendar to look for interest rate decisions for the coming week. I use the economic calendar from forexfactory.com every day. But you can also use different language versions such as tradingeconomics.com.
In the calendar you will find not only the date and time of the event, but also the forecast of economists and analysts. For example, we take a look at the Bank of Canada’s interest rate decision and the corresponding Forex strategy.
We see in this picture from forexfactory.com that on 06.09.17 the key interest rate decision (Overnight Rate or Cash Rate) of the September meeting of the BOC was announced. The forecast shows us a 0.75%, so no change from the previous month.
However, the result was a 1.00%. So, contrary to market expectations, the BOC has raised the key interest rate. A big surprise!
How do you think the Canadian dollar reacted? Extremely bullish, as you can see in the following charts (CAD/JPY and USD/CAD)
You can see that the Algotrader catapulted the CAD in a few minutes about 200-300 pips (depending on the FX pair) upwards. But not only Algos and Scalper, but also Daytrader and Swingtrader have their joy, as the higher time units show, because in the following days the CAD rose further.
But it also shows that a currency pair is always determined by two currencies. In the following days, the USD became generally stronger again, and the JPY weaker. Of course, the development of USD/CAD and CAD/JPY depends on this.
This first setup therefore aims at targeted trading in the context of interest rate decisions. We only want to trade if there is a surprise (otherwise not)!
I always have a surprise when the actual expectation is missed – both positive and negative. In the above example, there was a positive surprise because the market did not expect an increase in the key interest rate. I can use this fresh, positive sentiment for all relevant trading styles, i.e. scalping, day trading and swing trading.
As a day trader, for example, I can place an order within the first minute after the announcement of the interest rate change, or wait for a response and enter the market at more favourable rates.
Of course I can also trade when there are no surprises, but then I have to pay attention to many parameters in the statements or press conferences. That would be another setup I would present to you in the online course or the Trading Lounge.
2. trading setup of the Forex strategy
The second setup deals with a “precursor” to the interest rate decision. Here, too, we work with an economic calendar, but now we pay attention to the central banks’ most important indicator – inflation.
The announcement of inflation data can also trigger high volatility in the currency under consideration if there are large deviations from the forecast.
We can turn this catalyst into a Forex strategy. As with the interest rate decision, we can trade it with a 10-15 point target as a scalp trade, with a 20-40 point target as a daytrade or with a 50-200 point target as a swing trade. The point values are not binding, but serve as input and rough orientation for the individual trading styles.
If you want to trade inflation data, you should search for “CPI” (Consumer Price Index) in English calendars and “VPI” (Consumer Price Index) in German calendars.
As an example I have used the calendar from 12.09.17.
At the top you see the CPI data from Great Britain. So it is clear that the GBP is affected. As a forecast, 2.8% was expected and finally 2.9% came. So we had a slightly positive deviation. This small, positive deviation caused about 75 pips in the GBP/USD in the following hour.
We would have seen an even bigger move if the deviation had been strong, such as 2.5% in negative and 3.1% in positive.
Note also here: The bigger the deviation from the forecast, the more volatile it becomes and the better chances we have for a profit trade. Quite simply because the sentiment in the currency is even stronger/weaker and many market participants want to (sell) the currency.
Here too, you can consider which trading style you want to trade the scenario with, because this is also what determines the risk management for the trade.
Now you have got to know 2 of 5 trading setups in the context of FX Newstrading. These setups do not occur daily. But with the other approaches you have in total 1-2 good trading opportunities daily in day trading and swing trading.
You may have noticed that these setups are based on the basic principle without chart technique. However, there is of course the possibility to optimize the trades by means of chart analysis, especially when setting stop loss and take profit. I use simple support and resistance zones or moving averages like the EMA200.
In the end, the first step is to test every trading strategy on demo accounts without risk. You have to get a feeling for the market, the financial instrument, the volatility of the event, etc.
For me it is the best Forex strategy because it combines fundamental analysis and chart technique, I can trade it cleanly with my favorite trading style (day trading) and after years of development I realize when, how and where I can optimize things in a targeted way.
And as mentioned at the beginning, the Big Boys also trade this approach, both through Algos and discretionary.
In order not to raise false expectations, I end this article with the clear statement that any strategy is only as good as the trader who ultimately implements it. Finding and developing a (theoretically) working strategy is the easiest part of trading. The patience and discipline of correct implementation, however, is the most difficult part!
Read my other articles about Forex Trading:
- 7 biggest mistakes in Forex Trading
- Best Forex Strategy For Beginners And Experienced Traders?
- Buy and hold forex trading Strategy
- Effect Of Emotions On Your Forex Trading
- Efficient Gap Forex Trading Strategy
- Forex Broker with High leverage
- Forex demo account
- Forex exchange market: Professional Guide
- Forex Signals experience – Worthwhile or not?
- Forex Spreads & Fees – How Expensive Is Trading?
- Forex Trading Correlations for more profit
- Forex vs. Futures – Strong Differences In Performance
- How Much Capital Is Required For Forex Trading? – minimum deposit
- How to avoid requotes from your Broker in Forex Trading
- How to become a Forex Broker
- How to choose the Right Position Size In Forex Trading
- How to find a good Forex Broker
- Learn Forex Trading: Instructions & Guide For Beginners
- Learn Risk & Money Management in Forex Trading
- List of 10 trusted Forex Brokers
- Martin Gale Strategy in Forex Trading
- Risk of Forex Trading: How dangerous is it?
- Risks on Weekends in Forex Trading
- STP Broker Comparison – The Best STP Brokers In Test!
- The 10 Most Common Reasons Why Beginners Make Losses In Forex Trading
- The best ECN Brokers for Forex Trading
- the best Forex Broker: These Are The Points That Matter
- The Most Traded Currency Pairs – Guide
- The Trading History of the Pound Sterling (GBP/USD)
- The trading history of the Swiss Franc (USD/CHF)
- The Trading History of the Yen (USD/JPY)
- Trading History of the AUD/USD
- Trading History of the EURO/USD history
- Trading History of the US Dollar (USD)
- What Are The Effects Of Different Levers In Forex Trading?
- What is Forex Trading? – Definition & Explanation
- What moves the forex exchange price | Influences of the Exchange rate
- Which Currencies Are Recommended For Beginners And Professionals?