Foreign Exchange (Forex) trading may appear daunting and complicated for beginner traders. On the other hand, buying and selling national currencies is a pretty simple process. Large companies, hedge funds, and governments dominated the foreign exchange market decades ago. Anybody may become a forex trader nowadays. With a simple mouse click or an account in an investment firm, the forex market is now easily accessible.
Using the right strategies, Forex trading may be risky but rewarding. These efficient strategies might help a beginner avoid avoidable losses. This guide explained the top 3 simple forex trading strategies for beginners.
Why Should Beginners use a Trading Strategy?
The Forex market is extremely liquid, with many participants. It is also a well-established market. As one might assume, the combination of popularity and time has resulted in the development of a plethora of trading strategies by experienced FX traders.
The sheer number of trading techniques available can be daunting and confusing for a day trader who might simply search for basic trading guides to learn to trade, or even an intermediate FX trader looking for useful trading strategies to improve their knowledge and skills.
Some day trading strategies have a steep learning curve and are quite complicated. As a result, Forex-newbies may want to begin with an easy strategy.
The simpler the trading strategy, the easier it is to digest the related principles. When you’ve mastered the fundamentals, there will be plenty of opportunities to develop more sophisticated actions. Whether you utilise a simple or complicated strategy, remember that your overall philosophy should always be to use what works.
Generally speaking, new traders cannot dedicate much time to watching events. Simple strategies provide a low-maintenance yet successful approach for these newbies to Forex.
Simple Trading Strategies in Forex For Beginners
The first two strategies I’ll demonstrate to you are fairly similar cause they attempt to follow trends. The third strategy attempts to profit from interest rate differentials rather than market direction.
But first, what exactly is a trend?
To put it simply, a trend is a tendency for a market to keep moving in a particular direction. A trend-following system attempts to produce buy or sell signals that align with the development of new trends. Numerous methods have been devised to identify when a trend begins and finishes.
Similar simple strategies are used in many successful Forex trading methods. In fact, several traders have developed outstanding track records by using such systems.
Nevertheless, there are many drawbacks to these strategies:
- They are difficult to stick with.
- Large trends can occur seldom.
- The circumstances are rear that point to the probable start of a trend.
Hence, the strategy tends to generate numerous losing trades. According to the theory, more infrequent but larger winning trades will offset these losses. In reality, it is a hard pill to swallow. Also, you tend to lose a healthy profit anytime the trend breaks down.
You may have heard “the trend is your friend,” but you might not be familiar with the whole expression, which adds “until the end.” The end comes when the trend fails, which can be difficult for a trader’s psychology.
One deep issue with a trend-following system is that it requires big pockets to function properly. This is because extended possession of a large amount of capital reduces your chances of filing for bankruptcy. Hence, while trend following is a decent Forex strategy for beginners to understand and deal with, it might not be appropriate for individuals with lower incomes.
Our first strategy tries to predict when a trend could emerge. It searches for price breakouts. The bands of support and resistance on the markets occasionally range. Consolidation is the term for this. A breakout occurs when the market pushes beyond the boundaries of its consolidation to make new lows and highs. When a new trend is formed, a breakout must occur first. Thus, breakouts are possible signals that a new trend has begun. Yet the trouble is not all breakouts result in new trends.
Even simple strategies in Forex must be applied to risk management. You are attempting to limit your losses during the trend breakdown by doing so. A new high indicates the possibility of an upward trend beginning, while a new low indicates a downward trend beginning.
The length of the period can assist in determining the highest or lowest high. A breakout above the highest high or lowest low for a longer period indicates a longer trend. A short trend breakout period suggests a short trend. In other words, you may tailor a breakout strategy to react more quickly or slowly to form a trend. Reacting quickly allows you to ride a quicker curve in the short term, but it may result in following more shorter-term trends.
Moving Average Crossover
A simple moving average is used in our Forex strategy for beginners (SMA). SMA is a lagging market indicator that follows older price data than generic strategies and moves more slowly than the current market price. The SMA moves slower the longer the period over which it is averaged. We combine a longer SMA with a shorter SMA.
We will use a 25-day SMA as our shorter moving average and a 200-day SMA for our longer moving average in this simple Forex strategy. When the shorter SMA crosses the longer one, it reflects a shift in the trend. Newer prices are higher than older ones when the short SMA moves above the longer prices.
It is a type of trade widely employed by beginners as well; thus, it is not purely a Forex Forex strategy. Most of all, it is easy to apply and understand. The crux of the carry trade is to benefit from the difference in yield between two currencies. To understand the principles involved, consider someone who converts currency physically.
A trader borrows a certain amount of Japanese Yen, for example. The cost of holding this is negligible because the interest rate on Japanese debt is extremely low (effectively zero at the time of writing). The trader then converts the Yen into Canadian dollars and invests the proceeds in a government bond with a yield of 0.6%. The cost of financing the Yen debt should exceed the interest received on the bond.
The easiest forex strategy is easy to master and works well for you. Swing trading, moving averages, and scalp trading are relatively simple strategies. Whenever you find a good strategy, strive to learn other types. To make substantial profits in forex, however, you must master 2-4 strategies and incorporate them into your trades.