Interested in knowing what are the best forex trading strategies to increase your potential of becoming successful? In this article I’m going to go over 3 major technical trading strategies that work the best.
I Trend Trading Strategy
Okay, the first one I’m going to show you is a very easy, yet highly profitable day trading strategy. I’ve been using these trend trading strategies since 2007 and it still works today. I’ll try to be brief and straight to the point. If something is unclear, please skype me @paulkoger
Let’s get straight to it:
Discover a currency pair or a stock that is trending up or down
Browse through different stocks to discover the ones that are trending in an easily noticeable direction, like WCN here. It has to be really simple to tell the direction of the trend. The easier it is to see, the more likely this strategy is to work.
How to do this – go to your broker’s stock/currencies selection (I use Etoro in this example).
Look for stocks/currencies that are moving, now select the time frame to be 1hour, and zoom out your chart to spot any trends. If you spot a trend, choose a smaller time frame, like a 5-minute chart to time your entry.
In Etoro it looks like this:
Check through all the stocks/currencies to see if you notice a pattern that is familiar to you. Like in this picture you can notice a simple breakout pattern. More about this pattern in one my next articles.
Wait for a pullback in the opposite direction.
After you have checked through different stocks and currencies and have found something that is trending either up or down, you need to start looking for a good spot where to enter.
The key strategy for entering into a trade is to switch to a shorter timeframe and wait for the stock to move against the trend. Example – if you are watching the 1-hour timeframe chart and you see a trend, then switch to a shorter timeframe like 5-minutes and start looking for a pullback.
If you have found an uptrend, you need the instrument to move down a bit. If you have found a downtrend, you need the instrument to move up a bit. You do this to reduce risk and increase the risk/reward ratio.
Most stocks move in waves, in order to immensely improve your odds of success, you have to find a trend, wait for a pullback, and when the pullback gets exhausted/stops, you go in as quickly as possible.
The best places to buy are where the trend is going up, but there is a short period of profit taking, meaning people are selling. This way you can catch the big waves with less risk and more profit 😉
Set a stop loss to control your risk – Important!
90% of losing traders lose, because they can not control their losses. They let their losers run and wipe out their entire accounts. All the professional traders are aware of this mental problem and always close their losers early and let their winners run.
Before entering into a trade you need to know where you will exit with a loss. Losses are a normal thing, the only trick is to close positions quickly once the trade is not going your way.
The best way to determine where to exit is to put your stop-loss just below the previous low if you are buying and above previous high when you are short-selling.
Example: In this Euro/New Zealand forex chart we see a downtrend happening. The red arrow suggest a good place to sell, now a proper stop-loss in this case would be slightly above the last high (red line in the picture).
You would only risk very little in this case, but had a lot to gain as you can see in the chart 🙂
Sell when the trend breaks.
Trends can be highly profitable, but in order to keep your profits, you need to know when to get out of the trade. How to know when to exit is to watch the trend closely and if you see it breaking, you go out immediately.
How to tell when a trend has broken? The rule of thumb is that the trend is broken when the new high is lower than the last high in case of an uptrend and when the next low is higher than the previous low in a downtrend. See in the same example:
So the trend breaks if the new low is higher than the earlier low. You exit when the price goes through previous high. And for uptrends once again – trend breaks when new high is lower than previous high, you exit the trade when price goes through previous low.
Now as you have learned a very powerful strategy, I encourage you to go and try to use it. PS! If you found this helpful, please comment below.
II Channel Pattern
Channel pattern trading is a strategy that works very often. Why? Because most of the time, the instruments are trading in a channel formation. They are not forming any interesting high probability patterns and stay inside what looks like a rectangle.
Although this seems like a boring time in the market, it can actually be highly profitable. If you can recognise this sort of pattern, it is rather easy to predict what the stock or currency pair is going to do in the near future. And this works very often.
Now let me show you how to trade this step-by-step:
1. How does the pattern look like?
This strategy consists of finding a chart pattern that looks like a channel or a rectangle. As shown on the picture, you need at least two bounces from the channels edge to confirm the channel.
You should only enter into the trade on the third time when the chart reaches the edge and you notice that it wont go through the previous support or resistance lines. You can enter every time the price reaches and starts to bounce back from the edge, it doesn’t have to be the third time.
If the channel holds, you can keep profiting from it, but once it brakes, get out and trade the brake/out pattern or look for another opportunity elsewhere.
2. When to take profit and when to cut your losses.
Before you enter into the trade you need to know when to take your profits and when to cut your losses. In this strategy I use 1/3 of the channel range for my stoploss level and 2/3 for my target price like shown in the picture above.
As this pattern appears and works quite often, it can be a great moneymaker for your portfolio. Markets tend to be in a sideways movement rather often, this will help you to make money during these so called “boring” times.
What you need to do is search for clear patterns, often the chart is very choppy, the price is moving all over the price. Only trade when the pattern is easy to recognise. Don’t throw your money at something that sort-of looks like a channel.
If you want belong to the top 10% of traders you need to be sharp and only take the trades where you feel strong about the pattern. One very important tweak that has helped a lot of professional traders to really excel at their profession is keeping track of your trades and different patterns. Write down what worked, what didn’t and do your own statistics.
3. A Real Life Example
Here you can see a 30-minute British pound to Aussie dollar chart. I recognised a channel pattern in the 30m timeframe after checking through different time frame charts. It seemed to be trading in a range since 14th of October. The upper level seemed to be the 1.61 level and lower level at 1.59.
As I noticed the chart when it was near the higher end, I took a short position. The pink line is where I sold, the orange line is where my stop-loss is and the green line is where I have set my target profit level. In this case the I didn’t exactly follow the 1/3 for stoploss and 2/3 for target price level, because I wanted to take less risk here.
And the result? This trade turned out to be a profitable one. I managed to make +1132 euros. My risk was really tight on that trade as you can see from the chart. I used a low risk, high reward ratio. These ratios have less probability of working, but when they do, the gains are decent.
III Double Tops Strategy
Most successful day traders that use technical analysis utilise chart patterns to make money in the trading business. They have a list of key patterns that work and they stick to them. Every time the specific shape appears, they will initiate a trade, knowing that they will win 55-90% of the time.
One of these highly successful patterns is double tops (DT). These appear quite often, I have been able to find DT-s almost every day, it depends how long you stay behind the computer and how many different instruments you browse through.
Once you notice a proper double top, you can make a trade knowing that the odds are in your favour to be correct and win. Below I will show you the process of how I find and trade DT-s every day. And as I’ve said in the headline – this is one of the most profitable patterns out there, so I advise you to take notice 🙂
Let’s get to it:
Browse through the different instruments on your broker
My favourite instruments are currencies. To find the double top pattern, I check through the main currency pair’s charts.
From there I check the 1-hour and 5- minute charts to find double top or double bottoms forming. I also zoom out to get a better overview of the longer term chart.
Here I have found a nice looking double-top pattern from CHFHUF currency pair.
You can choose a timeframe of your liking, it depends on how long of a trade you are looking to take. If you want to make a trade within 5 minutes to a few hours, you should use 5 or 15-minute charts, if you’re looking to swing trade, use a longer time frame chart, 30 minutes, 1 hour or more.
How does the pattern look like?
You need to look for a W-shape pattern, where a chart has ran up, pulls back, now goes up again, but now stops at the same level or below the previous high and starts heading down again.
In the above picture I’ve drawn an example of a double top chart pattern. There you can see that the stock was unable to reach higher than the first time, it’s strenght had worn off. Now you need to wait for the chart to go below the previous low, which was between the two highs. When it brakes that previous low, you go short/sell the instrument.
Sometimes the pattern does not work, for these occasions I always have a stop loss set at between the second top and where I entered into my position. If it didn’t work this time, don’t worry, it is important to stop out at the right time to preserve your capital and try again next time.
To take profit, I use a target price that is 1.5-2 times further than the stoploss, as you can see from the chart. As this pattern works often, 1.5 times profit/loss ratio has been sufficient for me to remain profitable in the long run.
Double Bottom – Yep, it works the other way around as well
That is basically the same example from above flipped upside down. NB! It is important to not enter before the neckline breaks. Some traders have a looser stop loss, above or below the second top/bottom. As I am rather conservative and have found success with the above stop loss and take profit targets, I stick to these myself. You are free to experience with different levels.
Example – EUR/GBP
The above chart displays a very good example of a double top pattern in action.
Ok, now it’s your turn to these strategies out. Read this through once again and try to locate a different patterns that seem clear. Use reasonable stoploss and profit target ratios and make notes of your trades. Use the statistics to see which patterns work for you and also try to realize what went wrong if the trade doesn’t go your way and adjust your trading for the next time around.
Good luck with your trades!
Please don’t hesitate to write to me at the comments section or via skype @paulkoger