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Classifications and Examples of Trading Strategies

Summary

Forex guide for beginners. Profitable trading strategies with examples, and screenshots.

 

One of the most frequent tips given by experienced colleagues to newbies is to either find your strategy and/or trade systematically. But what is a trading strategy, and how do I trade systematically? This article will not only answer these, and other, basic questions related to trading strategies, but will also analyze a few simple examples of trading strategies used on Forex.

Explaining Trading Strategies

A trading strategy (TS) is a set of rules which a trader will follow to make decisions around opening a trade on Forex, setting a stop loss and take profit, assigning a volume of positions, etc. These rules relieve the trader from manually deciding to open a trade analysis every time.

In most cases, the trading strategy is:

  1. The trader receives a signal that market conditions are favorable for opening a transaction. The signal can be indicators, the formation of a technical analysis figure, the output of important economic statistics, etc.
  2. The trader opens a trade by setting a stop loss and take profit (if the TS provides for this).
  3. The deal is closed by stop loss or take profit, or the trader closes it manually, based on the relevant rules of the strategy.

If the deal closes, the trader will then wait for signals to open the next one. Sometimes several transactions can be open at the same time for several assets, but overall the cycle does not change.

Types and Classifications of Trading Strategies

Trading strategies differ and are classified according to several key features. Consider the following main classifications and types of TS.

Indicator/Indicator-free

This classification is divided into strategies in which indicators are used,in which decisions are made indicator-free, and in which other types of analysis are used. Indicator strategies, as a rule, are more systemic and require less independent analysis from the trader.

Newbies often seek out indicator-free strategies, since at first glance the indicators seem too complicated for them. In fact, most indicator strategies are simple; you just need to understand their signals. Many strategies without indicators require additional analysis and decision-making from traders. As a result, beginners who are trying to find a simple and understandable trading system can end up creating additional difficulties for themselves.

Market Condition Classifications

Trading strategies are also classified depending on the market condition in which they are applied:

  1. Trendy – trend trading is considered to be the easiest and safest way, and so is best suited to beginners. The main thing is to correctly determine the trend in order to open a deal in its direction in time. Indicators like the moving average, graphical constructions and figures, and many other analysis tools help traders with this strategy.
  2. Counter Trend – trading against the trend is a risky business, but some pros believe that these strategies are the most profitable. By trading against the current trend, there is a chance to catch the new movement before anyone else, and therefore earn more than anyone else.
  3. Trade in the flat – according to statistics, the market is only moving in a trend 30% of the time, and the rest of the time, the price fluctuates in the horizontal range (flat). Flat strategies help make a profit from this state of the market by earning from small, chaotic price fluctuations. In such strategies, oscillators are actively used, as well as support and resistance levels, Fibonacci tool, etc.

Examples of Trading Strategies

In order to better understand the essence of trading strategies, consider a few examples of different types of simple TS.

Moving Average (MA) + MACD Combo Strategy

This is a simple indicator strategy in which trading is conducted using signals from two indicators.

  1. MA – a simple moving average with a period of 10.
  2. MACD – “trend oscillator” with standard settings.

Transactions on this strategy are opened under the following conditions:

  1. If the price chart crosses the MA from the bottom up, and the MACD histogram crosses the zero point of the oscillator in the same direction, a buy deal is opened.
  2. If the price chart crosses the MA from top to bottom, and the MACD histogram also drops below zero, a sell trade is opened.

I1 Buy deal with МА + MACD strategy

The stop loss for this strategy is set at the nearest local extremum and the take profit is set at three times the stop level. After closing a deal on one of these orders, the trader waits for the next signal.

Price Channel Trading Strategy

The following strategy is based on technical analysis. In order to receive signals for opening trades, the trader needs to find a clear price channel. Such channels do not always appear on all charts, so it may take time to search for a suitable pattern.

The price channel is built on the minima and maxima of candles. To build, you need at least two minima and two maxima, after which two successive lines are formed.

Trading in the price channel can be conducted in two directions:

  1. On the rebound from the border of the channel.
  2. On the breakdown of the channel boundary.

Only the trend channel is used for trading; the flat is not suitable for this strategy. Trading on a rebound is in the direction of the trend, trading on the breakdown is against the trend.

If the channel is ascending, trading is conducted as follows:

  1. When the price reaches the lower boundary of the channel and then turns up, a deal opens to buy.
  2. When the price breaks through the lower boundary of the channel, and the candle closes below this boundary, a sale is opened.

I2 Deal to sell upon breakdown of ascending channel.

For the descending channel, trade is conducted as follows:

  1. When the price reaches the upper boundary of the channel and then turns down, deals are opened for sale.
  2. When the price breaks through the upper boundary of the channel, and the candle closes above this boundary, a buy deal is opened.

In all cases, the size of take profit should be approximately equal to the height of the channel, so stop loss is set at a ratio of 1:3 to take profit.

Conclusion

In order for Forex and other financial markets to generate a stable income, it must be systematic. Trading strategies provide consistency, as they offer clear rules to the trader.

Unfortunately, not all trading strategies are profitable. Even those strategies that once brought a stable profit lose efficiency over time as the market is constantly changing. In order to make money on Forex, you need to consistently improve your vehicle and be on the lookout for new trading approaches, just in case old strategies stop working.

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