Simple Forex Trading Strategies for Beginners
The current Forex market is quite expansive, with lots of trading strategies. As a beginner, it is easy to get overwhelmed, lost in the various strategies that have been devised over time. As with most things, however, when trading, the smart option is to start simple and build up from there.
Below are some simple strategies as you begin your foray into the world of Forex trading.
- Price Breakout Strategy
At every point in time, the markets range between 2 lines: the support line and the resistance line. They are not very hard to find; look for the highest price point in the chart that seems to correspond with other high price points. Once found, draw a horizontal line (let’s call this line 1) across the high points, touching as many points as possible. This is your resistance line.
Look for the lowest price point in the chart and repeat the process above, drawing a line 2. The line below is your support line.
Your chart should end up looking like the figure below:
A breakout occurs when the market starts to move outside the lines 1 and 2 above and it sometimes signifies a change in trend, either upward or downward. When a price point breaks out of the resistance line and exceeds the highest price seen over the past 30 days, that is a strong bullish signal (i.e. the market will likely trend upward henceforth).
If the price point breaks out of the support line with a 30-day low, that is a strong bearish signal, i.e. the market may trend downward henceforth.
NOTE: The longer the period of the highest/lowest price point, the longer the new trend. Meaning: a 120-day low will bring a longer downward trend than a 30-day low.
- Pin Bar Strategy
Sometimes, breakouts do not lead to a change in trend. The trick is recognizing when there will be a change in trend and when there will not. The pin bar strategy helps in this regard. It is a trend reversal signal and one of the easiest to recognize and trade on. Before we go on, however, it is important to understand what pin bars look like.
The above are pin bars; the red is a bearish pin bar while the green is a bullish pin bar. During a break out, the appearance of one or more bullish pin bars on (or around) the resistance line is a signal that the market is about to enter an upward trend.
Conversely, the appearance of one or more bearish pin bars is a signal that the market is about to enter a downward trend.
- Inside Bar Strategy
The inside bar strategy is similar to the pin bar strategy above, but it is a continuation—and not a reversal—signal. It also works with breakouts and it is very easy to understand, master, and trade on.
Here is what an inside bar looks like:
For a bar to be described as an inside bar, the preceding bar has to completely overshadow it as seen above.
The appearance of an inside bar signifies the continuation of an ongoing trend after a breakout. If for example, as described in (2) above, you see two bullish pin bars just after a breakout, this signifies an upward trend. If not long after, an inside bar appears, this reinforces the upward trend.
- SMA Crossover Strategy
The simple moving average is an indicator that can be found in all forex trading software, and if mastered, the SMA crossover strategy is quite effective. The SMA indicator uses a lagging action and old price data to predict the market’s direction. Now, because it is slower than the current market, one single moving average cannot be used to trade, rather, you need 2/3 moving averages set to different time periods.
For the crossover strategy, set the longer SMA to, say, 20 days and the shorter one to 10 days.
The figure above shows the movement of the 10-day, 20-day, and 200-day SMA in relation to each other. Focus on the 10-day and 20-day averages and a trend is apparent.
Whenever the shorter-period line (10SMA) crosses over the longer-period line (20SMA) and moves upward (I), it signals a reversal from the bearish trend to a bullish one. Conversely, when the lines move downward after a crossover (II), it signals a reversal to a bearish trend.
Practice these strategies on a demo trading account for some time before using a funded account. This should help you master the techniques without pressure, and it gives you an opportunity to tweak the strategies to your liking. With time and experience, you may end up combining all the strategies above to get trading signals—this is a sign that you have truly mastered them.