I have quite a few strategies, but all except a few fit within two broad categories which I will call false breakout forex strategies (for ranges) and the low risk trend trading forex strategies.
As you read, you may notice that these simple forex strategies are different than how most people trade….and that’s probably why they work.
These two simple forex strategies that can be individualized to hopefully help people avoid constantly entering the market at the wrong time. These forex strategies also provide reasonable stops and profit targets which will often present favorable risk/reward ratios. Keep in mind, these are the basics of the forex strategies, you can add your own “flavor” to fine tune exact entries, stops and/or profit targets.
Simple Forex Strategies – False Breakout (for ranges)
The first method is a “false breakout” forex strategy. For pairs that are stuck in ranges (and preferably ranges within ranges) I wait for a breakout. Sometimes a false breakout occurs and sometimes the rate just keeps going (an actual breakout).
Whether a false breakout or actual breakout occurs does not matter. If a false breakout occurs I will use the false breakout forex strategy and in the event of an actual breakout the next strategy, trending, will present me with a trade.
In terms of a false breakout, I want relatively short lived moves outside the range. The price then moves back inside the former range and I jump in assuming the range will continue and my stop loss is small (relative to profit) since the extreme of the false breakout just gave me a stop price.
I only use this strategy in “rangey” and choppy environments, never during a strong trend. (Your personal trading plan should define how you will determine if the market environment is ranging or trending).
Profit target is before a resistance/support level within the range. For example, if the price breaks through the top of a range (resistance), and then falls back into the range, assume the range will continue and place a target for the trade just above support.
Therefore, when a breakout occurs…wait. It will either keep going or move back into the range. If it goes back into the range enter when the both the bid and ask are back inside the range. Pick a profit target based on support and resistance (this is where the strategy can be individualized) and place a stop just a couple of pips outside the recent false breakout price.
If the potential reward is not greater than the potential reward by a factor of at least 2:1 then don’t make the trade. And again make sure the overall environment is choppy (and not just a small range which has developed within a larger trend).
Here is an example. At the time of this snapshot the GBPUSD had been quite choppy and for more than a month was stuck within a relatively large range (and at this point, still is). Once the range is in place we see a false downside breakout on March 12 (see arrow). Once the pair moves back inside the range, buy (in this case) and place a stop and a profit target.
The stop is below the recent false breakout low and a target will near the top of the range.
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Upon looking at this range some may ask: “Why only trade the false breakout?” There is a reason. Typically people place orders at the extremes of the range trying to capture the high or low. This can work occasionally but ranges are dynamic, sometimes falling short of former highs and lows and other time breaking out. Therefore, I prefer to either wait for false breakout or actual breakouts (addressed next) and just leave pairs alone while inside a range–especially pairs where the USD is involved. This means that strategy is infrequently used, but is included here because it provides a potential context for the next strategy, which is likely to be far more profitable.
Simple Forex Strategies – Trend Trading
If a breakout occurs from a range, a trend may possibly develop. The following is a low risk trend trading forex strategy but it requires evidence that a trend is actually in place. In the case of a breakout, a long-term trend or a trend reversal (the emergence of a new trend) our evidence is the same. In case of a uptrend we need to see a move higher (above a former high) a pullback which stays above the recent swing low, and then a move back higher. That provides sufficient evidence for me to enter a long position (be aware of trends on multiple time frames).
Therefore, I only buy (uptrends) on pullbacks that hold above support and then start moving higher. For this I use trendlines or the last major swing low price. My stop is below the recent low and profit target will vary but is usually just beyond the former higher (can also use trend channels to gauge profit targets).
Entries are based on the market pulling back and pausing, then an up bar moving above the high of significant down bar which occurred recently in the decline. This is not catching a falling knife. We are trading the trend and watching for a move that indicates the trend is continuing after a pullback has occurred. Another entry method could the High Probability Forex Engulfing Candle.
You can add personal filters to this strategy, such as momentum or indicators.
Let’s look at a recent example. The USDJPY was locked in a range from June, 2011 to January of 2012 until it finally broke out. A trade or two may have been made on a false breakout but the pair ultimately kept moving higher. We now have the first criteria for an uptrend–higher high. We wait for a pullback and it found support above a former low (higher low). Now we are looking for a long entry as soon as the price begins to rise again (Note: this keeps the risk low, compared to the conventional method of buying as the price makes a new high).
Two entries pop up and are marked by the arrows. Long on Feb 29 and March 8. Both these days were green bars which showed the pullbacks had ended. Entries can be individualized and based on your own indicators, candlestick patterns or price action.
Exit slightly beyond the former major high, or if a trend channel can be constructed, use that as a guide for placing a profit target.
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Simple Forex Strategies – Summary
These two simple forex strategies present a template on which to build your own, individualized, trading strategies. Both methods require a lot of patience and discipline in that the strategies require doing the opposite of what most people do. The trend strategy is the most important because that is where most of the money is made. But traders should also be aware of the range strategy, as markets are either trending or ranging. Being aware of both allows the trader to switch strategies at the right time and implement the right strategy for current conditions.