When you start trading, you are usually inundated with trading methods and systems including very basic methods and advanced Forex trading strategies. The truth is that most strategies can be broken down into two main categories and some are a hybrid of the two:
- Discretionary trading
- Mechanical trading
Mechanical trading can be something relatively simple such as the following moving average system.
- Plot a 20 SMA and a 50 SMA on your chart
- When the 20 crosses over the 50, buy/sell the first close
- Wait for the first pullback into the 50 and buy/sell the break of the high/low
As you can see, there is not too much thinking involved and for those just getting their feet wet, it is not a bad start. The issue with this simple system is there is not really an “edge” that you are taking advantage of. Basic strategies use common indicators and perhaps an easy to identify chart pattern to trade off of.
Any trading method that is a simple if “A” occurs do “B” is not my style of trading and those types of methods are pretty basic. My success with those has been mediocre at best. Perhaps it boils down to me needing a more “hands on” approach to trading.
When you start looking at more advanced Forex trading strategies, you generally see a more discretionary approach. This is my preferred approach to the Forex markets. Why are these advanced? Let’s take a look at the meaning of discretionary:
Discretionary: Left to or regulated by one’s own discretion or judgment.
In order to use your judgment, you are going to need to have some ability to judge what price is doing and use probability to select your trading option. This is not something that neophyte traders are able to do and that is the one of the reasons that those who develop “Expert Advisors” do so well in selling their products. NOTE: I do not suggest you ever use an Expert Advisor and that name is quite deceiving.
Fibonacci trading is one of the advanced Forex trading strategies that I use. Why is it advanced?
- You must choose which swing levels to start drawing from
- You must choose which level you will look at for a potential trade
- You must find a way to enter the trade keeping in mind capital exposure
- You must find a way to exit the trade both in profit and if a losing trade
To highlight these points, I want to show you a setup in the AUDUSD currency pair that attracted my interest and is now a live trade.
This chart uses a four hour timeframe. As you can see, there are several “clusters” of Fibonacci retracements and extensions in the range of .9421-9454. Once price reaches that zone, I started to look for a reversal.
Finding the swings to measure is discretionary and while there are some rules, it is mainly discretion. When price reaches the zone, a simple approach would have been to sell when price hit the bottom of the range with a stop at the top of the range. I actually used an oscillator to see that momentum was returning to the downside and then played a break of the candle low for an entry at .9405.
Advanced Forex trading strategies does not just mean the strategy you trade. There are other aspects that beginning traders should ignore but experienced traders can start to incorporate into their trading plans.
Hedging – Changes in regulation has taken hedging the same pair out of the hands of traders. There was a time you could sell the EURUSD for example, hold the short and then take a long when the market rallied. This was a great way to take advantage of both sides of the coin. You can do it with different accounts but not in the same account. You could capitalize on USD strength/weakness by trading pairs such as GBPUSD and EURUSD at the same time but different directions. It is extremely complex though and can certainly be classified as one of the top advance Forex trading strategies.
Trailing – When your trade is in profit, instead of using a fixed profit target you can trail the stop to certain price points. To examine this further, I will use the AUDUSD trade as before.
Since this move was so strong, it offered very little in terms of retracements on the four hour chart. I had to use the one hour chart to find areas I could tuck my stop above.
Once the market rallied, I was on alert for price to resume the trade. Once it broke the lows as indicated by the yellow, the stop was placed a few pips above the red lines. I preferred to use the four hour chart and the last trail was using the four hour chart. Trade was stopped out for profit at .9194 which gave 208 pips on the second unit of this trade. This occurred as I was writing out this article
Pyramiding – Some traders will add to their position once it has been shown that the analysis was correct. This is simply taking another trade in the same direction generally utilizing the same setups and triggers as the initial trade. Many traders will wait until they have taken all the risk out of the initial trade before adding to the current position. This lessens the capital exposure on the trade and only makes the risk on the new position relevant. Pyramiding is not something I currently utilize in my own trading.
Scale out – This is something I use for a variety of reasons. This is where you take profits on partial positions of the overall position. I will continue using the AUDUSD trade as an example.
The sell was taken at 9401 and the stop was 52 pips away. To take all the risk out of the trade without moving my stop, I would need to exit partial position at least 52 pips in profit. This allows all the risk to be taken out of the trade without needing to move the initial stop. This is important because it is always possible that you are not trading a corrective move, but are trading against a new price direction. This is how price moved up into my trading zone:
I take the position that I may be wrong on the move which then allows me:
- Bank some quick profits
- Take the risk out of the trade
- Keep a position running for bigger profits…with ZERO risk
These are advanced Forex trading strategies and should not be undertaken by those just entering the trading field. For those that have experience, experiment with the discretionary approach I touched on and see if the other strategies fit into your trading plan