5 MOST PROFITABLE FOREX TRADING STRATEGIES IN 2023
Greetings, I'm Manny, and I'm delighted to present to you the top 5 currency trading strategies that yield remarkable profitability. My journey as a forex trader commenced in 2013, initially as a part-time endeavor. Over the years, I honed my skills and transitioned into a professional trader and fund manager by 2018. While it is true that there are additional trading strategies beyond the scope of this list, they undoubtedly align with at least one of these 5 overarching strategies. Furthermore, within the confines of this enlightening article, I shall reveal the art of combining these individual strategies, unveiling the secret to amplifying my trading triumphs. Brace yourself for an enlightening exploration into the world of profitable currency trading.
1, TREND
In trading circles you will often hear the saying “The trend is your friend” Trend trading is probably the most popular strategy there is. It is widely used by mutli-billion dollar hedge funds,sovereign wealth funds and family offices. Trend usually refers to the general direction an asset class is moving over a certain period of time and the aim of the trader is to capture volatility Broadly speaking, there are 3 types of trend which are uptrend,downtrend and range-bound movement.
1. Uptrend: An uptrend occurs when the price of an asset consistently moves higher over time, forming a series of higher highs and higher lows. It indicates a bullish market sentiment, and traders may look for opportunities to buy during pullbacks or consolidations within the overall uptrend.
2. Downtrend: A downtrend is the opposite of an uptrend. It happens when the price of an asset consistently moves lower over time, forming a series of lower highs and lower lows. It suggests a bearish market sentiment, and traders may consider selling or short-selling opportunities during rallies or bounces within the overall downtrend.
3. Range-bound: A sideways or range-bound trend occurs when the price of an asset moves within a relatively narrow price range without making significant upward or downward progress. In this situation, traders may seek opportunities to buy near the support level and sell near the resistance level until a breakout from the range occurs.
2, News Trading
If petrol is fuel needed for a car to move, then news is the equivalent fuel for volatility in the forex market. To be able to trade news profitably, you need to look out for events that markets have not fully priced in. The central banks control the value of their respective currencies by deliberately enacting policies that will make the currency stronger or weaker. Traders usually trade currencies days or weeks in advance before a central bank’s anticipated move. So on the day the central bank changes interest rates, the currency doesnt move as you would expect because it has already been priced in. One may ask how professional traders know what the central bank will do to interest rate before their meeting. The answer is “ THE CENTRAL BANK” After Every Central Bank Meeting, A Report Is Released To The Public And It Contains What Economic Data The Bank Deems As Important To Influence Their Next Interest Rate Decision. Market Participants Pay Close Attention To This Data Releases And Immediately Act When The Number Comes Out. The Economic Release Is Always Juxtaposed With The Projections Of The Central Bank. If It Is In Line With The Expectation Of The Bank, That Means The Central Bank Is Going To Change Interest Rates At Their Next Meeting And As A Direct Result, You Will See The Currency Begin To Rally Well Before The Next Meeting.
3. Mean Reversion
This is probably my most favored trading strategy due to the sheer size of its hit rate and rightly so because there is actually academic literature to support this trading strategy. In the International Review of Economics& Finance Vol.7,1998, rigorous test results showed that both the returns on currency assets and real exchange rates exhibit a random walk component and a transitory component, thereby indicating mean-reverting behavior. The idea behind this strategy is that weak currencies won’t be weak forever and strong currencies can’t be strong infinitely. Over Time, These Currency Dynamics Tend To Revert To Their Long-Term Average Or Mean State. In My Implementation, I Employ A 2 Standard Deviation Principle. For Instance, If The AUDUSD Currency Pair Is Trading At A Level 2 Standard Deviations Higher Than Its Mean, I Initiate A Short Position. Conversely, When It Deviates By 2 Standard Deviations Below The Mean, I Adopt A Contrasting Stance. Naturally, The Strategy Encompasses A Greater Level Of Intricacy And Incorporates Numerous Additional Factors. However, I Trust That You Comprehend The Essence Of The Message I Aim To Convey
4. Long-Short Hedging
Hedge funds love this trading style and so do i. This is an investment approach that involves taking strategic long and short positions in different securities or assets. It is a market-neutral strategy that aims to generate returns by capitalizing on the relative performance of the chosen investments, regardless of the overall market direction. What does this mean in practice? Imagine i am confident the ZAR(South African Rand) to lose value so i decide to buy USDZAR currency pair. Now after a few days there is a risk on sentiment that makes the US dollar extremely weak and the ZAR stronger. What do you think will happen to my USDZAR buy trade?? Yep, you are right. This trade will end up in massive losses. So to protect against it, I will have to pair ZAR with another currency in the same family(emerging markets currency) like the MXN(Mexican Peso) so I buy MXNZAR. With this approach, my trade is market neutral and won't be affected by risk on/risk off changes. Another example is i decide to buy apple stock because I think it will be bullish in the next 6 months, but I worry my trade might backfire if the entire market crashes again due to another coronavirus strain. So I mitigate this risk by selling the US30 index and buying Apple shares at the same time. If the general market is bullish over the next 6 months, I lose on my US30 trade but I make more on Apple. Alternatively, if the stock market sells off, i make more money with my US30 than the losses of Apple
5. Classical Chart Patterns
This is last but certainly not the least. This gave me a lot of success when I started my trading career and it still does.
I owe my introduction to the world of classical chart patterns to the esteemed Peter Brandt, whom I deeply admire and regard as one of the most exceptional traders of our time. His unparalleled success since the 1980s can be attributed to his reliance on these patterns within his trading strategy.
The primary chart patterns that traders diligently monitor when employing this approach include:
I. The revered Head & Shoulders formation, ii. The intriguing Double Tops & Bottoms, iii. The captivating Cup & Handle pattern.
The essence of this strategy lies in the subsequent price action that unfolds once a chart pattern has been successfully identified. To enhance the probability of success further, I synergistically merge this approach with mean reversion, thereby establishing a formidable strategy that ensures consistent, risk-adjusted returns year after year.
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