It’s essential to have a well-defined and effective Forex trading strategy for 2023 before you start trading. First, you’ll need to identify your trading goals. Are you looking for a long-term investment or a short-term profit? Knowing this will allow you to develop a strategy tailored to your goals. What’s more? Learn this guide and build your own forex trading strategy for 2023.
Table of contents:
1. Forex for Beginners: What Is It and How Does It Work
If you’re already a Forex trader looking to get an idea of how to build a personalized Forex trading strategy for 2023, feel free to skip this part. However, I’d encourage you to read on if you’re getting into Forex.
Forex, also known as the foreign exchange market, FX, or the currency exchange, is a decentralized international market where investors trade all the world’s currencies. The forex market is the largest liquid market in the world, with an average daily trading volume exceeding $6.5 trillion.
Forex trades directly influence global prices of goods. So, the price of an avocado that came to you from Mexico, the price of your gasoline, all the way to the price of your running shoes that were produced in Indonesia, are all directly influenced by what’s going on Forex. To learn more about the Forex market and beginners’ hacks, read our guide on How to Start Trading Forex Within Minutes.
How Do I Start Trading Forex? Chances Are You Already Have.
Most of us already have a forex transaction completed. Anyone who’s ever traveled abroad has one. When going to another country with a currency different from the one used in your country, you must complete a currency exchange to have any purchasing power.
So, for example, traveling from the US to Japan, you would have to exchange USD for Japanese Yen. The forex exchange rate between the two currencies is based on supply and demand, determining how many Japanese Yen you will get for your dollars. And the exchange rate fluctuates constantly.
1.1. How Is Forex Traded?
As opposed to stocks, Forex is traded over the counter (OTC). This means there is no physical exchange. It makes sense when you think about the quantities of physical money that would have to be transported from bank to bank each time a trader made a transaction.
The banks and other international financial institutions control the trading so everything can run smoothly.
Forex is open to traders Monday through Friday, 24 hours a day. While there are more than 180 currencies in the world, the vast majority (some 70%) of all Forex trading is made through the following currency pairs, the so-called majors:
- The euro and US dollar: EUR/USD
- The US dollar and Japanese yen: USD/JPY
- The British pound sterling and US dollar: GBP/USD
- The US dollar and Swiss franc: USD/CHF
- The Australian dollar and US dollar: AUD/USD
- The US dollar and Canadian dollar: USD/CAD
- The New Zealand dollar and US dollar: NZD/USD
The trading starts on Monday with the pacific trading session and moves towards Tokyo, London, and New York.
2. How to Trade Forex: Spot Market, Forwards Market, and Futures Market Explained
As you probably already know, the vast majority of circulation on Forex is not made by exchanges but by speculation. Similar to crypto or stock trading, the idea is to buy cheaply and sell with profit. And there are three main ways of doing so, each requiring a different trading strategy.
2.1. Forex Spot Market
The first is the spot market. Traders use the spot market, the primary market, to trade on the spot, exchanging in real-time.
2.2. Forex Forward Market
The forward market allows traders to form contracts with one another. These contracts allow them to perform a transaction at a future date according to predefined terms.
You may agree to trade $2000 for 150000 Russian Rouble in one year to confirm and protect the payment from any fluctuation in the foreign exchange market. Once the contract is made, you will receive the equivalent of 150000 Russian Roubles in a year, even if its worth drops to $500. Furthermore, most traders stick to the seven major currency pairs as they are less volatile and their prices are more predictable.
Read also: Trading Forex With All Terms Explained
2.3. Forex Futures Market
The same general rules that apply to the forex forward market also apply to the forex futures market. A contract is made for a predefined sum of a chosen currency to be traded at a future date.
Two traders can privately agree to a forward contract that is traded OTC, allowing them to change its terms according to their needs. Meanwhile, a futures contract is standardized on an exchange, leaving little room for renegotiation.
3. Preparing Your Own Forex Trading Strategy
Now that you understand the basic Forex terms let’s get down to business. A Forex trading strategy for 2023 is not only a plan of action. Most importantly, it’s a set of rules that you, as a trader, will follow when making your trade decisions.
Forex, just like other markets, requires you to be disciplined and capable of sticking to your strategy to make calculated rather than emotional decisions.
Trading strategies are commonly based on indications in the market when specific factors adjust to the parameters of the opportunity that the trader has chosen. Many seek to simplify their investment strategy, so they opt for automation by subscribing to tools that allow them to choose the right moments to enter and exit a currency position.
Below we’re going to go over a couple of examples of the most popular Forex trading techniques so that you know what you will deal with when coming up with your strategy.
3.1. Simple & Effective Trading Strategy: Breakout
Every market has fairly predictable trends on which you can generally base your Forex trading strategy in 2023. However, the breakout strategy is about identifying when the market goes ‘sideways,’ meaning when there are no clear trends on the horizon. That’s when you look for your chance to speculate the breakout, which will then dictate the next trend.
The breakout is an example of a beginner forex strategy that is relatively inexpensive. Still, it can test traders who need more patience and focus on the present results rather than the long-term ones.
Breakout is considered to be the perfect beginner Forex trading strategy for 2023. It puts your patience to the test while at the same time giving you a solid foundation and understanding of the fundamentals of entry and exit points.
3.2. Forex Trading Strategy For 2023: Price Action
In simple terms, price action can be described as pure price analysis without adding any extra indicators. The idea is to have your chart as clean as possible so that you can focus on price movements rather than the minutiae.
It is based mainly on strength and weakness analysis, price formations, and candlestick formations. The strategy can be applied to swing and day trading.
It’s an excellent approach for beginner traders, requiring you to minimize distractions and focus primarily on price movements. It requires you to fiddle with different chart indicators, allowing you to understand the chart on a deeper level. Indicators and chart compositions can help you find trends, breakouts, and reversals.
3.3. Forex Trading Strategy For 2023: Scalping
Scalping is trading on time frames of M1/M5. Most strategies on lower intervals focus precisely on the price mentioned above action methodology, i.e., momentum analysis and price and candlestick formations.
In scalping, you want to go for small stop losses and to enter positions at key support and resistance levels. It’s an ADHD-friendly trading approach, so if you’re an impatient trader, you should try scalping. However, it might require a good amount of market understanding to be beneficial.
4. Building Your Own Forex Trading Strategy
Building a forex strategy may seem very complicated, but for a beginner, this means taking a strategy already exists and accommodating it to your personal needs and preferences.
4.1. Define a Set of Rules
Your job is straightforward. You will have to define a set of rules, pick a strategy, and, using your best knowledge, set up the rules you will have to follow.
An example set of rules could look like this:
- Use small time scales on M1 or M5 charts
- Use stop loss to limit losses
- Trade only between the London and New York sessions
- Use RSI and ATR
- Set a target of 3 to 10 pips
- Use Japanese candlesticks
- Use Renko charts
- Automate trading as much as possible
- Prioritize EUR/USD
Remember that the set of rules you come up with has to accommodate you. It has to work well with your daily life. If you constantly break the rules you had set for yourself, consider reviewing the set and trying again. Think of it as a process rather than writing set in stone.
4.2. Demo Trading & Backtesting
Before applying any Forex strategy in the market, you must test it first. And the best way to test if a strategy is viable is through demo trading and backtesting.
Demo trading will give you the comfort of seeing how the strategy behaves in real-time. It could also help you to perfect your strategy so that all the little chinks you’ve had in your armor could go by the time you get to the market.
If you want to be on the safe side of things, I recommend trading a few of your first strategies in demo mode for at least a few months. As eager as you might be to start making real money, you need to do the due diligence of testing to avoid losing.
Similarly, it would be best if you never skipped backtesting. The backtesting will help you see if the strategy would have worked in the past, so it’s a simulation of how it would do in the long term.
4.3. What’s Next? Should You Build Your Own Forex Trading Strategy?
Planning, strategizing, trading. Most trigger-happy traders skip these steps and move on to trade in the market. And I get it. We all want a piece of the cake. However, the new traders are far more likely to lose their money while trading unwittingly.
The best thing you can do at the very start is to follow the steps and learn to apply different strategies using a demo account. Then, as you grow more familiar with trading, you can move on to modify your Forex trading strategy for 2023 so that they match your needs and ideas.
As you gain enough comfort and confidence and your testing results are reasonable, you should start trading in the market. Think of it as an investment. If you start early enough, you’re going to be in a position where you’re more likely to lose money than gain. And that’s just poor risk management.
5. SimpleFX: An Easy and Efficient Way to Trade Forex Pairs
SimpleFX is the perfect platform for trading both primary and exotic forex pairs. You can find the meaning of these terms in one of our latest guides: “Choosing The Best Forex Pair To Trade.” With advanced features like no-fee deposits and withdrawals, low spreads, and advanced charting and analysis tools, SimpleFX offers traders an easy and efficient way to trade the forex market.
With SimpleFX, you can also access a wide range of exotic pairs, providing more opportunities to diversify your portfolio and take advantage of global currency fluctuations. With SimpleFX, you can confidently and securely trade the forex market and profit from the potential of the world’s largest and most liquid market.