One can succeed, even excel, at forex trading perfectly well using very simple trading strategies. As you will see, forex trading does not need to be an overly complex process (it’s not rocket science, and you don’t need to be Einstein to make a living at it).

We’re going to trade our way through the first week of October, 2014, using only one simple indicator—a common moving average. We’ll see how we do, and without looking ahead, I’m going to predict right here in the second paragraph that we’ll do very well. I have not “cheated” and checked out beforehand how well this will work—I am solely stepping out in faith on the trading principle that I firmly believe: "Simple forex trading strategies work quite adequately to provide relatively easy and impressive trading profits."

Here is the very simple forex trading strategy that I tend to use: We’re going to trade off the one-hour chart, and our trading signal/trigger is going to be the 50 EMA (the dark blue line that will appear on our chart—an exponential moving average gives more weight to recent data than a simple moving average does; in this instance I’ll be using an EMA “weighted to the close”). Here are the simple rules of our trading strategy:

1 – We will buy on an hourly close above the 50 EMA or sell on an hourly close below the 50 EMA. We will not enter a position if the hourly close is more than 20 pips past the 50 EMA (if, for example, price were 20 pips below the 50 EMA but then made a huge move up in one hour to close 80 pips above the 50 EMA, we would not take that trade, as the initial risk involved would be too large).
2 – Our initial stop loss level will be 16 pips to the other side of the 50 EMA or an hourly CLOSE 11 pips to the other side of the 50 EMA. (E.g., if we buy or take a long position, our initial stop will be 16 pips below the 50 EMA; if we sell or take a short position, our initial stop will be placed 16 pips above the 50 EMA). If we survive three candles into the trade, we will then move our stop 10 pips to 6 pips to the opposite side of the 50 EMA.

(My thinking here is this: when trading off the hourly charts, within three to four hours of our entry, the price should be clearly in our favor—that is, well established enough on the positive side of the 50 EMA for us so that we shouldn’t see anything more than a small, brief crossover of the 50 EMA against our position.)

3 – Once we are 50 pips ahead (profitable) in the trade, we will close one-third of our position, allowing the remaining two-thirds to continue to run, with a stop 49 pips back from that 50-pip profit level. In other words, 1 pip better than the break-even level of our initial entry price. For example: buy at .7500; at .7550, take profits on one-third of our original position, and move our stop to .7501.
4 – Our second take-profit target will be 80 pips. At that target, we will close out half of our remaining position and move our stop on the final third of our original trade to the price level that is 6 pips back across the other side of the 50 EMA. That should hopefully allow room for a moderate retracement to take place without stopping us out before price advances to our final profit target. If we are stopped out, it should still be at a nicely profitable level (with price having moved 80 pips in our favor, the 50 EMA should have moved to a point where even 6 pips back across it is still a profitable price level in relation to our original entry).
5 – Our third and final take-profit target will be 100 pips.

All right, let’s just start at October 1 and see how we do. I’m going to put an hourly chart of AUD/USD here, and then just run down the trades for you as they play out:

  • 1-     On October 1, we buy at .8733 on a one-hour close above the 50 EMA (marked by a dark blue number “1” below that candle—henceforth, each event will be marked by the corresponding number placed below the candle where the activity occurs). Our initial stop is .8708, 16 pips below the 50 EMA level at the time we enter our trade—in this case the 50 EMA level at the time of our trade is .8724.
  • 2- On October 2, we hit our initial profit target of .8783 (50 pips), take profits on one-third of our position, and move our stop up to .8734, 1 pip better than break even on our trade entry point, in accordance with the rules of our strategy.
  • 3- Still on October 2, we hit our second profit target of .8813 (just 3 pips off what turned out to be the near-term high—a pretty good take-profit point!), close out another third of our position, and move our stop on the remaining third of our position to .8751.
  • 4- On October 3, we are stopped out of our remaining position at .8767 (6 pips below the 50 EMA at that time—a 33-pip profit from our .8733 trade entry point). This candle is also a trigger for us to enter a short trade, since it closes back below the 50 EMA, at .8763, with an initial stop at .8789.
  • 5- On October 3, we hit both our 50-pip and 80-pip profit levels, and we move our stop appropriately.
  • 6- One candle later, we hit our 100-pip profit target and close out the remainder of our trade. (This also ends up being a pretty good take-profit point, as the bottom turns out to be just about 20 pips below our third profit target.)
  • 7- On October 6, we enter a new long position at .8728 on an hourly close back above the 50 EMA. We are eventually stopped out for a 20-pip loss.

So, how’d we do?
- On our first trade, we made profits of 50, 80, and 33 pips respectively on the three-thirds of our trade. Our average profit per third of our position was 54 pips.
- Second trade, we hit all three profit targets of 50, 80, and 100 pips. Our average profit per third was 76 pips.
- Third trade, stopped out for 20-pip loss on total position.
- Overall, two out of three winning trades, total net profit of 110 pips for the seven-day period. Not bad, eh?

Now, I’m sure that if we played it out for a month or more, we’d encounter some losses that would lead us to slightly alter the strategy, to tweak it a bit for better performance—after all, that’s how you improve your trading strategy, by practicing it and analyzing how you can improve its performance. But the bottom line is this:

Bottom Line

The bottom line is that successful, very profitable forex trading does not require a bunch of complicated technical indicators or a vastly complicated trading system. A very simple, basic, logical trading strategy, practiced with good money management (to minimize risk), simple discipline, and adherence to a few basic trading rules will work just fine. I talk elsewhere, and often, about the fact that it’s the psychological mindset of winning traders that makes them winning traders, not some secret trading method that they possess.

Summary:

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This article illustrates the theory that one can profitably trade the forex markets using just a very simple trading strategy.

 

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Using just one common moving average indicator and a few common-sense rules, we were able to make over a 100-pip profit in one week.

 

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Our winning trade percentage was 66%, and our worst loss was only 20 pips.

 

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writer bio

JACK MAVERICK

Jack Maverick has over 20 years of experience in futures and forex trading, first as a broker and then as an independent trader.  He enjoys sharing the trading wisdom and knowledge he has gained from his own trading experience and from other successful traders.

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Comments

 Mobileguru
# Mobileguru
Friday, December 5, 2014 9:09 AM
Can this strategy somehow be applied to binary options. My initial reaction is not likely since we don't have the same level of control as we do in the forex market.

I am interested in your thoughts about this strategy or anything close to it working with binary options.

Stefan
 Jack Maverick
# Jack Maverick
Monday, December 8, 2014 10:58 PM
As I stated elsewhere, I don't personally trade binary options, so I can't really offer any intelligent comment on the subject. :)

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