Profitable Forex Strategy

There are really just a handful of profitable Forex strategies. All others are variations on these. Profitable Forex strategies come from how you approach Forex trends, the innate instability in the Forex market and the use of technical analysis of daily markets.

Predicting Forex trends

Predicting Forex trends is a key to how to trade Forex. In this case we are not talking about minute by minute or hour by hour variations in the Forex markets, but rather large shifts in the relative values of various currency pairs that take place over weeks, months, and years. Accurately predicting Forex trends can result in substantial gains in trading currencies directly or trading via the futures or options markets for foreign currencies.

We have written about trading the Colombian peso (COP) and how the Colombian currency is tied closely to the price of crude oil.

The Colombian peso was the success story of 2012 when it out performed all other currencies against the US dollar. These last few months trading the Colombian peso has been a matter of staying ahead of losses as the fall of the peso has mimicked the fall of the ruble and Russian recession. In each case the major problem is the fall in the price of crude oil. Bloomberg notes that the Colombian peso leads global losers due to dropping oil prices.

Successfully anticipating when oil will rise or fall gives you an inside track to trading the COP. Things have a way of balancing themselves out in the Forex markets. In predicting Forex trends over the longer term a trader needs to do his own fundamental analysis based upon his own time horizon.

Currency rate instability

Although companies doing business internationally prefer stable currencies, speculators commonly look for profits in currency rate instability.  The continuing Greek debt crisis is a recurring threat to the Euro and lends to currency rate instability. A profitable Forex strategy is to keep track of such situations and trade accordingly. Fundamentals determine the eventual exchange rate of any Forex pair but the Forex market is inefficient in the short term and this leads to temporary instability of prices. Addressing this fact provides a profitable Forex strategy.

Forex Technical Strategies

Many Forex traders use technical analysis of chart patterns for a profitable Forex strategy. This fact is confirmed by a poll that CitiFx_Pro took of 3000 Forex traders.

  • Fundamental and Technical Analysis: More than One Half
  • Technical Analysis Alone: One Third
  • Fundamental Analysis Alone: Fewer than One Tenth

Ninety percent of traders use statistically based technical analysis tools as their profitable Forex strategy.

The point of using Forex technical strategies is that a mathematical method based strategy is not going to be driven by impulse, fear, or greed, the common demons of trading psychology. By developing and following Forex technical strategies the trader can audit his trading results and modify the strategy as needed. The Forex trader does not need to develop the mathematics underlying Forex technical strategies. Rather the trader can modify parameters in his trading software to allow for more latitude from different variables used in calculating equations and offering trading suggestions. A profitable Forex strategy will commonly be based upon technical indicators.