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Wall Street Traders' Favorites: Three Classic Trading Strategies

Leslie
Leslie
04-29

Not adhering to forex strategies prevents consistent profits. Developing or adapting a strategy needs time and experience. It must fit your trading plan and account size.

Martingale Trading Strategy

The Martingale Trading Strategy is a strategy based on a gambling method popular in France during the 18th century. Its main principle involves doubling your stake every time you lose, so when you win (considering each gamble as a 100% win/loss), you not only recover all your previous losses but also gain a profit equal to the total amount of your first bet. This strategy would be guaranteed to work if one had infinite resources, as with an unlimited number of bets, a win is inevitable. The problem is that no trader has unlimited funds, and thus, using this strategy ultimately leads to a blow-up. Despite being a very popular forex trading strategy and used in many paid forex trading bots, it is strongly advised not to engage in trading using this strategy.

Features

Theoretically guaranteed to succeed.

Practically flawed.

The risk/reward ratio may be extremely low.

How to Trade?

Can be used for any currency pair and time frame.

Your basic position size is predetermined.

Use a fixed stop-loss and take-profit, placing orders randomly (long/short).

After hitting a stop-loss or take-profit, you either win or lose.

If you win, you can set the position back to its initial size and go to step three.

If you lose, double the position size and go back to step three.

If your account had endless funds, you would eventually win a lot. With limited funds, you would eventually lose everything.

Example

There are no example charts for this trading strategy because there is nothing significant to show on a chart for this strategy. Here is an example.

Suppose you start with an account balance of $10,000, trading mini lots (0.1 of standard lots), trading EUR/USD.

You can set the basic position size to 0.1 lots.

Suppose you decide to go long, setting a stop-loss of 40 points (or $4). The take-profit is set to the same value.

If the position is stopped out, then your account balance becomes $9,996.

For the next position, you need to set the size to 0.2 lots, thus risking $8, with the same profit potential. Suppose you decide to change direction and enter short.

If you win, you not only recover the $4 loss but also profit another $4. Your account balance would be $10,004.

You can reset the position size to 0.1 lots and start trading again.

With a $10,000 account balance and a basic risk value of $4, you would blow up your account after 11 consecutive losses. It would take 250 consecutive wins for the account balance to double.

Scalping Forex Strategy

The Scalping Forex Strategy is a simple trading strategy that involves opening and closing many positions within a very short timeframe, aiming for very small targets and very low stop-losses. Not all forex brokers allow scalping, and not all of those who do are good at it. Scalping may not be suitable for all traders, and it's personally not recommended. This page displays the simplest scalping forex trading strategy.

Features

Lucky traders may achieve substantial profits.

No need to pay attention to technical, fundamental, or any other type of analysis.

Spreads may take up a large portion of the profit.

Usually, the reward/risk ratio is very low.

Not all forex brokers allow scalping.

Requires a lot of time spent watching and trading.

How to Trade?

Suitable for currency pairs with high intraday volatility, recommended for pairs with low spreads (such as EUR/JPY, GBP/USD, EUR/USD, and USD/JPY).

The best time frame is 1 minute or shorter.

The best trading times are the European session/American session and American session/Australian session overlaps.

Closely monitor the market behavior for 5-15 minutes to prepare for entry.

Enter when you are confident you have "caught" the current short-term trend.

Set a stop loss of about 10 pips.

Usually, the take-profit is set to 1-1.5 times the spread. The take-profit is set very low, typically 2-5 pips, so you need to monitor the position closely, ready to close it manually.

Example

There are no example charts for this trading strategy because there is nothing significant to show on a chart for this strategy. Here is an example.

Suppose you open a long position on EUR/USD with a stop loss of 10 pips and a profit target of 4 pips. Then, 20 seconds later, when the position reaches the 4 pip profit target, you manually close the position.

Suppose you open a short position on GBP/USD with a stop loss of 10 pips and a profit target of 4 pips. Then, if after 3-4 minutes the trend unexpectedly reverses, the position is stopped out.

Suppose you open a short position on USD/JPY with a stop loss of 10 pips and a profit target of 3 pips. Then, about 1 minute later, when the position reaches 4 points of profit, you manually close the position.

Suppose you open a long position on EUR/JPY with a stop loss of 10 pips and a profit target of 5 pips. Then, if in 5 seconds the price surges, reaching 12 points of profit, you manually close the position.

All these 10-point profits were achieved within 6 minutes. Of course, these are hypothetical scenarios.

Carry Trade Strategy

The Carry Trade Strategy is a very popular fundamental forex trading strategy not only among retail traders but also among large hedge funds. The main principle of the Carry Trade strategy is to buy high-yielding currencies and sell low-yielding ones. This setup allows profits not only from currency pair fluctuations but also from interest rate spreads (overnight interest). This strategy works only under normal global economic conditions. It should not be used during economic crises. Please note that if you aim to profit from overnight interest, your forex broker should be one that actually pays out real overnight interest. If your broker is a “swap-free” one, then you cannot benefit from overnight interest.

Features

Potential for long-term profits.

Two sources of profits.

Only suitable in a gradually growing global economic environment.

How to Trade?

Choose a currency pair with a significantly high positive interest rate differential (AUD/JPY, NZD/JPY, and GBP/JPY are examples of such pairs).

Decide to go long or short depending on the direction of the positive overnight interest for the chosen currency pair.

Choose an appropriate size of the position so that you can withstand significant book losses.

Do not set a stop loss (a rare forex trading strategy, it is advised not to set a stop loss).

Wait.

Close the position and exit when you feel you have made enough profit or you anticipate global financial turmoil.

Example

Carry Trade Strategy Example Chart

The example chart describes the long-term "carry trade" growth of GBP/JPY from late 2000 to mid-2007. During this period, the British Pound maintained an interest rate of 5%, while the Japanese Yen's interest rate was close to 0, leading to nearly 5% in overnight interest, which could be doubled through your leverage. If using a 1:100 leverage, the overnight interest over the period would be approximately 3000%. Throughout this period, GBP/JPY also rose by over 9,300 points. As you can see, the potential profit was considerable.

The problem was that the upward trend in 2007 was very rapid, giving traders almost no time to react and exit. The carry trade is very risky and should be approached with caution.

Risk Warning and Disclaimer

The market carries risks, and investment should be cautious. This article does not constitute personal investment advice and has not taken into account individual users' specific investment goals, financial situations, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article are suitable for their particular circumstances. Investing based on this is at one's own responsibility.

The End

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Investment

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