A forex trading strategy is a set of rules and guidelines to determine when to buy, sell, and hold a currency pair. It takes into consideration market conditions, technical analysis, and other factors that can influence the price of a currency.
The strategy name stands for:
- 5 – five currency pairs to focus on
- 3 – a trader must stick with three trading strategies
- 1 – a trader just choose one time in a day to trade
Generally, forex trading strategies can vary from simple to complex and can be tailored to an individual trader’s risk tolerance and investment goals. Traders often use multiple forex-trading techniques, including fundamental analysis, technical analysis, price action naked trading analysis, trend following, scalping, swing trading, and more. Each strategy has its strengths and weaknesses, and the best strategy to choose depends on an individual’s goals, risk tolerance, and market knowledge.
One extremely effective strategy is the 5-3-1 trading strategy. And this article will help you understand how to use it in forex trading.
What is the 5-3-1 Trading Strategy, and How Does It Work?
The 5-3-1 forex trading strategy is very simple and is among the best strategies beginner traders can use. Since the strategy is focused on developing a trading structure, it helps them to maintain discipline and follow their trading plan to achieve optimal results in this complex financial market.
Traders use the 5-3-1 approach in forex trading because it provides a structured and focused approach to the market. By limiting the number of currency pairs and strategies, traders can avoid being overwhelmed by information and focus their efforts on the most active and profitable trades.
Now, what’s the name of the strategy mean? The number itself stands for: 5 (five currency pairs to focus on), 3 (a trader must stick with three trading strategies), and 1 (choose one time in a day to trade).
The Logic Behind the 5-3-1 Trading Strategy
So, what’s the idea of the 5-3-1 trading strategy? Why is it such an effective strategy?
More than anything else, the 5-3-1 strategy provides traders with a structured and organized approach to trading the forex market. By limiting the number of currency pairs, strategies, and the frequency in which a trader makes a trade, traders can increase their chances of success by focusing on the most active and profitable trades.
This is especially effective at the start of a trading career when the most essential thing to learn is the repetitive price movements of specific assets, the best times to trade, and the trading strategies that are most valuable to you.
And that is why the 5-3-1 strategy is so vital at the beginning of your trading journey. As a matter of fact, many proprietary trading firms often apply this technique and require their traders to watch the screen for several hours and make only one trade a day with one goal – to learn how the market works. Even more so, in some cases, when a trader gets into a tilt, your manager might ask not to trade during the day or even for a week. It’s a common technique prop trading firms use to ensure traders follow a set of trading rules and a risk management plan.
All in all, that’s the idea of the 5-3-1 strategy. It is a great way to learn and understand what are the best currency pairs for you to focus on, the best strategies you should utilize, and the favorite time of the day for you to make the most trades.
An Example of Trading Forex Using the 5-3-1 Strategy – Step-By-Step Trading Plan
To be consistently profitable in trading, traders need to make and follow a trading plan since it helps them to remain disciplined and focused. A well-crafted forex trading plan helps traders define their trading goals, risk tolerance, and strategies, track their progress and adjust their approach as necessary.
The 5-3-1 trading strategy is an excellent example of developing trading as it helps traders become more disciplined and profitable when everything is set according to your plan. So, here is a step-by-step guide to using the 5-3-1 forex trading strategy.
Step 1: Choose Five Currency Pairs
The forex market consists of more than 180 currency pairs. However, not all are suitable for trading due to low liquidity and high spreads. When selecting currency pairs, traders should consider factors such as volatility, trading volume, and the strength of the economies behind the currencies. Some popular currency pairs that are widely traded include EUR/USD, USD/JPY, GBP/USD, USD/CHF, and AUD/USD.
Therefore, when utilizing the 5-3-1 trading strategy, choosing currency pairs with high liquidity and trading volume is best. Moreover, those currency pairs are ideal for trading due to their sensitivity to market news and economic data.
Step 2: Focus on Three Trading Strategies
The second rule of the 5-3-1 strategy is to use three trading strategies only. By using three different strategies, traders can diversify their approach and reduce their overall risk, which may help to minimize losses and protect their capital if one of the strategies is not performing well. Since the Forex market can be volatile and unpredictable, having multiple strategies allows traders to adapt to changing market conditions. If one method is not working, traders can switch to another strategy that may be more effective in the current market environment.
Different trading strategies may be better suited to different market conditions, and having three strategies allows traders to take advantage of these complementary relationships. For example, a trend-following strategy may be effective in a strong trending market, while a range-bound strategy may be more effective in a choppy market.
At the same time, limiting a trading plan to only three trading strategies enables traders to maintain a disciplined trading structure. This makes the 5-3-1 strategy so effective because a significant cause for failure in trading comes from applying too many strategies, which may create confusion and an unorganized trading plan.
So, what do you need to do? Simple, you need to focus on three trading strategies only. For example, you can use the scalping trading strategy, the order flow analysis method, and chart patterns analysis. Or, you can choose the swing trading strategy, level 2 market data strategy, and chart pattern analysis strategy. It’s your choice, but you must select and stick to three strategies.
Step 3: Enter one Trade at a Specific Time, Every Day
The forex market is open 24/7, which means that finding the best time to trade depends on a trader’s preferences. Most forex day traders choose the session that opens in the morning.
For example, assuming you live in Tokyo and you are a day trader, then the AUD/JPY and NZD/JPY might be the best pairs for you to trade due to higher liquidity and more trading opportunities as a result of the Tokyo and Sydney session collusion. By focusing on one session, traders can recognize the best trading setups and pave their way toward profitability.
It also depends on your trading style. For example, if you are a trader that feels more comfortable in a ranging market with low trading volume, then trading in times with less volatility could be the best option for you. However, if you are a breakout trader, then choosing the hours with higher volatility during economic data releases can be ideal for you.
For that matter, you’ll have to try different things to know the best time of the day for you to trade. And that is the purpose of the last 5-3-1 strategy rule – to help you find the favorite time of the day to make the most of your trades.
Step 4: Backtest Your Trading Strategy
The last step is to backtest your trading strategy before applying it in the markets with real capital, either manually or automatically. For those who are unaware, backtesting is a process of evaluating a strategy using historical market data to determine its potential for profitability. In other words, you backtest your trading strategies risk-free on a demonstration account to see if it’s a profitable trading strategy.
If you need more explanation and guidance about that, you can visit our guide on backtesting your forex trading strategy or contact our trading coaches for more information.
“Do more of what works and less of what doesn’t.“Steve Clark
How to Start Trading Using the 5-3-1 Strategy?
To conclude, the 5-3-1 strategy is essential for beginners to become disciplined and profitable traders. However, it is also an excellent tool for experienced traders who get into a bad trading period and can be used as a time to cool off and get your head back into the right place.
Either way, if you want to learn the powerful 5-3-1 trading strategy, we are here to help you. By joining our trading academy and our trading room, you can quickly start trading with the 5-3-1 trading strategy.
- Fully funded trading account
- Access to our trading room, where you can discuss the forex day trading strategy with market analysts and other members of the community
- Easy-to-understand video lessons
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- Register absolutely free
Frequently Asked Questions (FAQs)
Here are some of the most frequently asked questions when it comes to the 5-3-1 trading strategy:
When should you use the 5-3-1 trading strategy?
In general, the 5-3-1 trading strategy is ideal for beginners who are making their first steps in the forex market. It helps them get familiar with forex trading by utilizing a risk management system and improving their trading skills and knowledge.
However, it is also an excellent tool for advanced traders when they get into a bad trading period. Using the 5-3-1 strategy, an experienced forex trader can take some time out from the markets and regain confidence.
Which currency pairs should you focus on?
To apply the 5-3-1 strategy, most forex traders choose major currency pairs due to the high liquidity and low spreads. Indeed, it is easier to trade these currency pairs as they are more volatile and liquid than other FX pairs, which enables traders to get in and out of positions easily. That said, there are no strict rules regarding what currency pairs you should trade. For example, if you feel more confident choosing your local currency versus another major currency, then you should certainly do so. The most important thing is that you choose five currency pairs and stick to those. This will allow you to become an expert in analyzing those chosen FX currency pairs.
What trading strategies can you use with the 5-3-1 trading rule?
Assuming you’ve chosen five currency pairs to focus on, the next and most crucial step is to develop a combination of three trading strategies. First, you need to decide which trading style best suits your personality. For example, if you plan to focus on swing trading, you can combine it with chart pattern analysis, carry trade strategy, or fundamental analysis. On the other hand, if you wish to scalp trade, you can develop a three-strategy setup involving level 2 trading and news analysis.
It all comes down to what works best for you. It’s a trial and error process, so the 5-3-1 trading strategy is ideal for those who want to develop an effective and profitable strategy without risking their capital.