Breaking Down the 5-3-1 Trading Strategy
Forex traders use this simple strategy to determine which forex trading plan is best for them based on their trading style. The 5-3-1 strategy is particularly beneficial for new traders who might feel overwhelmed by the number of available currency pairs and 24/7 trading hours.
These 5, 3, and 1 numbers represent the following
- The five best currency pairs to trade and learn
- Your trader’s guide to becoming an expert on three strategies
- Each day, there is only one time to trade
We will examine each element of 5-3-1 trading in more detail.
Five
Five major currency pairs are the only ones you should focus on following the 5-3-1 trading strategy. It would help if you chose a few pairs that are most familiar to you. AUD/USD, AUD/NZD, EUR/AUD, GBP/AUD, and AUD/JPY are all options if you live in Australia.
The strategy may depend on when the pairs are most active, but we’ll discuss that later. Understanding how pairs move can be gained by focusing on just five pairs.
Three
Choosing three specific trading strategies is the next step. Using technical analysis is subject to this limit regardless of the trading style you choose. When you limit your trading plan to three strategies, you can tailor your technical analysis to fit the timeframes your chosen indicators work for.
By avoiding overusing indicators, you avoid becoming confused by contradicting ones and getting mixed signals. Three components make up number three:
- First, decide what trading style will best fit your goals. Trading methods include carrying trading, scalping, news trading, swing trading, etc.
- Decide which indicators will work best for your style. Indicators based on moving averages like MACD and Stochastic Oscillators can be useful for day traders, and momentum traders often use the Relative Strength Index (RSI).
- Decide which risk management strategy will work best for you. Limit orders and immediate stop-loss orders may be preferable to prevent losses and lock in smaller profits, or you may prefer to use trailing stops if you’re trading long-term momentum.
One
Five-three-one strategy followers only trade once every day. Forex traders benefit from the 24-hour availability of the market. Liquidity and the ability to trade anytime are two benefits of trading all hours.
It is also possible to lose out on trading opportunities if you fail to log into your trading account on time, or the market may move against you without your knowledge if you fail to log in on time.
The most active currency pairs should determine your trading time. Tokyo, London, and New York are traditionally the three sessions of the forex market. Most currency pairs that trade during each session are obvious from their names.
For instance, Western Europe and the Americas may need help finding the Tokyo session worth their time. All currency pairs feature the least liquidity. If you’re interested in the carry trade strategy, the best currency pairs to trade are AUD/JPY and NZD/JPY.
Based on the first two steps of this plan, you can choose what time frame you want to monitor your trades every day. The most important aspect of your trading strategy is to execute it. You will be unable to execute your strategy if you trade a currency with low liquidity during that time.
Bottom line
A reputable Forex broker can offer you a free demo account where you can practice implementing this formula with different currencies and trading strategies without taking any risks. Start using the 5-3-1 strategy on a real account if you are an experienced forex trader ready to implement it.
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