Forex or Foreign Exchange is a global market for the trading of currencies. It is a vast global financial market, with over $5 trillion traded daily. We all know that online investments are pretty risky, which is especially true in the forex market. Forex is the process of exchanging one currency for another currency internationally.
5 3 1 Rule Trading Strategy Explained – A Complete Guide
The forex trading strategy is used to help forex traders decide when to buy or sell a currency pair to maximize potential profit and minimize potential risk. Forex trading strategies have many types of trading strategies, including Trend trading, Price Action Trading, Range trading, Position trading, and more. So in this article, I am here to share the best 5 3 1 rule trading strategy.
What Is A Trading Strategy?
A trading strategy is a systematic methodology used for buying and selling a currency pair in the forex market. It is based on predefined rules and criteria for forex trading decisions. It can also be based on fundamental analysis or technical analysis, or news-based events. While fundamental analysis can predict price movements, technical analysis focuses on specific forex indicators.
It typically consists of three stages – planning the trades, placing the trades, and executing trades. Some of the most popular top-level trading strategies are trend trading, range trading, breakout trading, reversal trading, gap trading, and more trading strategies.
The 5 3 1 rule trading strategy is also one of the best trading strategies. It is a simple guide used by forex traders in currency pair trading. It helps traders to establish the best forex trading plan for their style. Let’s look at the 5 3 1 rule trading strategy guide and how it works in trading.
What Is 5 3 1 Rule Trading Strategy Guide And How It Works?
The 5 3 1 rule trading strategy is a simple guide used by forex traders in forex trading. It is the process to establish the best forex trading plan according to the trader’s style. It is especially helpful for new traders or beginners who may be overwhelmed by the dozens of currency pairs available in forex trading. This strategy can be used 24/7 in the forex market.
The numbers 5 3 & 1 stands for:
- 5 – Traders can learn and trade only five currency pairs.
- 3 – Traders can use three trading strategies in their trades.
- 1 – One time to forex trade or trading at the same time every day.
How 5 3 1 Rule Trading Strategy Apply In Trade?
Traders should have enough knowledge about forex trading strategies to make a profit in trading. Beginners have to follow all the steps and procedures before trading. At the same time, traders invest in forex trading, which can lead to profit or loss based on market conditions.
However, a forex trader must know when to enter & exit the trade and which is the best trading strategy to use to make a profit. If it goes wrong, then traders will lose their investing money. In this case, it is important to start by creating a forex trading plan, i.e., Apply a 5 3 1 rule trading strategy.
In the 5 3 1 rule trading strategy, five designates that traders should focus on only five major currency pairs. It helps traders to gain a deep understanding of how the pairs move in trading. Traders should focus on one or two major currency pairs among five currency pairs. For example, if traders live in India, they may choose INR/USD, INR/NZD, EUR/INR, GBP/INR, and INR/JPY.
In the next step of the 5 3 1 rule trading strategy, traders should pick three specific best strategies to use when trading. The three selecting limits apply to the forex trading style and forex indicators. Indicators are based on technical analysis. Traders should focus on trading plans and indicators on specific timeframes. Can further break the 3rd rule into three components.
In the first phase, traders should pick a specific trading style that works best with their goals. A trading style may be carry trading, news trading, swing trading, scalping, and more.
Then in the second phase, traders should choose a few indicators that work best with their chosen trading style. Moving Average, Relative Strength Index (RSI), and more are some of the best forex indicators. Moving average-based indicators like the Stochastic Oscillator and MACD work well for day trading.
The final phase is risk management. Traders should decide on a risk management strategy that best fits their trading style. Traders may prefer to set close stop-loss and limit orders to lock in small profit gains and prevent losses, or during long-term momentum trades, traders can use the trailing stops method to capture gains.
In the last step of the 5 3 1 rule trading strategy, traders can only trade daily at one or the same time. So, traders become familiar with what the forex markets are doing then. Globally, forex trading is 24/7 on some financial instruments. The 24 hours of trading offer liquidity and the opportunity to trade whenever they want.
However, if traders fail to log in to their trading account on schedule, they will miss their trading opportunities, or the forex market will move against traders without their knowledge. The time frame depends on the first two steps of this 5 3 1 rule trading strategy. Yet, traders must execute their trading strategies.
5 3 1 Rule Trading Strategy And Supply/Demand Dynamics
Supply and demand dynamics between the two are at the heart of any forex trade, and the same is true of the forex market. The technical analysis is used to examine the price movements. Supply and demand are essential aspects of technical analysis for determining the supply and demand (S&D) zones.
Supply and demand zones are at the heart of the supply and demand trading strategy. These S&D zones are areas that show liquidity at a specific price. The supply and demand zones are also called the distribution and accumulation zones.
5 3 1 Rule Trading Strategy
5 3 1 Rule trading strategy has one of the trading strategies is supply and demand trading. Supply and demand trading has three things. The first thing is identifying whether traders are in a supply or a demand zone. If traders are in the supply zone, the prices are higher than the bid price. If traders are in the demand zone, the prices are lower than the bid price.
The next is identifying the pattern while trading in supply and demand zones. This step helps traders when to buy or sell the currencies. The third thing is to identify rally or drop patterns. If the pattern is rallying, then traders may want to sell high or buy low and vice versa in a drop pattern.
Conclusion – 5 3 1 Rule Trading
Hopefully, you got a clear overview of the best 5 3 1 rule trading strategy guide from the above article. We also discussed 5 3 1 rule trading strategies, how it works, how to apply this rule in trading, and supply and demand trading.
The 5 3 1 rule trading strategy is the best strategy for beginners. Beginners involved in forex trading can use this 531 winning forex strategy. They should spend at least five minutes per trade to plan for a 5 3 1 rule trading margin. So, look at the above article to find the best 5 3 1 rule trading strategy.