What is the 5-3-1 Trading Strategy? (2024)

The most active financial market is the global forex market, which draws both seasoned and novice traders. However, due to the level of activity and volatility in this market, you need a solid trading strategy to capitalize on opportunities.

Developing a strategy can be challenging though for beginners. The 5-3-1 Forex trading strategy aims to simplify the process and help traders in developing a clear trading plan for the Forex market. In the 5-3-1 trading strategy, each number has a specific meaning. This article will explore each number, the benefits of this strategy, and how to maximize its effectiveness.

Intro to 5-3-1 Trading Strategy

The 5-3-1 strategy lets you select the forex pairs you want to trade, the trading strategies you like, and the best times to trade, as opposed to strategies that concentrate on timelines and trading mechanisms.

Forex traders can create a trading plan that fits their style by using the 5-3-1 trading strategy, which is a straightforward guide. It’s especially beneficial for new traders, who may be overwhelmed by the extensive range of currency pairs available and the round-the-clock nature of the market.

The numbers five, three, and one represent:

• Five currency pairs to learn and trade
• Three strategies to become an expert on and use with your trades
• Trading once, at the same time every day

Let’s look at each part of 5-3-1 trading in more detail.

Select five currency pairs

According to the 5-3-1 trading strategy, you should concentrate on just five major currency pairs. The pairs you select should focus on one or two major currencies you’re most familiar with. The strategy may also consider the times when these pairs are most actively traded.

There are three types of currency pairs to choose from:

1. Major Pairs: These include the US dollar (USD) paired with a currency from a developed country. Major currencies include the euro (EUR), British pound (GBP), Japanese yen (JPY), Swiss franc, (CHF), Canadian dollar (CAD), Australian dollar (AUD), and New Zealand dollar (NZD). Examples of major pairs are EUR/USD, USD/GBP, AUD/USD, etc.

2. Minor Pairs: These currency pairs consist of any two of the major currencies, excluding USD. Examples include the GBP/EUR, EUR/CHF or CAD/AUD.

3. Exotic Pairs: Exotic forex pairs include one major currency and one from an emerging economy, such as the Thai baht (THB), Norwegian krone (NOK), Mexican peso (MXN), South African rand (ZAR), etc. In exotic pairs, the minor currency may appear either as a base or counter currency.

Note that not all currency pairs experience the same level of activity at all times. Typically, the overlapping trading hours of London, New York, and Hong Kong, see the highest levels of market activity.

Choose three trading strategies

Selecting three strategies is the next step in the process. This also applies to the trading style you choose and the indicators you use with technical analysis.

By keeping your trading plan focused on just three specific strategies, you will be able to focus your technical analysis on timeframes that best match your chosen indicators. It also ensures you don’t become confused by using too many indicators, which could show mixed signals. Let’s take a closer look at this strategy:

1. Decide which trading style best fits your objectives. This may carry trading, scalping, news trading, swing trading, etc.

2. Choose a few MT4 indicators that complement your chosen style. Day traders can benefit from moving average-based indicators such as the MACD and Stochastic Oscillator, while momentum traders prefer the Relative Strength Index (RSI).

3. Lastly, decide on a risk management strategy that best fits your style. This might involve setting up close stop-loss and limiting orders to lock in small profit gains and prevent losses. Alternatively, you can use trailing stops to capture gains during long-term momentum trades.

Trade at a specific time, every day

With the 5-3-1 strategy, you trade only once a day at a specific time. One of the biggest advantages of the forex market compared to other markets is its accessibility 24 hours a day. This continuous 24/5 trading provides liquidity and the flexibility to trade at any time. However, if you fail to log in to your trading account on schedule, it may result in missed trading opportunities. Also, you may experience market movements without knowing.

The time you choose to trade should be when the currency pairs you’ve chosen to trade are most active. Typically, the forex market is divided into three sessions: the Tokyo session, the London session, and the New York session.

For example, if you’re a day trader residing in Tokyo, the AUD/JPY and NZD/JPY might be the best pairs to trade because of their higher liquidity and greater trading opportunities brought about by the overlapping Tokyo and Sydney sessions. By focusing on one session, traders can identify the best trading setups and move towards profitability.

Benefits of using the 5-3-1 trading strategy

Implementing the 5-3-1 strategy with your forex trading approach can offer several advantages. Firstly, it helps to protect your trading capital by limiting the amount of risk you take. By following the rules, you minimize the possibility of incurring huge losses that could potentially wipe out your account.

Secondly, the 5-3-1 strategy helps you to maintain discipline. By encouraging traders to think strategically and manage their risk effectively, traders can avoid impulsive and emotionally driven trading decisions, which often result in huge losses.

Additionally, the 5-3-1 strategy encourages consistency in trading performance. By limiting risk and maintaining a disciplined approach, traders can achieve more consistent returns over time. This is especially important in forex trading, where volatility and market fluctuations can impact profitability.

Tips to maximize the effectiveness of 5-3-1

To maximize the effectiveness of the 5-3-1 strategy in forex trading, consider the following tips:

1. Keep a trading journal:

Record your trades, including the risk percentage, position size, and outcome. This will help you evaluate your performance and identify areas for improvement.

2. Stay disciplined:

Stick to your predetermined risk levels and avoid making impulsive trading decisions based on your emotions.

3. Use stop-loss orders:

Set stop-loss orders to automatically exit a trade when it reaches a certain level of loss. This helps limit potential losses and follows the 5-3-1 strategy.

4. Educate yourself:

Stay updated with market trends, financial news, and trading strategies to make informed decisions and improve your trading skills.

How to start trading using a 5-3-1 strategy

In conclusion, the 5-3-1 strategy is essential for both beginners and experienced traders. For beginners, it provides a structured approach to develop discipline and achieve profitability. Experienced traders can use this strategy as a way of navigating challenging trading periods and regaining focus.

Start trading with IronFX

Explore Forex Trading with IronFX, a leading online forex broker that attracts traders from around the world with its low spreads, fast execution, flexible leverage, and excellent multilingual customer support.

Learn all about forex trading with IronFX by opening a demo trading account to practice your trading skills. The demo account will allow you to trade currency pairs in a risk-free environment without using your funds. You can also visit IronFX Academy via IronFX’s website and access a range of trading resources and materials that will help you improve your trading skills and become a better trader.

Disclaimer:
This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced or hyperlinked in this communication.