What is the 5-3-1 rule in forex?

The 5-3-1 rule in forex is a trading strategy that is favoured by beginner traders as it helps them narrow down their scope and focus on a number of currency pairs and strategies so they don’t get overwhelmed.  When you first start trading, it can be quite stressful as you may be unable to choose which currency pairs to trade or what kind of strategies to follow. 

The 5-3-1 forex trading strategy simplifies things as it helps traders develop a clear trading plan. In this article, we will explore the meaning of this strategy, and how traders can use it to maximise their chances of success in the markets.

What does 5-3-1 mean in forex?

The 5-3-1 strategy allows you to focus on a specific number of forex pairs, trading strategies and trading times. It is a simple guide that helps forex traders develop a trading plan that fits their individual style. For new traders this strategy is ideal as it provides simple guidance and instructions to get them started.

Here is what each number represents:

• Five currency pairs that you can explore and trade
• Three strategies to learn and use
• Trading once, every day and always at the same time

How to trade with the 5-3-1 rule in three steps

 Step 1: Choose 5 currency pairs

The 5-3-1 trading strategy recommends investors to focus their efforts on five major currency pairs. Pick two or three major currencies which you already understand since they will form the basis of your currency pair selection. The strategy takes into consideration the period during which these pairs experience their highest trading activity.

The currency market contains three distinct pair types for selection.

1. MAJORS: The most common currency format involves pairing the American dollar with currencies from stable world economies. The main currency players in the market are EUR and GBP alongside JPY together with CHF and CAD, AUD and NZD. A selection of major currency pairs includes EUR/USD as well as USD/GBP and AUD/USD among others.
2. MINORS: The minor currency pairs mix major currencies with each other while removing USD from any pair. Three examples of minor pairs are GBP/EUR, EUR/CHF, and CAD/AUD pairs.
3. EXOTIC: These forex pairs include the combination of any major currency with an exchange rate from emerging economy currencies such as Thai baht (THB), Norwegian krone (NOK) or Mexican peso (MXN) and South African rand (ZAR). Exotic pairs display the minor currency either used as the base unit or the counter unit.

The trading activity differs between currency pairs throughout the day. The period of time when London markets overlap with New York markets and Hong Kong markets is considered to be the peak of trading activity.

Step 2: Choose three strategies in forex

The next step is to pick three strategies to focus on. Your selection of trading style and technical analysis indicators requires similar attention at this point. By focusing on three specific trade strategies you will have the flexibility to analyse technical data at appropriate time intervals.

You will avoid confusion from multiple indicators when you use three well-selected indicators since their signals will remain clear. This strategy works when you follow all its details. For example, first, select a trading approach that aligns with your trading goals. The available trading methods include carry trading, scalping, news trading along with swing trading among others.

Then you can choose up to three indicators based on the style of trading you have chosen. People who day trade rely on MACD and Stochastic Oscillator moving averages yet traders using momentum strategies typically use the Relative Strength Index (RSI).

Then you need to pick a risk management strategy which optimises your preferred trading technique. This involves using stop-loss and limit orders to gain incremental profits and protect yourself from losses. Trailing stops enable you to secure gains from momentum-based trades which last for extended periods.

Step 3: Trading daily, at a specific time

You should choose one particular time bracket for trading each day. The main strength of the forex market that overshadows other markets is the fact that traders have access to it 24 hours, each day. The forex market’s liquidity and popularity, allow traders to explore multiple opportunities throughout the day.  

Your trading should occur during periods where the selected currency pairs display maximum market activity. There are three primary market sessions in forex trading: Tokyo followed by London then New York. If you are a day trader in Tokyo, you should select the AUD/JPY and NZD/JPY currency pairs since their liquidity is at its best during the overlapping Tokyo and Sydney trading periods. Trade success can be achieved when traders dedicate themselves to one session to find optimal setups.  

Advantages of using the 5-3-1 strategy in forex

• By using this rule, your funds are better protected as it restrains the amount of exposure you accept.This strategy safeguards your account from massive losses which would deplete all your trading capital.

• The 5-3-1 strategy also allows you to cultivate a more disciplined approach, as traders are encouraged to use their strategic thinking and manage risks properly. This helps to avoid making emotional and hasty trading decisions which may result in significant losses.

• Consistency is another outcome of this strategy. A disciplined method applied with controlled risk exposure allows traders to generate sustainable trading returns. Forex traders require particular attention to volatility alongside market movements to achieve success.

How to utilise the 5-3-1 to its full potential

Trading journal

A trading journal should include risk percentage along with position size information and trade outcome records. The evaluation of your performance and the search for improvement opportunities becomes possible through this approach.

Remain focused

Trading according to your previously established risk levels should be your main priority along with deferring from emotional-based decisions.

Managing risk in forex

Traders should set stop-loss orders that will close their positions automatically when losses reach specific limits. Implementing stop-loss orders according to the 5-3-1 strategy serves to restrict possible financial losses.

Education

Continued education equips you to learn financial news and market trends as well as trading strategies that let you make effective decisions and develop your trading abilities.

Beginners together with experienced traders should use the 5-3-1 strategy for their trading activities. Through structured guidelines, beginners can learn discipline which leads to achieving positive and long-term, consistent outcomes. The strategy serves experienced traders as a method to handle market difficulties and restore their trading focus.

Start trading with IronFX

Forex trading beginners should consider IronFX as their trading destination since this globally popular broker offers excellent multilingual customer service alongside fast execution and flexible leverage and tight spreads. You can learn and explore the basics of forex trading through IronFX by opening a demo account to practice your trading.

Through the demo account you gain access to virtual funds and you can trade and test your strategies without spending your own money. The IronFX website offers free access to a wealth of trading resources at IronFX Academy so you can enhance your trading skills. Head over to the website to start learning about forex and how to trade smart using an extensive library of expert insights and tips.

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.