5-3-1 Trading Strategy – What Is It and How to

KEY POINTS

 the 5-3-1 strategy provides traders with a structured and organized approach to trading
financial assets.
 It helps traders 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.
 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.
The numbers five, three, and one in the 5-3-1 trading strategy stand for:

 5 – five currency pairs to focus on

 3 – a trader must stick with only three trading strategies
 1 – a trader just chooses 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. This article will help you
understand how to use it in forex trading.

Table of Contents
 What is the 5-3-1 Trading Strategy, and How Does It Work?
 The Logic Behind the 5-3-1 Trading Strategy
 An Example of Trading Forex Using the 5-3-1 Strategy – Step-By-Step Trading Plan
 How to Start Trading Using the 5-3-1 Strategy?
 Frequently Asked Question (FAQs)
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 does 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. 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
How to Trade 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 who 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.

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.

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.

Risk Disclosure: The information provided in this article is not intended to give financial advice,
recommend investments, guarantee profits, or shield you from losses. Our content is only for
informational purposes and to help you understand the risks and complexity of these markets by
providing objective analysis. Before trading, carefully consider your experience, financial goals,
and risk tolerance. Trading involves significant potential for financial loss and isn't suitable for
everyone.