Is there Realistic No Loss Forex Trading Strategy?

The internet is full of articles on how to minimize the percentage of losing trades. However, still for many traders, especially the beginners this is not enough, instead they are still looking for a no loss Forex trading strategy. Instead of aiming for winning the majority of trades, it would have been nice if there was a way to avoid losses altogether.
It might be disappointing to them, but unfortunately for those market participants, there is no such thing as a no loss trading strategy in Forex. There are several methods, which are aimed at reducing the number of losing trades and improving the chances of success.
In fact, some of them might be very low risk strategies. In this article we will discuss three such methods: carry trading, Forex correlation hedging strategy, and trend trading techniques. Now clearly all of them have the potential to give some valuable guidance to traders and improve their performance sustainability. Despite that, each of those methods has its weaknesses and risks as well.
It might be helpful to point out that the carry trading heavily relies on interest rate differentials. However, there is no guarantee that the central bank of a given currency will keep rates high and not reduce them to address economic concerns.
Another important point to mention is that highly positively correlated securities can diverge from each other as a response to major announcements or any other reasons.
Finally, traders might analyze candlestick patterns with moving averages and identify a trend. However, there is a risk that some important economic events might change the entire dynamic of the price action.

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Forex No Loss Trading Strategy

As mentioned before, there are some strategies which in general might have lower risk attached to them, compared to the others. Here is the list of some of those:
  • Carry Trading - Essentially involving buying a higher-yielding currency against the lower-yielding one.
  • Forex Correlation Hedging Strategy - Utilizes highly positively or negatively correlated currency pairs and commodities for hedging purposes.
  • Trend Trading Techniques - Makes use of candlestick charts, simple moving averages, and other indicators for the purpose of trend determination.
Despite the perceptions mentioned above, believing that those techniques can be used as a no loss FX trading strategies can be very misleading. We will go through some of the risks attached to each of those methods.

Risks of carry trading

The Carry trading strategy involves buying the high-yielding currency against the low-yielding currency and benefiting from interest earnings as long as the position remains open. For example, from 2001 to 2008 one of the favorite trades among market participants was buying the AUD/JPY pair.
The reasons for this were twofold: Firstly, in 2001 the Bank of Japan has kept the interest rates to 0% and kept them at this level for more than 5 years. Later as the economy improved the BOJ consented to 2 rate hikes, however, they never went beyond 0.50%. So as we can see during this period the Japanese Yen was a very attractive funding currency.
On the other hand, the Australian Dollar was one of the highest yielding major currencies. At the end of 2001, the key Australian interest rate was 4.25%. During the following years, the Reserve Bank of Australia steadily increased rates, until reaching 7.25% by 2008. Consequently, the Australian dollar was one of the favorite currencies to carry traders.
This is not surprising since traders could have earned from 4.25% to 6.75% annual return for holding long AUD/JPY positions. This might not sound that impressive, but if a trader used 1:10 leverage, that would translate into returns ranging from 42.5% to 67.5% per year.
This method worked well for 7 years and many market participants have earned some decent payouts by using this strategy. However, as the 2008 great recession entered the picture, the Reserve Bank of Australia cut rates repeatedly. Nowadays, partially because of the COVID-19 outbreak, AUD only yields 0.25%. Depending on the circumstance, at some point in the future, the RBA might start raising rates again, but for now, the Australian dollar is not a very attractive option for carry trading.
So as we can see from the above example, the interest rate risk is always present in the carry trades. However, another important factor is the exchange rate. There is no guarantee that the higher-yielding currency will always hold its ground against the lower-yielding currency.
Returning to the AUD/JPY example, during the summer of 2008, the pair was trading well above the 105 level. Surprisingly enough, by the end of the year, the Australian dollar collapsed below the 60 mark. Clearly, Trades who got caught in this move could have suffered severe losses.
Therefore, we can conclude that the carry trade can not be considered as zero loss Forex trading since it carries both interest rate and exchange rate risks.

Imperfections of Forex correlation hedging strategies

It is well known that some securities are highly correlated with each other, meaning that they tend to move in the same direction. There are also negatively correlated currencies, which typically move in opposite directions. Some professional Forex traders utilize this factor for hedging purposes, by opening a long position on one currency pair and shorting the other one. The logic here is that losses in one case will be offset by another.
For example, Australia is one of the largest producers of precious metals in the world. Consequently, higher gold prices can certainly benefit the local economy. As a result, the Australian dollar and the gold price have a positive correlation and quite often move in the same direction. So a trader can open a long AUD/USD position and short Gold at the same time as a part of a viable hedging strategy.
Now, this approach worked well in some cases in the past, but how would this method perform in 2019 and 2020?
To answer this question, let us take a look at this daily AUD/USD chart:
Trade Forex with the no loss strategy

Even without any thorough analysis, we can conclude that the last 15 months the Australian dollar was in the slow but steady downward trend. There were some pullbacks, the latest one being in March 2020, however, so far the overall direction of the AUD/USD pair remains intact. During this period the Australian dollar fell from 0.72 to 0.64 level against the US dollar and so far there are no clear signs of reversal.
So what is the reason for this tendency? Was the Gold price also falling and consequently hurting the Australian economy? To be sure, let us take a look at the daily Gold price chart:
Forex no loss strategy
Here we have a surprise, the Gold had a quite impressive run during the last 15 months, rising from $1,215 to $1,695 during this period. This development logically speaking should have benefited the Australian economy and most likely it did, however, AUD still fell significantly against the American dollar.
There can be several reasons to explain this, one of them being the fact that during this period the Reserve Bank of Australia has cut rates repeatedly, reducing it from 1.75% to 0.25%. As we can see this policy led to a divergence between AUD/USD and Gold prices.
So as we can see the correlation hedging method can not be treated as Forex no-loss strategy since in some cases it can fail and traders can lose money as well.

Problems with trend trading methods

Moving on to another popular trading strategy, it has to be mentioned that trend identification techniques are becoming more popular than before. There are dozens of methods for this, however, one of the simplest options is the use of candlestick charts and moving averages. This type of analysis can be helpful to traders and give them opportunities for earning some decent payouts.
However, despite all of its advantages, the trend trading is not a no loss strategy for Forex traders. To illustrate this, let us take a look at this daily GBP/JPY chart:
No loss FX trading strategy

As we can see from the above, the GBP/JPY pair was in the consolidation phase for at least 3 months. During late February, the Pound began to fall, firstly breaking below the 50-day simple moving average and then going from 144 mark to all the way down to 124 level.
So if somebody conducted a technical analysis at this point, everything pointed at the resumption of a downtrend: we had a very long red candle, followed by two shooting stars and also the Pound was trading well below the 50-day SMA. Consequently, it seemed like the most sensible thing to do was to open a short GBP/JPY position. Instead, we see that the pair has since recovered and now tries to consolidate near 134 handles.
As we can see from this example, the trend analysis can not be used as a no-loss strategy to trade Forex. The price action is not only dependent on purely technical indicators, but sometimes it is also influenced by fundamental elements as well.

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No Loss Forex Strategy - Key Takeaways

No loss strategies to trade Forex
  • Many beginner traders want to use Forex no loss strategy in their trades. Unfortunately, decades of experience shows us that such a thing does not exist. Even the very low-risk methods can not guarantee a 100% success rate in trading.
  • There are plenty of traders who earned decent payouts with carrying trades. However, the greatest weakness of this strategy is that it is heavily exposed to interest rate risk. It is not always easy to predict the future monetary policies of any given central bank.
  • No loss Forex hedging strategy can be valuable to reduce risk, but they can not represent any no loss strategies for Forex trading. There are many cases when usually correlated currencies and commodities diverge from each other because of the latest economic announcements or other factors.

FAQ: No Loss Strategies for Forex Traders

Can the triangular currency arbitrage method be considered as a zero loss FX trading strategy?

The triangular currency arbitrage involves the opening of 3 positions with 3 currency pairs simultaneously to benefit from pricing inefficiencies in the market. In theory, this might sound like a reasonable no loss Forex trade strategy. However, there are several problems with this line of reasoning.
Firstly, such arbitrage opportunities are rather rare and quite short-lived. With thousands of participants, the market is quick to spot the pricing inefficiencies and correct them. So there is no guarantee that a trader will manage to open all 3 positions, before the window of opportunity disappears.
Another issue with this approach is that a trader must manage to close all of those 3 positions on the same day. Otherwise, he or she most likely will be charged with rollover fees which could easily wipe out all of the earlier gains from arbitration.

Why in most cases the interest rates in emerging markets are higher than in developed countries?

Actually there are both internal and external reasons for this phenomenon. In general, inflation levels in developing countries are relatively higher than in the case of developed economies. In order to address this problem, central banks in those countries are holding on to high-interest rates to restrain the growth of the consumer price index.
As for the external factors, because of higher inflation rates and in some cases history of steady depreciation those currencies are generally viewed as riskier investments. In order to attract bond investors, governments have to pay a risk premium and offer higher interest rates.

When did the Australian Dollar start to diverge from the Gold prices?

The divergence between the Gold prices and the Australian dollar is a rather recent phenomenon that began as late as 2018.  From 2002 to 2011 both of those securities were in the long term uptrend, reaching the peak levels at the end of this period.
After this development, the Australian dollar and Gold moved on to downtrend, falling consistently until the end of 2015. This was followed by recovery for the next 2 years. However, at the beginning of 2018, those two securities began their divergence. The precious metals resumed their uptrend, getting very close to 2011 levels.
On the other hand, as the Reserve Bank of Australia started cutting rates, the Australian dollar surrendered its gains and ended up in a long term downtrend against the US dollar and some other major currencies.

Are dual currency deposits a viable alternative for those looking for a no loss FX trading strategy?

Dual currency deposits are quite similar to the typical certificate of deposit, however, the main difference is that a client chooses the alternative currency in which to receive his or her money at the end of the term if the exchange rates are favorable.
So for example, an investor might open a $10,000 dual currency deposit at a 2% interest rate with the term of 3 months. Let us also suppose that he or she chooses the Euro as an alternative currency when EUR/USD traded at 1.15 so that $10,000 investment was an equivalent of approximately €8,696.
At the end of this period, there are two possible scenarios. If the US dollar falls against the single currency, then an investor will receive a $10,000 deposit back plus $50 interest. However, if the dollar appreciates EUR/USD reaches 1.10 level, here instead of €8,696, then he or she will collect €9,090.91 plus €45.45 in interest.
So for those who like low-risk investments and make use of two currencies, this type of investment might be a viable option.

Are there any no loss strategies in the Stock Market?

Just like we do not have any no-loss strategies to trade Forex, the stock market can not offer such techniques either. Even most conservative investment styles have some risk attached to them.
However, one popular low-risk strategy in the stock market is dividend investing. This essentially involves buying and holding the blue-chip stocks which have a long history of consistent dividend growth over several years. Some investors might choose a list of 5 to 20 stocks to build a diversified portfolio and each time buy those stocks which are relatively undervalued.
Here it might be helpful to point out that if a stock has a high dividend yield this does not always mean that it is a good investment. Some companies might choose to reduce amounts, paid to investors. This is why it is essential to research and identify those corporations which have a good track record of increasing dividend payments over long periods of time.
Since this strategy rarely involves the sale of securities, the risk of losing money here is much lower than in case of the regular trading.
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