How to develop your very own Forex trading strategy
The number one rule in trading forex profitably is to have a plan. You probably already heard this a million times before and like every other forex trader, you are searching for that holy grail strategy that will guarantee consistent wins.
First of all, however, you need to understand what a basic trading strategy entails and how you can adapt it to the current market.
Since trading forex involves opening and closing positions in a moving market, we need a predetermined set of rules that we can follow in terms of when to enter and exit the trade. This way you aren’t just gambling away every time you trade. Instead, you wait for the current market conditions to fit your entry criteria before placing a trade and you accompany your entry with profit target and stop loss orders to guarantee a break-even or profitable exit.
Can you stick to the strategy every time?
Having the discipline not to stray from the rules outlined by the strategy is quite an important lesson all traders eventually have to come to terms with. Emotions like greed and fear are detrimental to online trading and that’s why the rules should be followed religiously.
Admittedly, there will be times where you will see opportunities that you can’t resist going for especially if you don’t have the patience to wait for the stars to align. That’s completely understandable but if you overdo it, you might find yourself eventually forgetting that you had a strategy in the first place. Trading forex without a game-plan is a big mistake since you are likely to have more losses than wins and particularly when you are just starting out.
A solid forex trading strategy will help minimize the losses and get the most out of the profitable ones. It also takes emotion out of the equation and helps you focus on more important aspects. Instead of worrying about missing out on an opportunity, it’s best to invest the time to perfect your trading strategy.
Your success in trading forex will depend mostly on your strategy and as such you need to work at it constantly. Even if you do manage to find or develop a strategy with a certain degree of profitability that doesn’t mean it’s always going to work as is. The market is constantly changing and evolving, and you need to be able to adapt accordingly. Some say that retail traders can’t compete with the trading algorithms or robots employed by the big banks but even they need to be constantly monitored and tweaked to not fall behind. At the end of the day, nothing can be guaranteed, and you need to learn as you go.
In not so many words, you need a strategy that suits your trading style and personality and is somewhat reliable. To get there, you need to put a lot of effort into practicing and educating yourself about forex trading in general and get familiar with the tools available at your disposal.
The strategy in itself can be quite simple, and you can even verify its accuracy and reliability by seeing how it performs based on historical market data. Although backtesting is not a guarantee of future reliability and performance, it’s a good indicator of how well you understand what you are doing and that’s equally important.
Let’s work our way through the basic steps towards creating a solid forex trading plan:
What kind of trader are you?
So, the first step is actually getting to terms with what your objectives are and what type of trader you want to be. If you have the time to spend looking for opportunities a few times a day, you can try scalping which involves doing multiple hit-and-runs, gaining a few pips from each trade and moving on to the next one.
On the other hand, if you don’t want to be stuck in front of the platform all day, you can instead opt for long-term trades by holding positions open for a few days at a time – until you hit your profit targets. When you settle on the type of trading that best suits your schedule, you will find it easier deciding what timeframes you will be trading.
Assets and market conditions
Next up, you need to decide on the assets you want to trade and under what market conditions. Trading forex gives you access to hundreds of tradable assets, but most forex traders mostly focus on just a few. So, you can either trade the major currency pairs like the EURUSD or GBPUSD or even switch to spot metals like gold and silver. Then you have stocks and commodities like oil and coffee.
Each market has its own character of course and therefore you need to adapt your trading strategy depending on the instrument. Then you must think if you will wait for a trend to form or try to catch a reversal. Depending on what you choose, you will need to use the right indicators to help identify proper entries.
This brings us to the technical indicators you can utilize in order to identify and predict opportunities in the market. Just remember, more is less – you want meaningful information and a chart free of too much clatter. Some indicators can help identify trends and others work better at pinpointing breakouts from key resistance levels. If you have already established how you want to trade, you will find it easier in deciding which are the right tools for the job.
Aside from the technical indicators, you can incorporate in your trading strategy, you also have to think about the fundamentals. Fundamental indicators like a country’s GDP and central bank monetary policies are key drivers of currency rates and therefore a very important aspect of trading forex.
Keeping up with news and financial events is critical and a quick glance at a live economic calendar can go a long way in finding opportunities in the instruments you will be trading.
The next step is to outline your setup. This involves the necessary requirements and favorable entries which need to be met before you enter a trade. For example, you are watching a currency pair and you already identified support and resistance levels and want to wait for a breakout above the resistance level before you make your entry.
A favorable trade is only as good as your exit strategy. Always set a profit target and a stop loss order along with your trade in order to minimize losses if the market moves against your position and maximize profits when your speculation proves accurate.
Also, when you trade, you need to be aware of the risks for each trade and if the reward is actually worth taking such a risk. As a general rule of thumb, you don’t want to put down more than 2-3% of your account on a single trade.
If you want proof that your strategy works, the best place to do it is on a risk-free demo account. Every broker offers a demo trading account which simulates live market conditions and you can use this account as a sandbox to test all your strategies.