It is important to have a game plan when you trade
If you read up on Forex trading, you will certainly come across a recommendation to have a trading strategy. However, the details of this advice often seem rather vague.
In this article, we tried to gather the most important things you need to know about Forex trading strategies. We hope that these insights will turn out to be of use for you.
In essence, a trading strategy is a set of rules
for market entry and exit. It is presumed that with a strategy you have a ready-to-use
plan of action. You need to check whether the market situation fits the
conditions outlined in the strategy and, if it is indeed so, open a trade.
Should you really live by the rules?
Such an approach has a couple of obvious merits. Firstly, if you abide by the rules zealously, the destructive emotions (fear, greed, insecurity, etc.) get removed from the list of your daily bugbears.
It happens as you shift the responsibility to the shoulders of the inanimate strategy. Secondly, with a strategy, you certainly reduce the time spent on market analysis as the area you have to cover by it significantly narrows.
So, is a trading strategy a way out for lazy people who want some carefree trading experience? That is not really so.
Almost any source about trading strategy will undoubtedly tell you that there's no "Holy Grail" that will allow you to relax and enjoy the ride. All the strategies you can find on the Internet have various degrees of imperfection.
Finding the winning strategy
As a result, to pick out a strategy that - 1. fits your personality; 2. has a decent success rate, - you will need to do a rather big, time-consuming and, put simply, impressive job. To complete it, you will have to possess all kinds of knowledge about the world of trading. That alone will require plenty of effort on your part.
Moreover, any strategy you find or come up with has to be backtested on historic data. This can be done either manually or automatically. In addition, the market is like a living creature: it evolves with time.
As a result, even if you managed to find yourself a strategy that satisfies you at one point, you won't be able to allow yourself to rest on the laurels. Constant vigilance should become your motto. You will need to monitor the performance of your strategy and adjust it from time to time.
So, what's the takeaway from above? It's like this: it's good to have some sort of trading strategy because it will provide you with a framework of dealing with the market and help you control your emotions. If you don't get obsessed with the idea to find a simple solution, you will be fine.
What steps should you take to choose a trading strategy or to create one of your own?
Step 1. Give truthful answers to these questions: how much time are you willing to spend on trading? How long do you hold a typical trade (i.e. are you a scalper, a day trader, a medium-term trader or a long-term trader)? At this point, you should develop an understanding of the timeframes you will use.
Step 2. Decide which instruments you will trade and which market conditions you will focus on. Will you be a classic trend trader? Are you willing to make counter-trend bets or trade in ranges? Do you want to tool your strategy to breakout trading specifically? A strategy that is good for trend trading can show a weak result when the market is in a range, so you will need to choose different kinds of indicators for each market condition.
Step 3. Choose your toolkit. Each technical indicator has its purpose. No good will come out of using the indicators for the wrong tasks or combining two indicators with similar functions together in one strategy. In addition, no indicator is perfect so the goal is to reduce the impact of their weak spots and find a way to filter out entry signals. You will need to know how the indicators work both for seeing the flaws and strengths of the existing strategies and for designing your own one. For example, the Stochastic Oscillator goes well together with Moving Averages, Heiken Ashi, or Alligator. It goes without saying that you need to study the price action (candlestick patterns, chart patterns, trendlines) as well: it also produces signals and hints.
Step 4. Think of whether you will incorporate fundamentals in your strategy and, if so, in what way.
Step 5. Define the setup (required conditions) and trigger (entry rule) of your strategy. In short, the setup represents preconditions for your trade. It can consist of one or more filters that let you know that the market's "weather" has become favorable. A trigger is a signal itself that highlights a particular entry level.
Step 6. Set the strict risk management parameters: risk/reward ratio, position size. The common ratio between potential loss and profit is 1:3. The basic rule of trading is like this: risk no more than 1-2% of deposit for 1 trade.
Choose exit rules - make a rule for Take Profit and Stop Loss orders. A good exit is as important as a good entry.
Step 7. Write down the rules of your strategy. Even if you are sure that you remember all the steps of your strategy, it is important to have them on paper, so that you don't hesitate when it is time to trade.
Step 8. Backtest your strategy on a demo account. Make a good effort: this will create a base for your success. If there are mistakes, you will be able to correct them without losing money.
Step 9. Start using your strategy on a live account: don't digress from your rules but keep learning and thinking about how to make your strategy even better.
Once again, we encourage you not to underestimate the importance of learning and the procedures mentioned above: they will improve your performance. Good luck in your trading!
This article was submitted by FBS.