One of the biggest mistakes that many new Forex traders make is wrongly believing that they do not need a strategy.
Lots of new FX traders think that successful forex trading is about merely looking at the charts and being able to trade on a hunch, anticipating where price is heading next.
However, these traders all find out the hard way that trading without a strategy is a recipe for disaster.
Having a solid Forex trading strategy is a vital part of achieving success as an FX trader and certainly vital to maintaining success.
A good strategy specifically sets out the exact trade setups you can take so that you know what to look out for in the market. It determines your risk and also your reward, letting you know where to place your stops and targets and at what size to trade as well as how to manage your trades.
So, how do you build a Forex strategy?
The first thing to consider is time. How much of it do you have available to trade? How much of it do you want to spend trading?
If you work a fulltime job, you most likely only have mornings and evenings to place trades and can maybe quickly monitor progress on a break. This means that higher time-frame swing Forex trading will be most appropriate.
This is where you place trades using the daily or H4 candles and typically hold a trade for 1 – 2 days.
Alternatively, if you have a lot of free time and like to be more active, shorter time frame trading such as day-trading will be more appropriate. This is where you trade from as little as a 5 – 10 minutes per trade up to one day.
Learn or Develop
The next step is to decide whether you want to learn techniques and setups that other FX traders already use successfully, or whether you want to develop your own.
Again, time and motivation are important here. Developing a strategy requires a lot more time whereas learning a strategy already in use by other Forex traders can help you quickly get up and running in the markets.
Once you have your strategy, you need to conduct backtesting to get an idea of the types of returns you can expect as well as an idea of the distribution of returns.
For example, does the strategy have long drawdown periods? What is the recovery rate? How many trades do you average a week or a month etc. Which market conditions work best, trade or range?
Set Out Your Criteria
Once you know what your setup is, you need to have it written down and clearly defined so that you know exactly what trades to take (and also, which not to take).
Criteria for entry should be noted as well as rules for stop loss placement, position-sizing, target and how to manage your trades.
It is best to think of as many different scenarios as possible here to make your plan as thorough as possible and avoid getting caught out.
For example, if I’m in profit and the market reverses more than half my gains, shall I move the stop to break even or close the trade out? If I have a position open ahead of a key news release, do I close my trade or move my stop or take partial profits, etc?
All good strategies need to be monitored and tweaked occasionally. Journaling your Forex trading and tracking your results will allow you to track the strategy’s performance against your test results.
If there are any huge deviations, it is important to work out what is causing them and how to adapt the strategy to perform better going forward.
But try not to micro-manage your strategy! Losses need to be accepted.
If you consider each of these different factors, you will be well on your way to build a robust forex trading strategy which will help you navigate the markets and provide you with an advantage over other traders.