Forex trading is a very lucrative business and is definitely not for the faint hearted, in fact some would say that only a very select few are capable of making any money at all from the financial markets. Unfortunately for the rest, they fall into the 90/90/90 club which means that 90% of traders, lose 90% of the capital, within 90 days but then again if trading was that easy then everyone would be doing it.
One of the most important things to think about when trading is establishing a strategy, because without a strategy it would be considered gambling, and we all know that the house always wins. Building a strategy is one the most important, and one of the first things every trader should do before they place a trade, and we are going to go over how to build a forex trading strategy in this article.
There are very few people who are able to fully commit and be available to actively trade the forex markets, so this guide will be for those who have a full time job. It is common for people who are in full time work to make their trades actually in work, lunch or at night. The issue with this kind of trading is that because the market is so fluid, being able to trade sporadically throughout the day means that there are plenty of missed and wasted opportunities.
What kind of trader are you?
In order to start your trading journey, you need to figure out what kind of trader you are because it can affect how you trade and when you trade.
- Scalp Trading – This type of trading is for those who don’t like to hold positions for very long. In fact this is best suited for the traders who are get too on edge whenever they enter a trade, and get very uncomfortable being in the trade and look to exit really quickly.
- Swing Trading – This kind of trading is best suited for those who work in full time occupations because the trades last over an extended period of time, from a week to a month.
- Position Trading – Position trading is trading over very long periods of time, so this style can be used by people who have a
full timeoccupation, as you’ll be using higher time frames like daily, weekly and monthly.
So before we even begin to design the strategy, we also have to answer an important question:
What market condition do I want to design this strategy for?
How to Pick a Condition?
Markets conditions can be split into 3 groups: Ranges, Breakouts, and Trends; each with a different idea of when the best time to buy or sell might be.
This is the second entry, when we need selecting a time frame for the strategy.
The first installment in the series discussed market conditions. One of the most common questions from new traders is ‘What time frame works best?’
After all, there are quite a few different time frames we can work with, aren’t there?
Money and risk management
All people has a certain level of risk tolerance. What usually is proportional with income and savings. Anyways it should be.
One trade is a single deal not your whole business, so you don`t put all into a single deal. Right?
So do not put all your money into a single trade. The risk I suggest is 1-2% of your capital.
Yes you can limit your risk on the market with a stop loss order, A stop loss order will close your trade in case of you reach a certain level of loss in that certain trade. Clear? I hope so..
When deciding about the affordable loss if the trade goes against our plan. See it with an example, the capital is $20.000 the
`something` for $1.000 on $100 than you will have 10 of that “something”. If the price decreases to $80 per each than you are at the level of
keep loss lower than profit and win more trade than lose
Use Time Frames that Match Your Goals
Often times, traders can get conflicting views of a currency pair by examining different time frames. While the daily might be showing an up-trend, the hourly can be showing a down-trend. But which way should we trade it?
Incorporating a longer time frame will allow the trader to see a ‘bigger picture’ of the currency pair so that they may get an idea of ‘general trends,’ or the sentiment that may exist; while the shorter time frame chart can be used for plotting the actual trade. This leads into a very popular permutation of technical analysis in which traders incorporate multiple time frames into their approach.
In many cases, traders can benefit from using multiple time frames; in an effort to incorporate as much information as possible into their analysis.
By utilizing multiple time frames in their analysis, traders are getting multiple vantage points into the currency pair(s) that they are looking to trade.
Next step is Support and resistance. They have a recurring nature as a trader goes through the process of building a strategy. Because of its importance, it often behooves the trader build objective mannerisms for incorporating these prices into the strategy.
When strong support and resistance levels are found, this can enable traders to effectively plot their approach, manage trades, and adjust risk levels.
There are quite a few ways to grade trends, and many of those ways have pros and cons. One of the more popular indicators for grading trends is the 200 period Simple Moving Average, which is often considered to be one of the more common technical indicators in usage today
Technical vs Fundamental Analysis
Traders who use technical analysis as a tool to help them with their trading believe that past activity in the markets and price action, are better indicators of an assets likely future price movement, as they believe that “history repeats itself”. Some traders believe that changes in price are not random, but that markets trend both in short term and long term, and traders can apply technical indicators to help make their decisions when entering and exiting certain trades. There are a plethora of different technical indicators that are available, as well as paid ones that have been developed by former traders or software companies.
Fundamental analysis on the other hand is the study of how external factors such as news events, like inflationary reports, labour numbers and interest rates, have an impact on the markets. This sort of analysis is used by more professional traders who have access to news feeds, squawk codes and maybe even a coveted Bloomberg terminal. However it is possible for retail traders to profit from news releases but it is a skill that takes a while build. Trading size on either entry will vary from trader to trader. This will depend on your preference for trading breakouts or pullbacks, typically one entry type is favored, even if only marginally, than the other. There is no right or wrong formula here, the more important factor is consistency in application over time.