Building your very first forex trading strategy can be a challenging task to begin with. When you are new to the world of trading and the constantly fluctuating currency market, Read More
Hence, as a beginner, you really need a guide to create and implement your trading strategy, and I hope this blog can help you in your trading journey. Most of you may already know the answer, but having a clear idea about what a trading strategy is supposed to serve makes the strategy selection process easier for everyone. In forex trading, you will be opening a position to buy or sell a currency pair based on the direction in which you expect the market or price to move. Those who anticipate an upward price movement will buy the pair, whereas those who expect a drop in price will sell the pair. In forex, buying is what we refer to as going long or opening a long position, and shorting is the term used for selling. Now, how you make this decision is defined by your strategy or trading system, which is a bunch of rules and techniques you apply to find trading opportunities and execute the trades. The strategy can be focused on technical analysis, where you only consider the price movements and monitor the market situation with the patterns formed on a price chart or fundamental analysis, which goes deeper, considering the economic events and factors triggering the price movements. It can also be based on market sentiment analysis or a combination of all these analytical approaches. While deciding on the strategy, you should also assess the amount of trading capital required to execute it. This depends on the currency pairs you choose for trading and the trade size. If you are availing leverage, you can open bigger trades with a smaller amount of capital, and this is what we refer to as margin trading. In this case, you will need to use a margin calculator to determine the required margin before placing a trade. A forex trading strategy needs to be very clear and specific as it functions as a guideline that tells us how to navigate the volatile currency market and what options to choose to get the best possible results in trading. A trading strategy can be manual or automated based on what you prefer. Manual strategies are pretty simple and straightforward, as you will completely control the trading process. You will be the one conducting marketing analysis and finding trade setups that fit with your strategy. The trades will also be manually executed and managed. But when it comes to automated strategies, a trading robot or EA will monitor the market and make trading decisions on your behalf. They work with an algorithm that takes action and executes trades on the basis of predefined commands. Here, you won’t have to execute or manage the trades manually, but you will have to monitor the account performance to ensure that the automated trading system is working properly. Automated strategies are suitable for attaining high speed and accuracy in trading. Besides this, you also get to eliminate the emotional element from the trading process. However, automated trading may not be suitable for all types of traders. But you can still incorporate certain aspects of automation into your strategy for better performance. For instance, stop loss orders are a type of automation as the trade exits happen automatically when the price reaches a specified level, resulting in a loss. Even forex calculators, like currency calculators that convert one currency to another, make the trading process easier by automating the calculation. It gives accurate results by applying real-time conversion rates, which can be hard when you do the conversion manually. Even if you are going to engage in manual trading, using such simple automated tools is essential to make informed trading decisions as they provide precise data while also minimising the time and effort that is required for performing trade-related calculations. When it comes to creating a forex strategy from scratch, you need to do some research and learn about different strategies or techniques that can be ideal for you. The best strategy will be different for everyone as we have different levels of skills, and a strategy that works for one trader may not bring the same results to everyone who follows it. A strategy is only a set of rules; its success rate depends on your ability to pull it off. It will be better to start with something simple when you are a beginner, and later on, you can take it to the next level when you become confident in your trading skills. Now, look at the various aspects you must consider while devising a forex strategy. Once you have found a strategy that works well, you might not want to make any changes and will continue to follow the trading plan for a long time. However, your strategies can stop working when the market situation changes, and thus, you will have to change your strategy before it affects your account performance. Hence, you may not be able to follow the same strategy forever, as the results can turn out to be different than what you had anticipated. As a beginner, you should always backtest your strategies and try it on a demo account before going live. This is important for evaluating the performance of your trading system and making necessary changes if you detect any shortcomings in the strategy. Once you go live, you should keep journaling about the trades and the results you get for tracking your progress and reviewing the strategy. You need to keep checking your trading history and ensure that the strategy is living up to your expectations. If you see that the actual results do not match the expected results, it is time to modify or change the strategy to adapt to the market situation. You should also keep the risk/reward ratio in check, as sometimes the strategy may not be in line with your risk profile and profit targets. In that case, you need to switch to a strategy that fully aligns with your trading goals and risk tolerance. One simple strategy you can follow in the forex market is trend trading, where you simply enter a trade at the beginning of a market trend to profit from the emerging trend. The same can be done when you expect a trend reversal. Price action strategies that focus on the key support and resistance levels can work well for a beginner. You can also use indicators like moving averages, RSI or stochastic oscillators for a detailed analysis. Technical indicators can confirm a trend or reversal. For example, a trader might expect an uptrend in the EUR/USD pair and place a trade to make 25 pips profit when the price moves from the entry point to the take profit level. Some more technical elements need to be considered for trend trading strategies, and the market may not be trending all the time. It can also get stuck in a tight range, and you will have to follow a different strategy in such situations. To sum it up, the success of your strategy depends on several aspects, and you may have to switch the strategy if it does not yield the desired results. But you should always give some time to your strategy, as being disciplined and sticking to your plan is important for trading success. What Is a Forex Trading Strategy?
Basics of a Forex Trading Strategy
Creating a Forex Trading Strategy
Can you follow the same strategy forever?
Example of a Basic Forex Trading Strategy
Wrap Up