Do you need a trading strategy?

Education

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.
ForexLive

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.

Products You May Like

Articles You May Like

Soft CPI Keeps USD Weighed Down
How to Create A Worldwide Retirement Crisis, Using This One Simple Trick
US Stocks to open lower following mixed Chinese and US data; Middle East in Focus
Próximamente IPC de Inglaterra y Canadá
As Broadcom plunges, taking chip sector with it, analysts urge calm: ‘The sky is not falling’

Leave a Reply

Your email address will not be published. Required fields are marked *