Why do many traders fail in Forex Trading? The answer is they start trading without having any plan or strategy. The Forex Traders dive into the ocean of Forex Trading without having a strategy for where they are heading up to. To achieve any goal in life, a good plan and an excellent strategy play a pivotal role in success. When developing a strategy, a Forex Trader should question himself why he is trading Forex, this question is the first step in developing a Trading Strategy that can result in making a profit or loss.
What is a Trading Strategy?
A Trading Strategy is a vital part to become a successful and profitable trader in Forex Trading. A Trading Strategy is a design, a set of rules, and a key guideline for a Trader. A Trading Strategy answers all the situations which can arise before, during, or after a trade. A Trading Strategy defines when to buy, why to buy, where to place the stop loss, when to hold when to sell, when to accept a loss and when to take a profit. It is a set of rules to be followed by the Forex Trader and how to react in certain situations especially if the currency pair suddenly moves in an up or down direction.
Why develop a trading strategy?
A precisely developed trading strategy can save a Forex Trader from big losses and by constantly improving the strategy a trader can earn good profit. When the strategy is fully developed a lot of time can be saved by the trader on trades as the trader would now be applying the strategy to different trades. Developing a trading strategy can take a lot of time in the beginning but once put into action it can reap huge profits. By developing a trading strategy, you will find yourself learning more about the market and how it works. You will also be able to become more successful at forecasting the market. When you follow a strategy, you will know how to make sure that your predictions are accurate.
How to develop a Winning Forex Trading Strategy
A trader needs to develop a trading strategy that will suit his needs. Once a trader has developed a trading strategy, he should do the back-testing of the strategy and then put it into action. It can be a difficult task to determine which strategy is best. A trader may need to be flexible when developing a trading strategy. Decide a particular timeframe to trade and analyze the market movements in that time frame. then consider the size of your account and how much time daily you can give to trading. Also, retest different strategies on a Demo Trading Account.
When developing a Trading Strategy for yourself it is important to understand and analyze the following factors for better results.
- What type of Trader you would be?
Traders should give some time to Demo Trading which can help to understand their personality and figure out what type of traders they want to be. There are multiple trading options like Day Trading, Swing Trading, Positing trading, etc. It is important to choose the trading style that gives you full control and focus on your traders.
- How much time you would be going to spend on Trading?
Are you going to be a part-time or full-time trader? How much time you are going to spend on trading daily? A trader should be very clear about how much time he is going to give to trading. If you have developed a Scraping Strategy and want to be a Scrap trader then you have to spend 3 to 4 hours on the trading screen with full focus. Without diverting the attention, you need to analyze the short-term charts generally in minutes for Scraping. On the other hand, if you are a swing trader or a position trader then you would be analyzing the Charts Patters on longer time frames generally the daily and weekly charts. Developing a Strategy on longer timeframes will give you a leverage of more time as you would be spending less time daily on executing trades.
- Account Size
The account size is the amount of money that is deposited by the trader in the Forex Trading Account with the Broker. Generally, nowadays traders can open accounts with brokers for as low as $5. You should decide how much money you want to start trading with. It can be $50 or it can be $5,000 it depends on how much risk you can take. Before finalizing the account size, you should understand the risks associated with trading and beware that in Forex Trading complete account can vanish in minutes. Understand that many novice traders have lost a lot of money in Forex Trading.
- Defining Risk Percentage Per Trader
Before entering into any currency trade, define the maximum risk you can take on that trade. You need to exit the trade as soon as you lose the pre-calculated amount. Traders advise the risk percentage around 1% to 2%.
- Maximum Trading Account Loss
A trader should decide first what is the maximum total loss he can bear and at what stage he would stop trading on the Real Trading Account. Suppose a trader opens a trading account with $500 then what is the lowest point where he would stop trading? Would he stop trading when half of his capital $250 is lost or would he wait until his account is wiped off completely? At what point you would revise the trading strategy, spend again sometime on the Demo Trading Account with the new strategy and start again?
- Risk and Reward Ratio
The risk to reward ratio means how much money loss a trader is risking to make how much profit. For Example, if a trader is going long by calculating a potential profit of $3 and the stop loss is set at a loss of $1 then the risk and reward ratio, in this case is 1:3. The trader is risking $1 to make $3. Generally, the risk to reward ratio of 1:2 is considered satisfactory while the 1:3 ratio is considered good.
- Stop loss and trailing stop loss Criteria
Develop a strategy to place stop loss once you enter a trade. Test the stop loss placement strategy on Demo Account and analyze the results. Like, stop loss, trailing stop loss is a must to earn additional profits.
- Position Size
Before entering into a trade, define the position size. How many lots are you going to trade? Position Size is directly proportional to the risk. The higher the position size, the higher the risk.
- Entry Points
Whether you are planning to enter a long trade or a short trade, the profits immediately depend on the entry point. If the entry point is correct, the trade starts with a profit. Develop a plan to choose the best entry points for your trades, Re-test the plan of Entry Points on the Demo Account for some time.
- Exit Points
Profitable are those traders who decide the Exit Points of their trades before entering into any trade. Whether a particular trade is going for profit or it is making a loss, it is vital to close the trade at any point. If the Exit Points are precise, a Trader can close a trade with good profit, and vice versa a trader would be able to cut the losses short in case the trade goes in the wrong direction.
A winning Forex trading strategy should consist of the following key features.
- Stop loss Indicator or set plan for stop loss
- Reference Baseline for Bullish or Bearish mode of Forex Currency Pair
- Trader Entry Point Indicators
- Trade Exit Point Indicators
- Volume Strength Indicators
Types of Forex Trading Strategies
There are different types of Trading Strategies used by Traders and every Trading Strategy varies from the other. Some Traders use different Trading Strategies in different situations and some use the same Strategy with slight variations during different phases of the market. Some Traders change their Trading Strategy reference to the chart time frame for example they have a different strategy for day trading and a different strategy for swing Trading. Likewise, some traders change their Trading Strategy reference to Market Movement like they have a different strategy for Bull Market and change the strategy in the bear market or range-bound market.
After analyzing the above-mentioned factors, it is time to develop a Trading Strategy. A Forex Trader can use a Trading Strategy that is already developed and applied by Professional Traders and easily available on the Internet or in books. A Forex Trader can also make variations in an already developed trading strategy if required. A Trader can also develop his trading strategy and can back-test it on different time frames for better results.
Trading Styles and Timeframes:
|Trading Type||Trading Timeframe||Chart Analysis|
|Scalping Trading Style||Trading on a shorter timeframe, on minutes charts. Sometimes even on Seconds charts||Minutes and Seconds charts|
|Momentum Trading Style||Trading on shorter timeframe when momentum is built||5 Minutes, 15 Minutes and 30 Minutes charts|
|Day Trading Style||Trading on a shorter timeframe and closing the trades within a day.||Hourly and Minutes charts|
|Swing Trading Style||Trading on Medium timeframe. Trades are kept overnight for the next day.||Daily and Weekly Charts|
|Position Trading Style||Trading on Long time timeframe. Trades can be kept for weeks or months.||Weekly, Monthly and Yearly Charts|