Forex trading strategy
This is a premeditated algorithm of actions that allows you to achieve your goal as quickly as possible at an optimal level of risk. Most often the goal is to obtain a certain percentage of profit.
A trading strategy should answer three main questions:
- Trade what?
- Trade where?
- Trade how?
Key elements of a trading strategy:
Trading system
While a trading strategy defines the general concept of trading, a trading system is a specific plan and algorithm of actions within a trading strategy, which determines the entry and exit points of a trade, risk management and position size, as well as many other things.
Traders can use different types of trading systems depending on their individual needs and trading styles. A well-designed trading system can help traders make informed decisions and improve their trading performance.
Capital management
A money management system is a set of rules that allow a trader to effectively manage his trading capital in order to maximize profits and minimize losses, as well as to determine the optimal ratio between potential profit and risk.
The money management system is primarily responsible for the size of the position.
Risk management
Risk management system is a set of rules that allow to assess initial risks when entering a deal, control them when in a position, and reduce risks when triggers for exiting a position appear. The risk management system cannot guarantee the absence of losses, but it will help to reduce them.
Analysis tools
Analysis tools include a set of market research methods that a trader uses to determine the current state of the market and forecast future market movements, select trading instruments, assess possible risks, find market patterns and potential opportunities.
The main methods and tools of analysis include technical and fundamental analysis, economic analysis, seasonal analysis, price and volume trend analysis.
Trading plan
A trading plan is a document that describes all tactical aspects of a trading strategy, including the entry and exit plan, stop-loss and take-profit levels, order types, position size, etc. A trading plan should be clear, consistent, logical and cover almost all possible scenarios of events.
The trading plan includes:
- Trading idea. Describes the idea the trader wants to trade and the goal he wants to achieve.
- Entry and Exit plan. Defines what signals and triggers the trader will use to determine entry and exit points.
- Risk Managrmrnt Plan. Defines what measures the trader will take to manage risk and preserve capital.
- Capital Management Plan. Determines what size of positions a trader will use depending on the size of his capital and the level of risk.
- Monitoring and analysis. Defines what tools and indicators a trader will use to monitor his positions and analyze his trading activity.
Journal and stats
Logging and analyzing statistics is the process of tracking trades and results so that the trader can analyze their successes and failures and identify areas for improvement.
Every professional trader keeps a log of transactions, with the help of which he tracks his statistics, analyzes the results achieved, evaluates his strengths and weaknesses, which allows him to optimize and improve his trading strategy and trading results over a long distance.
Without analyzing the deals made, a trader is doomed to repeat the same mistakes. The journal contains all information about the trades: time, price and trigger for entering and exiting the trade, position size and risk per trade, trading result, as well as the psychological state that may have influenced the management of the position.
There are short, medium and long term strategies
Short-term
This strategy is for experienced traders. It includes:
- Intraday. This is intraday trading, when a trade is opened and closed in one day. Forex strategies for day trading are uncomplicated and quite clear. They are suitable for most market participants. During the day, a trader can manage to make several deals using different instruments at once. Such variant of exchange trading allows traders to open up to 5 deals per day.
- Scalping. This option is convenient if you have a small amount of money on your account. Contracts are concluded for a minimum period - from a few seconds to half an hour. In this case, an experienced scalper can make up to 200 transactions per day, but not all of them bring profit. This is a rather complex way of trading, which is used regardless of the main direction of market movement.
Medium-term
In medium-term trading, positions are held for at least 1 trading day, and the maximum period can be up to 2 weeks. At the same time, in order not to lose your own investments, it is recommended to work with leverage not more than 1:3. Before entering the market, a trader conducts technical and fundamental analysis.
The medium-term trading strategy includes trend breakout trading. The strategy is based on the idea of wave development of the market. Any long-term trend ends with consolidation or change of direction. If the price breaks through the trend line and after a small consolidation pushes back from it, there is a change of trend.
This variant of the strategy for beginners is more suitable than scalping.
Long-term
A simple strategy for long-term trading is suitable for both novice traders and quite experienced market participants. In this case, contracts are concluded for several months.
Long-term trading provides an opportunity to observe the price chart movement in a more measured way and to worry less about the result of the deal. A trader does not need to sit at a computer all the time, 15-20 minutes a day is enough to monitor the market situation.
Proper forecasting when using long-term trading strategies allows investors to make large profits. One long-term trade can bring several thousand pips.
Long-term strategies include position trading. It is based on the wave theory, according to which the market develops cyclically - any growth is followed by a decline. A trader takes a long-term position, taking maximum profit from one wave of price growth or decline and ignoring local counter-trend corrections. The position is closed when the price reverses or goes flat. Cryptocurrencies and stock assets are best suited for position trading. Currency pairs move in a narrow corridor, while cryptocurrencies and stock assets have no growth ceiling and have long trends.
What does the choice of trading strategy depend on?
There are a lot of simple Forex strategies developed today. Therefore, it is important for every new participant of trading to choose the most optimal plan and improve it over time to suit himself. Profit in this business largely depends on the correct choice of the moment of concluding a deal and the period of holding a position.
3 rules to consider when choosing a strategy:
Rule 1: Duration of holding open positions in exchange trading
The demo allows a trader to familiarize himself with the functionality of the platform and test various strategies. For a beginner it is a great opportunity Having concluded a contract, each trader independently decides for what term he opens a deal, i.e. determines the time and date of closing the contract. Therefore, trading strategies are divided into short-, medium- and long-term strategies by the duration of holding a position. Investing in demos can be the beginning of real trading.
Rule 2: approach to currency market analysis in trading - fundamental and technical
In order to correctly forecast the market movement, you need to be able to analyze it. For this purpose, there are 2 types of analysis in trading: fundamental and technical. Some people think that mastering one of them is enough for profitable trading, but this is an erroneous opinion.
In practice, those participants who do not know the basics of any of these types of analysis most often lose money on the currency exchange. But those who effectively use both fundamental and technical analysis in their work make a big profit.
Rule 3: method of chart analysis (pattern search, indicator, candlestick)
For the Forex market, the best trading strategies are those that utilize different tools simultaneously. To analyze the changes on the price chart, it is necessary to use technical analysis, which consists of 3 main groups: figure (price patterns), indicator, candle.
