Education

Forex Trading Strategies

What is a forex trading strategy?

A forex trading strategy can be defined as a pre-established plan used by forex traders in order to achieve financial gain when entering a trade on a currency pair. A Forex trading strategy involves searching for trading signals which will provide a trader with the knowledge needed to decide whether or not to enter a trade on a currency pair. This can be done either manually or automatically. Automatic methods will see a trader develop a computer algorithm which is able to detect trading signals and complete trades independent of human interaction. Manual methods involve a trader simply manually searching for trading signals on a computer and then personally deciding whether or not to enter a trade. There is an obvious benefit to be noted with automatic systems as they eliminate the potential interference of human emotion.

Why is having a strategy important?

Having a trading strategy is vitally important as it gives any trader a clearly defined set of rules that must be followed when trading. These rules can be mechanically enforced by an automatic trading algorithm, or self-enforced by the trader. Whether it is manual or automatic, the rules established in a trading strategy allow the reader to escape the negative impact of emotional interference in their trading. Of course, a strategy enforced by a computer algorithm eliminates emotional interference more than a manual one, but both are equally effective. Having a trading strategy guarantees that a trader’s market methodology is followed strictly throughout the entire trade.

How can you develop your own trading strategy?

Although creating your own trading strategy may seem like a daunting task at first, there are several simple steps that can be followed in order to simplify the process. All of these steps allow the trader to understand what exactly they wish to achieve with their strategy which, in turn, helps them to decide what their strategy should entail.

Firstly, a trader must know their own market ideology. A clearly defined market ideology will be the foundation of an entire trading strategy, and as a result, is crucial to a trader’s success. It is useful for a trader to consider what exactly they wish to gain from their strategy and incorporate that into the forming of their own methodology. Every trader’s methodology is different which is why it is crucial to develop your own strategy rather than employing someone else’s.

Secondly, a trader must fully understand the market they will be investing in. When it comes to Forex, it is necessary that they decide on what currency pairs they will be trading in, and develop a full and thorough understanding of those pairs. This understanding will ensure that the trading strategy generates the best financial gains in the market.

Next, a trader must consider the timeframe in which their strategy will be operating. It is crucial that a trader creates self-enforced rules for their strategy which will dictate when they exit or enter a trade. Traders should also decide whether they would like they would like to be day traders, swing traders, or more long-term investors. This also includes defining entry and exit triggers i.e. events that will take place which will dictate when you enter or exit a trade.

Finally, it is necessary for a trader to consider the smaller details of their trading strategy. For example, they must decide how much money they are planning to invest, if they plan on investing in a lump sum or in several smaller amounts, and what risks they are willing to take. These smaller details ensure that all aspects of a trade are covered by a trader’s strategy.  In order to determine whether or not a strategy will be efficient, it is useful for a trader to “backtest” it. This involves testing their strategy on past data in their chosen market in order to test its effectiveness and accuracy.

Conclusion

Having a forex trading strategy is crucial for trading foreign currency. This strategy will ensure a trader sticks to a clearly defined set of pre-established rules, while also not straying from their own market methodology. Although it is possible to use other traders’ market strategies, it is beneficial for a trader to develop their own strategy which will accurately reflect their market methodology and ensure they achieve their own personal goals in a trade.