Having a good strategy is important while forex trading. As a beginner, it is difficult to design a good strategy that would provide effective results.
Here we will guide you to design an effective forex trading strategy. This is designed to help beginners make a lot of profit out of forex trading.
Step1: Time Frame: You must decide the type of Forex trading that would suit you. This will determine your Forex trading strategy. The most common type of traders in Forex is either swing trader or day trader. You must ask yourself, whether you want to look at charts every day, week, month or every year? How long do you intend to hold on to your forex trader positions?
This will determine the time frame you will be using for trading. Even after choosing a specific method you can still look at multiple ways and time frames, but this will serve as your main time frame.
Step2: Find indicators to set a new trend: You must understand the trends of forex trading in order to make an effective strategy. To do this you can make use of indicators. There are different types of indicators available out of which moving averages are the most popular ones. Typically traders make use of two moving averages, i.e. one fast and one slow and must wait until both of these averages cross over or under each other. This system is also termed as a moving average crossover method. If you want to identify and set new trends in forex trading, then using moving average crossovers as indicators are the best means. It will help you spot a new trend in the market. There are several other methods and indicators available in Forex trading that are much more complex.
Step3: Find indicators that can confirm the trend: After understanding a trend using an indicator, it is important to verify it too. Whenever you see an indication of a new trend, you can confirm the same by making use of other indicators. For confirming forex trends you can make use of indicators such as MCAD, RSI and Stochastic.As you practice forex trading, you will become more familiar with other indicators and you can incorporate it in your strategy.
Step4: Define Your Risk: While designing your forex strategy you should define the amount of risk that you are willing to take and how much you can lose. This is important because it is not necessary that you will always make a profit. As a good trader, you must think how much you can lose and how much you expect to win. This will help you to do money management. This plays an important role in forex trading.
Step5: Define Entries and exits: After defining how much you can lose, then you should determine how you will exit and enter into this trading to make a lot of profit.
Entries: Some people prefer to enter the trade when all the indicators match up and provide a good signal, even if the candle is still not closed. Other traders opt to wait for the candle to close. It is recommended by experts to wait until the candle closes in the indicators. This is because even if indicators match up at the middle of a candle, the situation of trade may reverse till candle closes.
Exits: For exists there are many options. You can trail your stop which means that if the price moves by X in your favor then you will move your stop by the same amount as X. Another method is to set a target and exit when price reaches that target. Forex traders make use of resistance and support levels for setting targets. Other traders simply opt to choose the same amount of fixed risks or pips on each and every trade. It is upto you to decide the strategy to calculate your target and make sure that you stick with the target. After you set the target you should not exit until the target is reached.
Step6: Write down the rules and always Follow it: This is the most crucial step while deciding your Forex strategy and create your trading system. Whatever rules you make, you should write it own at a place visible to you and you must always follow them while trading. Being disciplined and organized is important for a trader , so you must stick to the rules and should not get out of focus.
How to test your Forex Trading strategy?
So you have decided and created your Forex Trading strategy and even written it down. Now you are determined to follow the rules and make profit out of Forex trading. But you must perform a test of your strategy before you start trading. The fastest means to test the system is by finding a charting software package or by creating a demo account.
Using a charting software package, you can go back in time and then move your chart one candle in one move. When you move the chart in this manner, then you can make use of your rules that you have set for your trading system and perform your trade accordingly.You must record the trading details minutely as it will help you prepare future strategy. You can study your performance and learn a lot. Even if you lose, you must record it. Record your losses, wins, average loss and average win.
If you are happy with the testing with a demo account then you should follow the same strategy and trade on a live account. Although this will not be 100% same, but you will not incur huge losses. To get a good understanding you must trade on a live or demo account for at least a span