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How To Build a Forex Trading Strategy

Forex trading is a very interesting yet lucrative business and is definitely not for everyone, especially the faint hearted. In fact many would go as far and say that only a very select group of people are even  capable of making any money at all from the financial markets. Unfortunately for the rest of you out there, you fall into the 90/90/90 club which means that 90% of traders, lose 90% of the capital, within 90 days but then again if trading was that easy then everyone would be doing it.

 

One of the most important things to consider when trading is creating a strategy, because without a strategy it would be seen as gambling, and we all know that the house always wins. Building a strategy is one the most important, and one of the first things every trader should do before they place a trade, and we are going to go over how to build a forex trading strategy in this article.

 

There are very few people who are able to fully commit and be available to actively trade the forex markets, so this guide will be for those who have a full time job. It is common for people who are in full time work to take their trades when actually in work, lunch or at night. The issue with this kind of trading is that because the market is so fluid, being able to trade at random times throughout the day means that there are plenty of missed and wasted opportunities.

 

What kind of trader are you?

First things first, in order to start your trading journey, you need to figure out what kind of trader you are because it can affect how you trade and when you trade.

 

  • Scalp Trading - This type of trading is for those who don’t like to hold positions for very long. In fact this is best suited for the traders who get too nervous whenever they enter a trade, and get very uncomfortable being in the trade and look to exit really quickly.

 

  • Swing Trading - This kind of trading is best suited for those who work in full time occupations because the trades last over an extended period of time, from a week to a month. This sort of trader is one who is comfortable leaving a trade run its course for a few hours to even a couple of days.

 

  • Position Trading - Position trading is trading over very long periods of time, so this style can be used by people who have a full time occupation, as you’ll be using higher time frames like daily, weekly and monthly. A trader who practices position trading can sometimes quite often be considered as an investor because of how long they hold these types of positions.

 

Technical vs Fundamental Analysis

Traders who use technical analysis as a tool to help them with their trading believe that past activity in the markets and price action are better indicators of an asset's likely future price movement, as they believe that “history repeats itself”. Some traders believe that changes in price are not random, but that markets trend both in short term and long term, and traders can apply technical indicators to help make their decisions when entering and exiting certain trades. There are a plethora of different technical indicators that are available, as well as paid ones that have been developed by former traders or software companies.

 

Fundamental analysis on the other hand is the study of how external factors such as news events, like inflationary reports, labor numbers and interest rates, have an impact on the markets. This sort of analysis is used by more professional traders who have access to news feeds, squawk codes and maybe even a coveted Bloomberg terminal. However it is possible for retail traders to profit from news releases but it is a skill that takes a while to build.

 

Trading Psychology

Trading psychology is quite often forgotten or left out of a trading strategy because people simply don’t know how to factor it into their strategy. Your psychology and mindset is just as equally important as whether you trade fundamentals or technical. The best traders are those who leave emotion at the door and act like robots whilst they trade, because when it comes to trading there is absolutely no place for any emotion of any kind. One of the best ways to develop a strong trading psychology is to use a trading journal to record and annotate your trades, as this will give the chance to review them and see where you went wrong and where you can improve. By making detailed notes of the trades you have taken, you can analyze your progress and see if and where any emotion has crept in so you know for the next trade.

 

Conclusion

To wrap it up in a few words, forex trading is not an easy thing to master and many people fail to do so but these are people who have failed to prepare for such a challenge. Not only have they failed to prepare, they have also failed to work out any of the above, to help them narrow down what kind of strategy best suits them when it comes to trading. Secondly, the majority of people who fail at trading are those who jump straight in, rather than rigorously test their strategy as this helps them iron out some of the more grey areas and address parts that need to be looked at again. Forex trading is an art and should not be taken lightly.

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