Development of Forex trading strategy - 7 main stages
What is a forex strategy? Why do I need a trading system for trading? Why is Forex trading impossible without a strategy? How to create your own Forex trading strategy?
Good afternoon! When novice traders first get acquainted with the Forex market, they enter into transactions without a trading system. During trading, they use their intuition, which can and works in their usual lives, but is the key to disaster in the Forex market. Trading solely on intuition, such emotions as greed, fear and excitement do not allow traders to earn money.
If the transaction begins to be favorable, then the fear of loss prompts them to close the transaction too early, reducing profits. If the deal goes against them, they wait too long in the hope that the price will return to the opening level, allowing losses to rise. This, combined with leverage, usually leads to disaster. In addition, the discretionary nature of this type of trading makes its results very similar to the results obtained using a system with random inputs and outputs.
It must be understood that it is impossible to effectively trade Forex without a strategy. The sooner you realize this, the less money you will waste, and the faster you will learn to trade profitably. In this article we will help you in creating a trading system. You will learn what a Forex strategy is, why it is needed, how to create it and effectively apply it in trading.
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What is a Forex trading strategy?
Forex trading system is a set of rules necessary for the systematization of trading. They help the trader understand when to enter the trade, which stop loss and take profit set when to exit the transaction and refrain from trading. The Forex trading strategy also allows you to determine which currency pairs to trade on which timeframe and which lot to enter into the deal. All this makes it possible to reduce the influence of emotions on trade, and as a result, increase the profitability of the strategy.
What is an automated trading system?
For a second, let's digress from the topic and imagine how advisors (trading robots) trade on Forex. Unlike chaotic trading with random entries and exits, an automated trading system has a strict set of rules. Inputs and outputs are defined according to clear conditions. Thus, we remove all emotions that prevent us from trading.
When developing automated trading systems, people use rational thinking. Developers of trading robots test the Forex strategy using large historical databases. Trading systems that undergo quality testing are more likely to continue to work well in real markets. And with the help of parameter settings, you can always change the EA settings when changing market volatility or other conditions.
See also what brokers for trading advisers are.
Why do you need a Forex strategy?
Traders should think about how to achieve the same trading efficiency as automatic trading systems. They must use strict rules on entrances and exits. In addition, in order to avoid emotional thinking, they should also divide the trading task into two parts: the planning task and the execution task.
During the planning task, they must conduct a rational analysis of each transaction. The conditions for entering and exiting the transaction should be established at this stage. The execution task should be performed using strict discipline and without any additional assumptions, following your trading plan developed before bidding, when your mind controlled the situation. Thus, your emotions are controlled by the rational brain.
After the transaction, whether it was profitable or unprofitable, you should record the transaction report in your diary Trader. This will help you become a disciplined trader, and will also allow you to conduct trading analysis for a certain period.
Stages of creating a Forex trading system
When developing trading systems, the following criteria must be met:
- The idea of a trading strategy. This is the basis of the Forex strategy, its foundation. The simpler the idea of a trading system, the less it is influenced by external factors, such as volatility, time, etc. As an idea for your trading system, you can already take a ready-made strategy, changing it to your trading style, adding indicator or by choosing a different timeframe. For example, the basis of the Forex strategy may be following the trend and trading on pullbacks.
- Trading tools. Having decided on the idea of a trading strategy, you need to understand which trading tools work best on your system. These can be currency pairs, cryptocurrencies, precious metals, CFD contracts for stocks, bonds, indices, ETFs and others.
- Trading sessions. Even if you choose the most popular instrument - currency pairs, you need to remember that not all of them fit a specific strategy. Some are better traded at London trading session, others - at the Asian session. Some currencies are highly volatile, others are traded in flat.
- Timeframe. There are scalping strategies when deals are made on minute charts, intraday strategies - on timeframes from M15 to H4, daily strategies - from D1 and higher. You must determine for yourself which timeframe you are comfortable trading with. To trade on minute charts, you must have high resistance to stress. We recommend that novice traders trade on the daily timeframe, since in this case it takes less time to analyze, a deal is concluded no more than once a day, it is less susceptible to volatility and the release of news, as well as less influence of emotions on trading.
- Risk management. This is one of the most important criteria for developing trading systems, which is often overlooked by traders. You need to consider the size of your deposit (we recommend at least $ 500-1000), the amount of leverage (1: 100 is considered optimal), the percentage of risk in each transaction (1-2% of the deposit), the lot size (it can be fractional, for example , 0.01 or 0.1).
- Entry Rules. Depending on which Forex strategy you choose, determining the optimal points for entering a trade depends on it. For example, these can be indicator signals, graphical models, candle patterns (as in the strategy Price Action) etc.
- Exit Rules. You must determine which stop loss you will use (fixed or placed below / above the local minimum / maximum) when taking profit (for example, the nearest support / resistance level), whether you will use the transfer of the transaction to breakeven or a trailing stop.
See also list of the best Forex brokers.
It is impossible to trade Forex without a strategy. Even if you are lucky and you close a couple of successful deals, you will lose everything in the end. To avoid this, you need to develop your Forex trading strategy. You must write down all the criteria of your trading system in the trading plan and clearly follow it during trading, not succumbing to emotions. Do not go directly to a live account, trade for a while on the free demo account. And only when you feel confident, start trading on a live account.
Read also the article "What is Forex money management?".