What is strategy?
What should be in the trading strategy
Trade in the FOREX market is a business, more risky than many other and perhaps more profitable. Like any other kind of human activity, trading needs a clear system of work and constant planning. Very little chance to create a stable company making good profit without having a detailed business plan. Such business plan, or a set of rigid rules governing the behavior of traders in the market in any situation is a trading strategy.
To trade without a strategy. It is known that many successful traders often do not use any rigid strategy, and work intuitively. But intuition is a method of solving problems through the subconscious conclusion based on previous personal experience that no beginner trader. This means that the newcomer, especially at first, trading strategy is necessary.
Regardless of whether you are ready to trade strategy, which can be found on the Internet, or trader creates its own, it must meet certain criteria, each of which should be considered separately.
The idea of a trading strategy
The basis of any trading strategy must have a clear idea of the rationale. It is not necessary that this idea was completely unique. Millions of traders around the world daily watches the behavior of the 5 major currency pairs FOREX, and all of them come to mind around the same thoughts on how best to buy or sell these market instruments – think new is always difficult.
Work great in trading strategies simple and proven principles, such as trading with the trend against the retracement. Some less common observations, such as, rules of behavior crosses with the yen on the trade interval weeks can also form the basis of a reliable trading strategy can bring good profit. The main requirement for the ideasLovich strategies – logic and the absence of internal contradictions.
To predict the behavior of prices is impossible. Make no mistake about the fact that people have the ability to foresee the future. Even the most accurate methods of analysis of markets can only be expected to judge the most probable changes of financial instruments on the basis of historical data. The degree of this probability is slightly higher than the standard 50% for a completely random events such as heads or tails at the coin toss. The best traders are able to identify further growth or lower prices not more than 75% of cases. A lot or a little?
It is quite enough to if the simple rules to obtain a stable and sufficiently high income. But it's quite a bit, because on three winning trades sure to be one loss, which can pick up the entire Deposit. For a safe and profitable trade, the first requirement of any strategy is money management, which is called money management.
There are many different systems to manage finances for the trading operations dynamically, taking into account many factors. This is a complex formula based on the theory of probability and mathematical statistics. For most beginners it is important to remember that the risk per trade should not exceed 5% of the Deposit and the total of all open trading positions by 20%. The implementation of these simple rules will give you the opportunity to save part of the capital, even in a series of 20 consecutive failures, which is rare.
For successful trading it is not enough to limit losses, care should be taken not to commit the transactions contemplated profit which is less than 4 times the possible loss. Failure to comply with this principle of money management will lead to the fact that a trader very quickly lose the Deposit, as often happens when scalping, where the ratio risk/profit nlot worse than 1 to 4.
Trading time and work timeframe
Trade in the FOREX market goes around the clock, on weekdays. But the trader is not able to be at the terminal 24 hours a day. Trading system must take into account what time it should be open transactions, which of the exchange's sessions is preferable to trade. As a rule, these are the working hours in London and new York stock exchanges.
Select a timeframe in which trading takes place is a complex task even for experienced traders there is no definite answer which one is better. When developing a trading strategy or adapt an existing one, you need to understand that the duration of the retention of open trading positions is much more important than the time interval of the graph on which these transactions are open. In most cases, the more a work interval, the more precise the rules of technical analysis and safer trade.
It is known that almost any trading strategy which is stable within the day, can be successfully transferred to the medium or even long-term, but long term, most likely, will not work for minutes or even hours without serious alterations. Novice traders should stick with long time intervals for trading in the FOREX market and to consider the medium-term strategy, as the most universal.
Trading tools strategies
All FOREX trading strategies are divided into two main types according to what financial instruments they work:
- Multi-currency trading strategy, which is also called universal. These trading methods do not depend on the choice of the currency pair, because they are based on common ideas such as breakout of the morning range, trade on pullbacks or bounce from the border of the trading channel. The use of such methods is preferable for beginners and allows you to easily change currency pair for trading in the case of high volatility or a prolonged flat;
- Stretegui for certain currency pairs, which are developed taking into account the behavior of one or two or group of instruments with common properties, for example, crosses with the Swiss franc or Japanese yen. The use of these strategies with other tools, usually impossible, and the beginner is better to refrain from their choice to start trading FOREX.
Rules of entry and exit, indicators, and filters
Every trading strategy should have clear and unambiguous rules for opening trades when certain market conditions. Usually these conditions are the presence of a trend and the price reaches certain values or the indicators, but in some cases, the signal for the transaction may serve as the release of macroeconomic news or just the opening time of some of the world's stock exchanges.
Depending on what type of signals used in the trading strategy to open trades apply different indicators. In the case of news trading, indicator can serve as an ordinary calendar, but most often it is combination of moving averages or various derivatives of them. Even the price chart can be considered an indicator – moving average with the period equal to one.
Any indicator, even the most accurate, has the ability to serve a number of false signals. In order to reduce their number, in the trading systems use combinations of several different indicators, one of which gives signals to the transactions, and the rest serve as filters. Most often these filters are trend indicators, which allow to avoid unnecessary inputs on the oscillators, but for that purpose may apply any technical analysis tool, or markings on the waves of Elliot, for example.
Experienced traders say that to get out in time from the transaction much more difficult than to find the right entrance to it. The right trading strategy needs to have a clearly formalized rules lock in profits and to ensure the ratio risk/profit consistent with its rules of money management.
Every new strategy you plan to use to trade in the FOREX market should be tested on historical data. There are several good reasons:
- Testing gives you the opportunity to verify the profit or loss of the strategy at specific currency pairs or timeframes. Any change has implications for the health system as a whole, with the exception of universal trading tactics, which there is quite a bit;
- History testing provides better understanding of the trading strategies by direct observation;
- When testing, you can optimize the strategy to set key parameters and indicators to achieve maximum profitability;
- Only testing gives the trader a psychological confidence in the correct choice of rules your work on the market, removing unnecessary emotion from the trading process.