Develop Your Own Forex Trading Strategies

The most frequent mistake committed by people who are new to forex trading is to operate without forex trading strategies. Most newcomers are too keen and excited and tend to believe that they can make a quick fortune in a short span of time, approaching this task in a non-professional manner. Sadly, they soon realize how complex this type of trading is, and start accumulating losses.

If you want to become a successful forex trader, you must develop a forex trading strategy. Developing a strategy is vitally important but not difficult. Your strategy should address the following issues:

  • Logic of trading
  • Time of trading
  • Objective of trading
  • Managing funds
  • Documenting and analyzing the results
  • How and what to learn from mistakes

You should have a good reason for entering a trade. It's not unusual for some traders to enter a position just because they are bored or to get the excitement of being short or long — a potentially disastrous indulgence. Never enter a forex trade without a technical or fundamental reason (or both).

Deciding the Currency Pair You'll Trade

This may sound quite simple but it is important to define or you'll be confused. It is always a good forex trading strategy to focus on key pairs like GBP/USD, EUR/USD, and USD/JPY, rather than on all pairs.

It is equally important to decide your trading frequency and when you'll trade. You may opt to be a day trader or hold positions for prolonged durations. You'll also need to decide if you want to trade before or after economic releases. When would you want to trade heavily: at night, or during opening and closing of markets?

It is imperative to decide on these basic issues and follow them consistently as part of your forex trading strategies.

The next important step is to state the objectives of your trading, as you can't develop a good forex trading strategy without having clear objectives. While defining an ultimate goal would be presumptuous for a beginner, you should set periodic evaluation metrics to anchor your expectations to what you can actually achieve. And this overall portfolio monitoring has a parallel for each trade, where you should place limits to guarantee earned profit and automate stop-loss orders. Define your take-profit plus stop-loss currency pair levels before you enter the trade, though you can modify these as changing market circumstances warrant. New traders frequently have impractical forex strategies. This is not to deny that big profits can't be made during the first year of trading, but that would be rare.

How to Develop Your Forex Trading Strategies

Beginning traders commit a variety of mistakes arising from inexperience. Principal among them is to book their profits prematurely and allow losses to accumulate. These two phenomena are flip-side manifestations of "confirmation bias" whereby insecurity drives us to confirm our "superior wisdom" and cognitive dissonance prevents us from accepting our flawed judgment. Experienced traders develop mental self-discipline and use available automated trade order executions, like stop-loss orders to limit adverse price movement and progressive limit orders to allow gains to continue to accumulate while locking in specified profit levels. Ruthless self-criticism is a key trait for any trader who acts as his own advocate, judge and beneficiary. While telling ourselves narratives are what makes us human, understanding and internalizing the objective realities of the marketplace  — however abstractly — are the essential elements in formulating successful forex trading strategies.

Perhaps the most important forex trading strategy is allocation of your trading portfolio. As a beginner, to ensure that no one position or expectation generates overwhelming losses, you should ensure that no trade entails more than 2% of your portfolio value. As your experience and confidence grow, this limit may rise to 4%. The goal should be to keep inevitable losses to a minimum and ensure that winning trades stay that way (using limit orders at desired profit levels).

As an integral part of your funds management, a personalized forex trading strategy is essential. No one approach or methodology has proven consistently superior. What works and what fits you is what you should use. Whatever the approach, it will inevitably require continual refinement and modification.

The USD in Forex Trading Strategies

The outsized role of the United States Dollar is hard to overstate in developing forex trading strategies.  In addition to representing the counter-side to most trades, the global calendar is inordinately determined by the American economy and the pronouncements of its officials.

  • On a regular basis, the Non-Farm Payrolls (NFP) report is released at 8:30 AM EST on the first Friday of every month. It is followed closely as a barometer of American job creation and as with any statistic in the public realm, the key issue is the reality compared with expectations.
  • The comments and testimonies of the various stewards of the U. S. economy are also of primary interest, particularly those of the U. S. Federal Reserve Chairman who heads the Federal Open Market Committee (FOMC). The FOMC is that branch of the Federal Reserve Board which determines the direction of monetary policy and specifically U. S. short-term inter-bank lending rates. In our current era, where the entire world has seemingly tanked up on near-zero dollar-denominated debt, and with its exploding sovereign and corporate debt balances, market watchers have no alternative but to pay extra special attention to gyrations in U S interest rates. [Spoiler Alert: The inevitable cyclical rise in interest rates will get plenty ugly with spilled blood in a process that unfolds in predictable inverse order of economic stability.]

Cloud Computing, Big Data, Algorithms and Forex Strategies

By default the means devoted to generating forex trading profits have grown beyond comprehension. Vastly endowed "hedge" funds devote endless resources to parse the smallest market anomaly into profitable forex strategies. This new resource allocation regime is not friendly to the legions of upper-middle class banking functionaries who are now being replaced by a handful of immensely wealthy "unicorn" quant jocks, but for the individual trader, the news is more ambiguous. True, "strategy" has a different meaning in an era of processing peta-bytes (about 500 billion pages of text) of data. But in the larger sense it is only a further continuance of more powerful computers.

Where the individual forex trader benefits in harnessing this cloud computing and big data models in developing his forex trading strategies, is in the inevitable increase in disseminated knowledge. Not everyone with a supercomputer in his employ is a trader. Enough participate in an information-flow model that a significant increase in free information of value has dramatically changed the strategic landscape. For example, here at Xtrade, you can now benefit from the Autochartist market alert which employs a sophisticated algorithmic software to process real-time market data and generate rebound, breakout or approach technical trading recommendations at 15-minute granularity levels. Developing your own forex trading strategies has thus become a measurably easier process when you may choose from live evidence-based recommended opportunities.

Thus, the whole concept of forex trading strategies has taken on new meaning and significance in an era when machine-generated artificial intelligence, backed by vast hordes of private capital, and in an ever more diffuse set of marketplaces, dominates the forex valuation. And just because the bar to participation has never been lower, the guarantee of survival and success have not become any likelier.

Trading CFDs involves significant risk of loss. Trading FX/CFDs involves a significant level of risk and you may lose all of your invested capital. Please ensure that you understand the risks involved.