Are you an aspiring trader on the cusp of diving into the world of trading forex but unsure how to go about it? Or are you a seasoned forex trader perhaps who’s become a little too complacent about properly managing risk and losing capital rapidly? Wherever you are in your trading journey, building a forex trading strategy to help you mitigate risk exposure and increase the potential for making a profit is vital.
In this article, we’ll cover some of the steps to a successful forex trading strategy suitable for all types of traders worldwide.
Step 1: Research what type of trader you are
To achieve any kind of success in forex trading first requires identifying what type of trader you are. This is because each trading style is characterised by distinct character traits, trading techniques and tolerance for risk. Selecting a style that best suits your personality will help you in your endeavour to develop a more successful forex trading strategy. Three of the most popular ways to trade are:
- Day trading: a day trader usually looks to make gains from short-term price movements of a specific asset. They typically use a variety of techniques to execute many trades throughout the day, closing their positions before the trading day ends. Day traders make use of technical and fundamental analysis as and when required. Day trading requires commitment, focus, time, and fast decision-making skills. It offers the potential to make large profits but is also highly volatile with losses rising fast.
- Forex scalping: this is another form of day trading that sees traders opening a large number of small, short-term trades for just a few seconds or minutes. This type of trader can usually handle a high level of stress and generally shows an aptitude for managing risk to mitigate losing all their money.
- Swing trading: in contrast to day trading, a swing trader tends to hold a position for a few hours, days or more, in order to profit from a speculated price movement. They do this to be able to buy at ‘swing lows’ and sell at ‘swing highs’, or vice versa. Swing traders use technical analysis primarily, and fundamental analysis when needed. Swing traders are at risk of unforeseen price movements or market shifts and may incur significant losses as a result.
Step 2: Select your trading style to build your strategy
Once you have learned everything there is to learn about the different trading styles, consider the following criteria before deciding how you will trade:
- How much time do you have available to commit to the different types of trades?
- Your preference for the style of analysis required, i.e., are you more drawn to technical analysis, or do you consider yourself more of a fundamental trader?
- How risk tolerant or risk averse you are.
Step 3: Create a risk management plan
Risk management is one of the most critical components of a forex trading strategy to avoid losing large amounts of money. In the process of building your forex trading strategy, consider how much you are prepared to lose on each trade. Incorporate tools that will help you manage this risk by implementing mechanisms like:
- stop-loss orders that will automatically close trading positions when they reach a certain price level to limit losses. This level of automation removes the need for monitoring your trades continuously and may help to protect your gains.
- take-profit orders that close your trading positions when a price reaches a certain level of profit.
Also, be mindful of leverage as it is highly volatile and comes with a huge amount of risk. While leverage offers a trader the ability to make significant profits, it also exposes them to massive losses if not properly managed. It is therefore advisable to include ways of managing this risk in your forex trading strategy.
Step 4: Set entry and exit rules
- Entry rules: Identify buy signals to know when to enter trades. Set the rules as to what conditions must be met in order and all relevant market indicators.
- Exit rules: Before executing any trade, identify your exits. This will take into account defensive mechanisms like stop-loss and take-profit orders.
Step 5: Analyse the markets
A winning forex trading strategy is one that integrates the trader’s knowledge, expertise, and understanding of the market. Without these, you’re relying solely on emotions which is highly risky. So, what does this mean?
- Read as much as you can on everything to do with forex, be this e-books, articles, guides, FAQs, etc.
- Watch as many forex-related videos or join webinars to acquire tips from trading experts.
- Analyse past and current charts as often as possible.
- Keep up with global current affairs, including economic news, geopolitical events, and unexpected market fluctuations.
- Check indicators. Undertake additional technical and fundamental research relative to the types of trades you want to execute.
Step 6: Open a demo account to practice your forex trading strategy
Select a reliable CFD forex broker to open a demo account. This offers you the opportunity to hone your skills and gain some forex trading experience. A demo account allows you to test your trading techniques and put technical or fundamental analysis to use. It also provides you with a simulated trading environment to gauge the level of risk you’re prepared to incur, without putting real money at risk.
Step 7: Know when to make changes
As with any strategy, there will come a time when some adjustments must be made, based on the performance of your trades or unexpected market movements. Be mindful of monitoring the market and closely track open positions so that you’re able to make any necessary changes to your forex trading strategy if the market starts moving against you. Exercise caution and accept that all strategies, regardless of industry, have ebbs and flows that must be navigated to avoid losing money, particularly in forex.