Part of becoming successful in forex trading, besides mastering the terminology and knowing what influences the market, is developing a good forex strategy. To put it simply, a trading strategy is a system that helps you determine when to enter or exit a trade, identify trends and, of course, make a profit.
For beginner traders, choosing the right strategy can sometimes be a pain, especially if you are not familiar with all the knickknacks of the market. This article aims to explain to beginner traders why mastering a trading strategy is paramount in their development as a trader, as well as how to choose the best-suited strategy for their trading style.
So, first things first…
Why do you need a forex strategy?
The first step in choosing a trading strategy is understanding why it is important for your trading journey, as well as why a certain strategy may work for some traders, but not for everyone.
Traders use strategies for two main reasons: hedging and speculating. This means you will first have to determine what outcome you want to get from your trading strategy.
Strategies that are based on speculation are used to predict a move that a trading pair will potentially make. It goes without saying that, if you manage to correctly predict a move, it will increase your chances of making a profit. Keep in mind, however, that there is a big difference between “gambling” or betting on how a currency pair will move, and speculating using a probability-based strategy.
To develop their strategy, traders will use either manual systems, which involves the trader sitting in front of the computer and analyzing patterns, or automated strategies, which imply developing and using an algorithm that finds appropriate trading signals.
Popular trading strategies
Professional traders are able to develop their own unique strategy, based on the years of experience they have accumulated. For those less experienced, developing a personal strategy may not be the right move, as they are not as familiar with the market. But luckily, some forex strategies have been made available for anyone now, so you can try them, figure out which one works best for you and, once you get more experience in the field, modify them to your likings. Amongst them, the most popular are the following four:
In forex, scalping means taking small, but frequent profits. A scalping strategy focuses on opening and closing multiple positions during the day, either manually, or by using an algorithm, which determines when is the best time to enter and exit a position. Scalping focuses on short-term trades, with small returns, with traders usually opening and closing a position within a 30-60-minute timeframe. This is a quite popular strategy, which is why forex brokers for scalping are very searched for.
2. Day trading
This is a strategy that focuses on entering and exiting positions within the same day. This means that, before the market closes that evening, all your positions will be closed. You can use this on a single trade, or on multiple trades during the day. The length of the trade varies from very short-term trades (opened and closed in a matter of minutes) and short-term trades (in a matter of hours).
3. Swing trading
To use a swing strategy, you must be very familiar with trending markets and rang bound, to take advantage of them for as much as possible. It is a speculative strategy where traders determine tops and bottoms of a certain pair so that they can enter both long and short positions. It is usually a medium-term strategy, as positions can be held for as little as a few hours, or as long as a few days.
4. Position trading
Although this strategy focuses mostly on fundamental factors, technical methods can also be used, one example being the Elliott Wave Theory. Traders usually enter or exit trades based on macroeconomic themes, following important market fluctuations that affect the market in the long term. It is usually a long-term strategy, as positions can be held for days, weeks, months, and sometimes even years.
How to choose a forex strategy
Now that you understand how some of the most popular trading strategies work, it’s time to understand how to choose one that is suited for you. Effectively choosing a trading strategy is very important and failing to do so is one of the main reasons traders don’t make the profits they were expecting.
To decide on a strategy, you need to keep in mind a few aspects first:
1. Consider the risk to reward ratio
If your strategy does not have a proper risk to reward ratio, you stand the chance of losing all your profits in one single trade even if your strategy has a 90%-win rate, because that 10% can cost you all your account’s balance.
2. Improve your risk management technique
Perhaps the most important quality a trader must have is knowing how to manage risks. If you don’t have a money management plan in place, you risk investing more money than you can afford, or making one wrong move and losing all your profits.
3. Make sure your strategy aligns with your trading psychology
Trading psychology is an important part of making profit in forex, so if you want your strategy to succeed, you must ensure it aligns with who you are as a person and the type of decisions you usually make. For example, scalping can be a quite stressful strategy, which means if you are not able to handle stress, you may want to try a swing strategy instead.
4. Mind your emotions
Not letting your emotions govern your trading decisions can be particularly hard for beginner traders, but with a bit of patience and training, it can be done. The reason why you should not get emotional with trading, be it because of a big win, or an unfortunate loss, is because emotions can affect your decision-making and leave you prone to making mistakes.