What is a trading strategy?
Profitable Forex trading is all about having an edge and trading that edge. This edge is often gained by following a trading strategy, which is a set of rules that a trader follows in order to make money. A strategy can sometimes be referred to as a trading plan or a trading system.
Why do you need a trading strategy?
Without a trading system, traders have no plan. Without a plan, a trader usually relies on emotion to trade the market. This may lead to some quick profits but ultimately always ends in failure. A good trading strategy will guide a trader through the whole process of each trade. It will tell him when to buy, when to sell and how much to risk per trade. Following a trading plan can greatly reduce the challenges caused by trading emotion and trading psychology.
Every successful trader I have ever met has a trading strategy. You will not become a profitable trader without one.
'Trading Systems and Methods' is a great book that will teach you the ins and outs of trading strategies. I highly recommend it.
Click here to view the book (UK).
Click here to view the book (US).
What should a trading strategy include?
A strong trading strategy should be simple to follow but very detailed. It should include details of how to analyse the market, when to enter a trade, when to exit a trade and how much to risk per trade. It should also include details on managing the trade once open, for example, when to adjust a stop-loss, etc.
Trading strategies can be written down or they can be kept within a traders mind. It does not matter how the system is kept/recorded, just as long as the strategy is well-known to the trader.
A Forex trading strategy should answer the following questions...
What am I looking for?
What pairs should I be trading?
When do I enter a trade?
Where do I enter the trade?
Where should my stop-loss be?
Where should my take-profit be?
Do I need to adjust my stop-loss once in profit? If so, where do I put it?
How much should I be risking on this trade?
How often should I be trading?
What do I do if news events are appraoching?
Developing a trading strategy
Some things to consider when creating your own trading strategy...
Which time-frame would you like to trade? 15 minute, 1 hour, 4 hour, daily, etc, etc.
How much will you be risking per trade? 0.5%, 1%, 3%, etc, etc.
Is your strategy based on a certain market condition? Trend based, range based, trend-reversal based
How will you determine market entry? Pullback, break-out, dynamic support/resistance, Fib levels, news, horizontal levels, double-tops, etc, etc.
Where will stop-losses be placed? Above/below trigger candles, above/below structure, etc, etc/
Where will my take-profit be placed? Set RR, set pips, levels, break of structure, etc, etc.
Should you back-test a trading strategy?
I highly suggest you back-test a trading strategy before trading it. Back-testing can be done by simply studying historic price charts and recording the results of the strategy, if it were traded.
If the trading system gives promising back-tested results, you should then consider trading the system on a demo account or a small live account.
I highly suggest you use IC Markets when trading your strategy. This is the broker that I personally use. They offer free demo trading accounts - perfect for testing new ideas and methods. Click here to get started for free.
Common challenges to trading a Forex strategy
Emotion - a good trading plan will minimise trading emotion and psychology but it will not eliminate it. Even with the best trading strategy there will be moments of fear, greed and boredom. Becoming subject to these emotions will lead from the safety of your strategy.
Incompetence - some traders simply don't know their trading strategy well enough. Due to their lack of knowledge, they may miss trading opportunities or take trades that don't fit the criteria of the system.
Inaccurate results - there are instances where back-testing has not been done accurately (or even skipped). Once the trader realises that the results he is getting differs greatly from the back-tested performance, he will likely give-up.
When should you give-up on a trading strategy?
If the strategy has proven results of profitability then I suggest you give a strategy a 3 month window. You are not going to be perfect at trading the strategy within 3 months but if you have not made any money after 3 months of trading the system, you should consider trying something new or making changes to the current set of trading rules.
A few extra points...
Create your own trading strategy or learn mine (verified results and live trades included - click here). You can even follow my strategies in my Forex trading room. Learning or adopting a strategy can save you a lot of time and money.
Even traders that trade with discretion have a trading plan that they follow. No successful trader trades purely based on discretion or emotion. It is essential that you have some sort of trading plan, system, method or strategy.
Creating a trading strategy can be very tedious but it is a fantastic learning opportunity, try to focus on the positive.
I wish you all the best