Although not the absolute most important factor in trading, finding a forex strategy can be a bit of a challenge, especially to new traders. Strictly speaking, a trading strategy is a defined set of rules and guidelines for trading. I like to look at trading strategies in 3 broad categories: Trend Trading, Range Trading, and the Range Breakout. A good strategy should include rules for entries and exits, as well as trade management.
There are some essentials that need to be taken into consideration when trying to decide on a trading strategy, as they have considerable bearing on how well traders are likely to perform with any given method:
How long would I like to hold onto my trades?
If you are comfortable holding your trades for days or weeks, you might like swing or position trading. However, if you find that you lack the patience or inclination to trade in this way, day trading/scalping would be a better choice.
What is my personality type, and how will it affect my trading?
This might not sound relevant but it really is. If you are someone who feels a constant need for action, you will be more drawn to scalping, and could find it extremely difficult to succeed in trading if you were to do position trading instead. This statement however, is not an absolute, as it is possible to adapt especially in cases where scalping or day-trading is not an option due to time constraints. Our innate personalities often conflict with trading as a whole, making it difficult to succeed. For example; some persons are rebellious by nature, and the usual tendency would be to recoil from strict rules that control them. In these circumstances, the aspiring trader has to learn to adapt, as he realizes that trading without rules can be disastrous.
What market conditions do I intend to trade in?
Every currency pair experiences periods of consolidation, or ranging. It is during this time that many traders experience difficulties. Most strategies, unless specifically a range trading one, are not equipped to work in ranging markets. That is why, at the outset, the trader should consider this potential problem, and specify exactly what the market conditions are that he is prepared to, or are interested in trading in. From this point he can proceed in developing the relevant strategies.
How much drawdown are you comfortable with?
This is an important consideration because many trading methods get cast aside unanticipated draw-downs. These are often profitable over time, but an extended period of draw-down can make them unacceptable. A major problem here is the fact that the system might not have been tested as thoroughly as it should have been, in order for the trader to acquire reasonable expectations regarding the strategy’s performance. This is an important factor that traders should always give thought to before incorporating a new trading strategy into their personal arsenal.
Regardless of the type of forex strategy a trader uses, he is and will remain his own biggest asset or liability, as the case may be. A mediocre strategy can, in the right hands, create millions. Likewise, even the best of strategies will fail if the trader lacks the necessary attributes.
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