How To Build A Forex Trading Strategy

Hi Forex Traders!

The article post is focused on how to build a Forex trading strategy. Or in other words:

–          How to create a Forex trading strategy?

Forex trading strategies are always a popular topic because it is the prime method for which traders measure success. All Forex traders are very keen on reading or finding out about Forex strategies, or even willing to pay for them… Others spend hundreds of even thousands hours scanning the market in search of a good Forex trading strategy. And don’t get me wrong, this makes sense.

06 21 EURUSD DAY

Investing time and resources in good Forex trading strategies is definitely very important task, and I fully support that. There is however a couple of pit falls, which I advise a Forex trader to watch out for and avoid. Here they are:

1)      The quest of the perfect Forex trading strategy.
Or in other words, the quest for the Holy Grail. This intensive search leads to an undesirable situation where the Forex trader keeps trying to improve their own trading strategy. This process will either bear no fruit at all, or best will lead to the number of entries being reduced to such a small sample that the reliability of the testing results becomes questionable. For mechanical trading system to work, traders must ensure that enough data is tested over a sufficient period of time. Doing this work without a skilled programmer could prove to be mountainous task.

2)      They lack of focus on other key components such as risk management.
Of course, trading strategies are of key importance. But not to the extent that a Forex trader can have the freedom to neglect other vital element of the Forex business. Risk management and money management are vital to ensure that the trading capital is protected. A trading plan is crucial for measuring performance. Building a trading psychology is important to follow the trading plan. And then within trading strategies, there is a difference what a Forex trader focuses on. Are your studies and strategies focused on optimizing entries for 90% of the time and only 10% of your attention goes to your take profits and stop losses? Then your biased is too heavily skewed on only one part of the trading strategy process.

Before we dive into all of the details and goodies regarding the Forex strategy, take a look some of these great articles. Of course as I am sure you are aware, all traders must have a trade plan. As an extra clarification: this article is not focused on the trading plan, but on the creation of the Forex strategy, which of course is always a part of anyone’s trading plan.

* before you trade have a plan

* Forex trading investments

* ultimate guide to Forex investments

With that out of the way, we can now focus on the elements and process of creating and building a Forex trading strategy. Just to make sure that everyone is clear on the goal of the article:

a)      We are not looking to create or explain a Forex strategy here.

b)      We want to explain which elements and processes are important and needed to make a trading strategy concept.

With these tools in hand I hope that any development of your trading strategies become more logical and easier to complete. Pleas note that in order to succeed one must have impeccable commitment. 

First of all, we should mention that the type of trading strategy you create will influence elements of risk management, just as items such as money management influence your trading strategy and your trading psychology influence your trading style and trading strategy. So all these elements intertwined, but I will mostly focus on creating a trading strategy and the building blocks.

As an example of a Forex strategy that I have created myself, I will provide links to the million Dollar strategy which I have released not so long ago. Please take a look at those parts here:

1) million Dollar strategy part 1, part 2, part 3
2) long-term trading strategy for Forex

Second of all, I want to dive into the question that some of you might have: why do we need a trading strategy at all? In theory, it is true that anyone could in fact trade at any point in time on any currency and they might win a few times. Only highly experienced traders with loads and decades of experience might structurally succeed in consistently earning money with that though. They have learned how to read and interpret the flow of the market with just a few indicators and are able to make confident, patient, disciplined and successful trading decisions based on a mixture of their knowledge, experience, and “gut” feeling. This is an extreme level of proficiency and anyone applying the same without the proper background could lose their trading capital within an hour. Plain and simple, the rest of us are going to lose capital that way. Why? Without a trading strategy, there is no guidance, no support, and no methodology for the trade to tackle the market. There is no systematic method of the Forex trader to analyze, judge and trade, which can create trading chaos.

To be exact a Forex trading strategy will help with:

–          Creating consistency

–          Avoid overtrading

–          Avoid paralysis of analysis

–          Avoid making too many trade management decisions

–          Make monitoring of trades easier

–          Improve ability to spot opportunities

Last but not least, it will help with building patience. Forex Traders don’t like to hear it but limiting trading is quite beneficial. We want to trade all the time… but patience is vital. Forex traders need to wait for the moment that their trading strategy is at their best. And this can be less often then you think.

That leads us to the first choices a Forex strategy must make… but before we start that process, it is a MUST to read through this article on Forex trading systems.

http://winnersedgetrading.com/forex-trading-system/…  It will provide  a great guidance!

THE STEPS of HOW TO CREATE A FOREX STRATEGY:

Point 1. Trading Psychology: what is your preferred trading style? What is your trading psychology? What are key elements of your character and how can they influence your trading? You must know thyself before you can match your trading personality to that of the Forex market. An impatient person might trade better using a scalping system, while a more laid back person would thrive better in a long-term trading environment.

Point 2. Trading Style: depending on point 1 a Forex trader can decide how active they ideally would like to participate in the Forex market, in what kind of manner, and how frequent.

1)      TRADING STYLE: ACTIVE TRADER

–          You prefer to open trades quickly and often within 1 day

–          You don’t want to hold positions trade overnight

–          You don’t trades going against you for long time periods or many pips

2)      TRADING STYLE: SWING TRADER INTRA WEEK

–          You are ok with holding the trades from a few hours to a week

–          You are ok with holding a trade overnight, but might be reluctant to hold over the weekend

–          You can handle a position taking some time such as a day to develop

–          You are ok with taking a half a dozen to a dozen trades per week

3)      TRADING STYLE: SWING TRADER

–          You are ok with holding the trades from 2 days to weeks

–          You are ok with holding a trade over the weekend

–          You can handle a position taking some time such as week to develop

–          You are ok with taking a few trades per week

4)      TRADING STYLE: POSITION TRADER

–          You are ok with holding the trades from 2 to weeks to several months

–          You are ok with taking a few trades per month

What is your preferred style of trading?

Point 3. Discretionary element. How much guidance do you as a trader need or feel comfortable with?

Some traders want to have a trading strategy which has zero / no or hardly any discretionary element. An algorithm would best fit this type of Forex trader. Please read this article about algorithms or check out Tim’s articles on how to write your own EA.

Other Forex traders feel fine with having guidelines but want to leave space and room for their own interpretation of the price and market movements. The advantage of this method is that it allows traders to filter illogical entries and decision, which are not align with the market movements. This makes sense because the market is fluid as it is the grand sum of the psychology of all market participants. That is why the market is always and ever changing. The discretionary element will keep your strategy in sync with the market. An algorithm might do very well for 2 years but horribly fail in the third. The solution for that is a regularly development and update of algorithms.

In many cases the more experience and knowledge a Forex trader acquires, the more comfortable they tend to feel with adding parts of discretionary trading within their trading strategy.

What do you think? How do you trade? What do you feel more comfortable with? Write down your opinion in the section down below! Thanks!!!!

Point 4. What elements do you want to use for your trading: fundamental and/or technical analysis?

Read here more about technical analysis.

Read more about fundamental analysis via blog posts of Tony.

Point 5. Creating a Strategy Portfolio.

The market varies and does not exhibit the similar behavior during the day, week, month, year and decade. The market does make patterns but the exact movement of each pattern is different. Just like all humans have finger prints but all finger prints are unique. The same holds true for the market. Due to these differences, a Forex trader must know when to employ their trading strategies at the correct time. One of the most dangerous things that can happen is when a first time new Forex trader makes a ton of money when catching a strong trend. The novice trader has no clue that the trend time is limited and then loses profits in chop time.

So the following questions are key: what types of trading strategies do you want to focus on? What types of trading strategies watch with your trading personality? What fits your schedule? Can you handle multiple styles or do you feel (more) comfortable focusing on one?

Here are the different types of trading strategies:

–          Trends

–          Breakouts

–          Ranges / consolidations

–          Trading impulses

–          Trading corrections

Do you want to focus on 1 of these 3 and wait patiently for your environment to emerge and potentially scan more currencies? Or would you rather trade all environments, but maybe more focused on 1 or a few currencies?

That wraps up the article for today….

There are many other elements we want to discuss. We are about half way now and we are going to release a 2nd part on how to create Forex strategies next week Friday, so make sure to check that out!

If you think that we can help you out with creating your own strategy, that sure is correct. Check out our Forex services here:

a. Forex mentoring

b. Forex trading room

In the mean time, thank you for sharing this article!!! That is greatly appreciated!!!! 

Have an awesome weekend and Good Trading!

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  • Phoebe Ejimbe

    My preferred trading style is SWING INTRA WEEK.. I made this choice so as to keep check on my trading psychology. Ideally I would place my trade/s and go. I then check them less frequently. This stops me from tampering with them or jumping out of them prematurely for fear of losing money. I like to trade multiple strategies but would prefer to limit myself to TREND/BREAKOUT Trading strategies so as to become competent and profitable in the two rather than spreading my thin resources over larger number of strategies. Also the two strategies will offer me more high probability trading opportunies to choose from. I have no time constraints. I will use my free times to watch and continue to learn how the market does what it does and also do what is necessary to maintain a healthy body and soul..