Hello and Welcome to the ditto educational series that will provide you with the skills you need to become a Forex trader!
Today we will be discussing strategy as this is something that traders have found difficulty with when Making their own and implementing without deviation.
Our Forex strategy should be a step-by-step systematic approach to how and when we are going to use specific tools when developing a sequence of analysis.
Typical components of your strategy should include the following.
Firstly we have the types of analysis tools we are using. Whether it’s technical, fundamental or both this is something that will be personal to you based on preference, now although preference is important certain analysis tools will have a generally higher success rate and you should take some time to learn out of your comfort zone to improve on your weaknesses. You should have a clear order set out before you as to when and how you apply your analysis tools.
Next we want to have a clear picture of the time frames and trading windows we will need to use. It’s no good trading unsociable trading windows that encroach on our sleep and day to day responsibilities and in addition we want to use the same timeframes to implement our analysis tools while considering the type of trader we want to become. Scalpers will rarely trade using the daily time frame for instance as they are looking for faster gains on lower time frames.
We need to consider the full order of our analysis, and physically write it down. This could involve for example scanning through the major pairs to gauge and note down factors like where prominent support and resistance are currently in play, next we may check fundamental factors that are in effect and consult the economic calendar for that week, once satisfied we can draw up a more narrowed list of set ups.
We need to basically highlight what high probability trade set ups are available based on a description of criteria we look for. We are looking for high rates of success in our execution of trades and by sticking to the criteria we have set out we will know if it is working well or needs adjustment.
What Types of orders will you be using? If you are unable to be available during times where you would normally need to trigger a buy or sell the. You must make use of pending orders. If you are trading news and have plenty of time on your hands you may want to enable one click trading to quickly enter the market based on a data release. This will all factor in to your larger plan and you should write down every detail. The purpose of strategy development is to increase our probability of success through research development and application.
We can’t talk about strategy and not talk about risk. So let’s now take a look at the money and risk management side of trading.
Trying to determine what your risk appetite and tolerance is can be initially difficult. You need to consider your available trade balance, the pair your trading, pip worth, lot size and other factors. You should not be trading with money you need, if you do this it’s going to really play with your emotions when thing are not going your way, Be honest with what is truly available to you.
Those who make money in Forex may not have more winning trades than losing, they may just manage their losing trades so the winning ones make them profitable overall. This comes down to risk reward ratio and accepting losses when they occur in accordance with your strategy as well as accepting the profits in accordance with their respective targets. A common characteristic of new traders is to quickly take profits but let losing trades run, consequently they would have to maintain a higher risk to reward ratio.
In terms of percentage risk per trade you may want to risk a set percentage per trade. For example you could have 1, 3% trade with a risk reward ratio of 1:3 or 3, 1% trades with varying risk reward by varying the take profit levels.
Let look at the checklist for you to add your own plan to. You need to include:
your analysis tools/ the order you use them
Amount of money available to trade
Amount you are willing to risk per trade
Risk to reward ratio
Types of orders to use
High probability trade criteria
What timeframes and currency pairs, we are trading.
Once we have an established plan we need to be consistent with our methods. Being consistent and testing our strategy over a period of a few months, Will identify if our strategy needs to be adjusted and making changes on the fly will only serve to confuse us. Changes should be deeply thought through and then applied and retested.
Successful traders focus on how much money they could lose as opposed to how much they can win. Having a frugal and cautious mindset will protect you from losses and bad decision-making.
We should never get into any trade without first determining when we are going to get out. Your strategy needs to include every aspect of the trade and factor in every contingency.
Do not dwell on what you can not change, if you made a successful trade at a 1:3 risk reward ratio and it went on to continue for 500 pips it doesn’t matter. You made your win based on proper analysis, move on to the next trade.
It’s important to answer the tough questions first, that is what will separate you from the vast majority of those losing money trading.
Make sure you are prepared, continued research and education will be your best weapon in your continued success.
Now please take some time to think about your trading strategy and it’s development. Take the time to write down your approach to the markets in detail and contemplate what you have learned today, remember Contemplation is the key to learning.