One of the most important decisions to make in this industry is choosing the right trading strategy. If you choose the wrong one, it could cost you a lot of capital. There are a lot of factors to keep in mind when choosing a trading strategy. This 7-step guide should take you through all the things you need to keep in mind when making this decision:
Time Management
How much of your time are you able to devote to foreign exchange trading? If you are able to sit at your desk and observe charts for extended periods of time, you will have access to the whole library of forex trading methods, including those that were designed specifically for day trading and scalping.
In the event that this is not the situation, you have to center your attention on lengthier periods. You will be able to set alerts at important entry points in advance using these tactics. You will also be able to trade according to your strategy while having a peek at markets. Better than being glued to your screen the whole day.
It is essential to keep in mind that you should always be honest with yourself. The market will not wait for you to get home from your regular work before moving on. If you try to implement a plan that does not work with the way you organize your life, you can be dissatisfied with the outcomes.
Currency Pairs
Determining the currency pairings you wish to concentrate on is another crucial step to take. There are some currency pairings that are not actively traded in the foreign exchange market and are only seldom utilized in economic activity on a worldwide scale.
They contain currencies from underdeveloped nations and are typically more prone to volatility than the main currency pairs. Currency pairings are susceptible to being influenced by a variety of significant variables. Therefore, traders have to bear these in mind while making decisions on which assets to trade.
Trading Personality
Your trading strategy for forex should reflect who you are as a person. This is a very significant issue since a trader’s level of mental strength is one of the most essential factors in determining how successful they will be in trading. If you are not at ease with your trading technique, for whatever reason, you are more likely to experience feelings of anxiety, become exhausted, and make mistakes that will lose you money.
If you are able to make quick judgments but lack the virtue of patience, you would be better off looking at trading methods designed for shorter timescales, such as those developed for day trading or scalping. In these cases, the timeframes are much shorter.
In the other scenario, you want to investigate trading methods that were designed for swing trading or positional trading. Because a forex trading strategy that is tailored to your personality will make trading somewhat less difficult for you, you should not overlook the significance of this aspect when deciding which approach to use.
Risk Appetite
While some forex trading techniques involve a significant amount of risk yet have the potential to provide bigger returns, others take a more cautious approach. Your risk tolerance level should be reflected in the forex trading strategy that you choose. Otherwise, you’ll be setting yourself up for failure.
Your psychological characteristics and your current financial status both play a role in determining your risk tolerance. If you intend to use trading as an additional source of income in addition to what you already have, you should select more cautious trading tactics.
You might want to experiment with tactics that include larger drawdowns if your objective is to aggressively build your account balance. This is also if you have other sources of income that are sufficient to maintain your standard of living.
In any event, if the degree of risk associated with your forex trading strategy is higher than the level of risk tolerance you have set for yourself, you will not be able to successfully execute the strategy, which will lead to bad outcomes. When seen in this way, it is extremely crucial for your future success in trading that you link your trading strategy with your financial goals.
Market Direction
There are two primary categories of consumer behavior in the market. A trending market and a ranging market. Before deciding on a forex trading strategy, you need to first analyze the different types of markets. Employing tactics that have a history of success in markets that are range-bound while the market itself is trending might very well result in tragedy.
For instance, certain trading systems that are predicated on breakouts will continue to be unsuccessful in a true-ranging market. This is because you will be trapped in a large number of fake breakouts. When the market is moving in a strong trend, tactics for the range market behave in exactly the same way as they do when the market is moving in a weak trend.
In a market that is trending, any attempt you make to purchase when prices are near levels of support or sell when prices are near levels of resistance will fail since these levels will likely be broken. You should learn to differentiate between a trending market and a range market. Also have a forex trading strategy for each type of market behavior. In this light, you should learn to differentiate between a trending market and a range market.
Past Performance
The performance of the past is not always indicative of future results. This is a remark that you have undoubtedly heard a number of times. This is a fact, since trading tactics that were successful in the past may not be successful in the market climate that exists now.
However, this does not absolve you from the responsibility of conducting back tests of the forex trading strategy that you want to use. If you have correctly recognized the present type of market and chosen the suitable forex trading strategy, the next step is to evaluate how well it would have done in the weeks or months that have just passed.
You should give the strategy a go in live trading. This is to see if it would have been profitable for you in simulations. If your investigation reveals that the strategy has not been successful in the most recent weeks, you should look for another forex trading strategy. One that has a track record of producing better results.
Be Realistic
When deciding on a strategy for trading forex, it is critical to have a pragmatic outlook at all times. There is no reason to be in such a hurry. Take your time and do a thorough assessment of your own financial goals. Know the amount of time you have available for trading. Also know the preferences you now have about trading and the current status of the market.
In addition to this, you should get ready for a variety of market scenarios. You should be prepared with a strategy for both a market that is trending and one that is ranging. In an ideal situation, you should have several techniques for each type of market. This is so that you can instantly switch between them. Especially if you see that one of your techniques is not performing according to your anticipations.
You need to have several techniques for each type of market to be successful in trading in that market. You should also bear in mind that every strategy takes time to demonstrate its actual performance. Especially in the present market circumstances. As a result, you should exercise patience and allow it sometime before drawing final judgments about its effectiveness.
How to Find the Best Trading Strategy That Suits You
So how do you know that you have found the best trading strategy for you? If your strategy works with your schedule and you can handle the risk that follows, you should definitely be on the right path. Just remember to always be realistic and work according to your past mistakes to avoid making them in the future. Happy trading!