All strategies aren't the same, and if you're going to choose a trading strategy, then you need to make sure that it suits your personality. There are some things that you should look for in a strategy before you actually start using it to take trades.
As you know, there are different timeframes available in forex. Based on those timeframes, there are different types of trading styles.
So, depending upon the time, you can spend for forex you should choose your trading strategy. There are three types of trading styles based on timeframe.
1. Swing trading
In this type of trading style, the traders use daily, and a weekly chart to place the trade and keeps it running for weeks or till his targeted price is reached.
This type of trading style is very efficient, and one needs to spend less time on the chart. So, this type of trading is less time consuming than others.
If you don’t have much time to invest in forex, then you can look for a strategy which applies best on the weekly and daily timeframe and allows you to swing trade.
2. Day trading
In this type of trading style, the traders use daily, 4h, and hourly timeframes to execute their trades.
The traders look for new trade opportunities every day and keep the trade running for maximum one day.
This trading style is more time consuming than swing trading but provides you with multiple setups daily and endless opportunities.
If you seek your career in forex trading and have a lot of time to invest in it, then you can look for a strategy which allows you to day trade forex.
In this type of trading style, the traders mostly use shorter timeframes. They analyze forex charts on 1min to 15min timeframe and look for smaller entries. They aim for small profits or around 10-20 pips or even less per trade.
Scalping can be very time consuming because you have to continuously keep looking at the chart and search for new entries.
So, depending upon the time you are ready to invest in forex trading, you can choose your trading style. And based upon your trading style, you can look for a strategy which suits you.
High Risk to Reward ratio
There are many forex trading strategies for beginners and advanced traders available in the market. Some trade with high win rates of near about 90% of the winning trade, but that’s of no use if it doesn’t have a proper risk to reward ratio.
Lets consider you have a trading strategy with a 90% win rate but with no fixed risk to reward ratio.
Now what happens, in this case, is if you win 90% of your trade and make a decent amount of money. But the 10% trades you will lose can blow up your account as there is no fixed risk to reward ratio.
The trading strategy should have a high or decent risk to reward ratio. Suppose if you risk $10, then the minimum profit should be at least $30, which is 1:3 RRR.
The idea behind this is keeping your losers short and winners big. This thing makes a huge difference for any trader and doesn’t let you lose your account.
Keep in mind the win rate does not matter unless the strategy has reasonable Risk to Reward ratio. So the forex trading strategies that work will help you get a higher risk to reward.
This is the most important thing for any forex trader. I have been trading forex for so many years, and I haven’t seen a single forex trader (who is making money with forex) that is not good with risk management.
Every professional trader out there excellently manages risk. That’s what makes them successful.
The strategy which you use should contain a proper risk management plan, as trading without risk management will be a total disaster for anyone.
Trading without a stop loss is something which you should not do with your trading account because of its like sky diving with no parachute. It is only going to kill you the same way trading without stop loss will kill your account.
Also, you should never move down your stop loss, and there is no point in using a safety tool if you are not using it in the right way.
So you should be able to plan the trade which you are going to place with a proper risk management plan so that your account doesn’t blow up. One should always know how much amount is he willing to risk and why.
There are many other factors of risk management, such as controlling losses, calculating your lot size for each trade, and many more.
The successful trading strategy will contain a proper risk management plan by which you can easily understand and tackle the risk involved in forex trading.
Many successful professional forex traders don’t rely on any single setup for placing a trade. We have different structures in our strategy, and we use it accordingly.
Waiting for a single kind of setup can be too dull and can make you lose your patience and do the things which you should not (like taking wrong trades ).
For example, if your strategy has only one or two types of setups. Then your mind will make you enter the trade too early without even the setup being confirmed.
This is because you have minimal setups available, and this makes you jump in wrong trades and lose your money.
The trick here is to have multiple setups in your trading strategy. This will give you many setups to look after, which means more trades more money and will also help you deal with your patience.
The forex trading strategies that work will always give you multiple opportunities.
The forex market is imperfect, and it changes from time to time. Sometimes there is too much volatility, and sometimes the volatility is low, there are many other aspects in the forex markets which changes with time.
So having multiple setups in your strategy can help you efficiently deal with this.
Trading strategy not fully dependent on indicators
Telling you from the experience we have, indicators aren’t loyal. I am not saying it doesn’t work, it does, but then it needs some extra confirmation.
If you are trading with a strategy which makes you trade based on indicators itself, then you are in big trouble.
You need to understand this; humans make indicators, and they are just there to help you improve your trading. It isn’t a holy grail technique that will ensure you a 100% win rate.
The forex market is imperfect and is dependent on various factors. So, if there was any holy grail indicator that provides a 100% win rate then do you think any trader would lose money in forex? Absolutely not!
The whole idea behind the indicators was to improve your trading by presenting the historical data to the traders in an effortless way.
But a lot of traders do not understand this and place a trade totally dependent on an indicator. And end up losing money.
For example, you are using an indicator called relative strength index, and according to the indicator, you should enter a buy trade when the price is as level 30 and enter a sell trade when the price is at level 70.
The idea behind this is that level 70 represents the overbought area and level 30 represents the oversold area.
It may work sometimes but not always, if you enter into a trade just based on this principle then it may get you into trouble because it sometimes works and sometimes it doesn’t and hence can make you lose your money.
Indicators should be used but only as a one confirmation tool and not as an entry trigger. One should not be dependent on indicators for placing a trade.
You should look for many different things before getting into a trade and most importantly you should know the reason why you are getting into that trade.
The forex trading strategy that work will make you understand why are you buying or selling at that particular position and not just taking trade looking at the indicators.
So, the successful forex trading strategy will help you understand the market clearly.
Swim with the tide strategy
Always remember that the forex market is imperfect. The market changes from time to time; the forex strategy which you use should adjust itself according to the market.
The market acts differently in different sessions. You can expect high volatility in the London and New York session, but you can’t expect the same in the Asian session.
Because this is how the market works, no one can tell how the market is going to behave the next week or next month. So you should have a strategy which lets you be versatile with your trading setups.
I have been trading for a long time now, and I am telling you from my experience that the same trading strategy does not suit with every currency pair you are trading.
Yes, you are reading it right. There are eight major currencies in the forex market, and they make 28 major currency pairs which almost every trader trades.
Each currency pair you trade behaves differently. Some pairs are good with support and resistance levels, and some are good with the chart patterns like head and shoulders.
So, if you will stick to one single strategy and try to apply it to every chart you see, then you will end up losing money.
Because that’s not how it’s done, you should be able to read the charts correctly and then be able to choose what rules can be applied here and how can these pair be traded.
So, your strategy should allow you to adjust yourself in these situations and also according to each pair you trade.
Getting out of a trade
Many of you may not agree with us but, to know when and how to get out of a trade, is of equal importance when compared to how to get in a trade.
I have been through this in the earlier days of my forex trading career. I used to trade using a strategy I learned online, and was doing it quite efficiently. While doing so, I was getting trades right, but had no idea when to close them.
I would watch my trades go from profit to lose because I had no idea of when to close a trade and walk away with a profit.
This thing can be very frustrating because watching your profits turn into loss is not easy for anyone.
Our mind is not made in that way, and it can seriously affect our trading. The same things happened to me over and over again. I had no idea of when to take profit and also when to close a losing trade.
I used to keep losing trade running because I had no idea of when to close a losing trade. I would set take profit just by calculating pips randomly, but this is not how it works.
You need to validate everything you do in the forex market with a reason. So, any forex strategy you choose should provide you with these rules of getting into and out of trade effectively.
Every individual trader has his/her beliefs in the forex market. If you don’t have your own beliefs about the forex market, then you should first get those.
For this to happen, you will have to start learning the mechanics of the forex market, and you need to understand every basic of the forex market.
This will improve your technical analysis in an impressive manner. You will be able to see what is going on in the market. And you will able to relate to what the price is doing and why the price is behaving that way.
Every strategy you use should be compatible with your beliefs about price action. Whenever you trade using your strategy, you should not blindly get into a trade just by following the certain set of rules which you made in your strategy.
The strategy should be compatible with the beliefs you have and must make you understand clearly why are you getting into that trade.
If you are a beginner in forex trading, you may not have any idea about this topic, but trust me, there are various emotions involved while trading.
Mastering those emotions is an essential aspect of success in forex trading.
Trading on a demo account will not trigger any of those emotional problems. But once you start trading with the real account, you will see many of those psychological problems bombarding upon your head.
Even if you are excellent at analyzing forex charts, but if you don’t know how to deal with the psychological problems.
Then you will most likely not make it as a successful forex trader.
Consider you are very good at analyzing forex charts and you have a winning streak and everything is going right. Now, as you were winning traders, you became greedy and started trading too many setups with a very large lot size.
Soon, suddenly, you began losing trades and lost 50% of the profit you made. What is most likely to happen next is, your subconscious mind will make you think that the market is against you and the market is making you lose money.
This will cause you to oppose market, and you will end up losing money. Earlier when you were trading according to your plan, everything was going right, and you were making money.
But when the first psychological problem arose, and you were not able to tackle it, it got you into more psychological issues and made you lose money.
For this very reason, the strategy or course you chose should be in a way that it helps you deal with these emotional problems effectively.