You may have heard of people defining the importance of trading strategy in forex. Every other person in the market will ask you to have a strategy. However, only a few can tell you the right way to develop a forex plan.
Having a strategy and having an effective strategy are two different things. Effective strategy refers to a plan that actually works and gives a potential return. In this article, we will have a study of developing the best forex trading strategy for beginners.
What is a trading Strategy?
A trading strategy is a blueprint or a plan that tells when, where, which, and how to trade in the forex market.
We generally have plans in our life and act accordingly. For example, many people have a daily routine plan, and they follow it every day to manage things.
In the same way, a trading plan defines each step of your trading journey. It includes the trade rules, journal, risk, time frame, forex order type, analysis and all the key criteria. A trader just needs to follow it to achieve the desired goal.
5 steps to build the best forex trading strategy
Building a forex plan requires proper market understanding, investment research, continuous knowledge upgradation and customization. It is the initial stage to start a trading journey, and many traders hurry at this stage.
A strategy is the key pillar to your trading success. A little hurry during strategy development can affect the entire trading journey. But do not worry; we are here to help you. Follow the below steps to prepare a cutting-edge and high-win-rate trading plan:
Start with Market Knowledge Enhancement:
Don’t jump to strategy formulations till the time you know the market well. The Forex market is the largest and the most complex, like a big ocean.
Now, how will you learn to sail a boat in the ocean when you don’t have the basic information about the ocean? So, in the first step, learn about the foreign exchange market. You can start by learning about trading sessions, lot size, market analysis, leverage, and other key aspects of the forex market.
A quick glance
Integrating three distinct Relative Strength Index (RSI) indicators may yield a victory rate of up to 90%. The three RSI indicators employed in this technique are the 14-period RSI, 7-period RSI, and 3-period RSI. Each of these indicators plays a key role in determining market trends and momentum.
Yes, it’s vital to only initiate trades that allow you to put a stop-loss order close enough to the entry point to avoid suffering a catastrophic loss. But it’s also important to place stop orders at a price level that’s appropriate, based on your market analysis.
The digits five, three, and one stand for: Five currency pairings to study and trade. Three tactics to become an expert on and utilise with your transactions. One time to trade, the same time every day.
The 1% risk rule in forex trading is a guideline recommending that a trader should not risk more than 1% of their whole trading capital on a single trade. This rule is aimed to preserve capital and safeguard traders from the harmful impacts of a succession of losing trades.
Swing trading is most ideal for novices because to this modest speed. In truth, the possibility of success is actually the largest here – but the danger must still be considered seriously! Although they are particularly well suited to trading for beginners, few newbies choose for swing trading techniques.
Get an idea of diverse forex strategies:
There are multiple strategies for trading in financial markets. These strategies are divided based on time frame, risk, and analysis method. In order to select your ideal one, basic knowledge of different trade styles is a must. Here are the top trading strategies you should know about:
Day trading Strategies:
Day trading strategies are short-term trading strategies where the whole trading occurs within a day. Under this, traders open and close a trade in a day and can withdraw their profit at the end of the day.
Day trading strategies are of different types, such as one trade a day, 50-pip a day forex strategy, scalping and others. Day trading requires quick decision-making and a great understanding of the market, so it may not be suitable for market beginners.
Carry Trades:
Carry trade is a strategy to take advantage of interest rate differences between two currencies. The concept of the method is simple: a trader buys a currency with a high interest rate against a currency with a low interest rate. By doing so a carry trader can make a significant profit from interest rate difference.
Breakout strategy:
It is a strategy that takes technical analysis into consideration to identify potential price moves. Under this, traders open long or short positions whenever the price rises or falls below the key levels.
Traders use indicators such as moving averages, Bollinger bands, and support and resistance levels to determine price breakouts. With trade entry and exit levels, traders can even identify the levels to set stop loss and take profit.
Swing Trading
Swing trading is amongst the most popular strategies for forex beginners. Neither too time-consuming nor too typical. Traders with a basic understanding of the market can start with it. Under this, traders hold a position for 10 to 15 days to make a profit from medium-term price fluctuations.
Position Trading:
It’s a long-term strategy that is suitable for investors or passive traders. Under this, traders hold a trade for a few months to a year and earn a profit. The strategy locks your capital for a long time; however, the risk is the least compared to the others.
Price Action:
It is also known as the king of forex trading and gives the most favourable results. Under this, traders keep a watch on charts, trendlines, indicators, momentums, and candlesticks to identify price movements. Based on the technical analysis interpretations, price actions traders make buy and sell decisions.
Set Forex trading rules:
Rules are the key elements of the Forex plan. Trading involves the risk of losing money, and the rule is the tool that minimises the risk. So, in this step, a trader needs to set rules to control negative outcomes.
These rules can be related to profit expectations, risk management criteria, leverage usage, maximum drawdown, trade numbers, and other factors. One thing to remember here is that rule setting is not enough; you need to stick with them.
Backtest your trading strategy
Once you have formulated your strategy, it’s time to test it. No matter how much time and effort you have invested in creating a strategy, it is useless if it does not work. To identify the effectiveness of the strategy, you can backtest it.
Numerous backtesting software are available online to test the strategy. You can use them, identify the strengths and weaknesses and make the necessary changes. Also, you can go for demo trading. Place the first few trades on the demo account using a strategy. If the results are positive, start trading, and if not, customize it.
Select Market Analysis tools:
You may have heard about three types of analysis: Technical, fundamental and sentimental. In this step, you need to determine which type of analysis you are going to use with tools.
At this stage, selection is crucial. As there are ends number of tools to analyze the market, using multiple tools makes the analysis process complex. So, you need to be specific and choose an analysis method that fits your strategy and three to four tools. Short-term traders can focus on technical analysis more, while long-term traders can give more importance to fundamental analysis.
Bottom Line
The development of the best forex trading strategy requires the best approach. Strategy is the foundation of a trading journey. The more time and effort you put into its formulation, the stronger it will become. Also, your work does not end with strategy formulation; you need to continuously analyze and update the results.
Market Investopedia is a leading platform that helps traders deal in the diverse financial market. If you are experiencing trouble in strategy formulation, seek our experienced team’s help or explore more content.