Sooner or later every trader comes to the understanding that he needs his own trading system. It is possible to use others’ forex strategies, but they should also be adjusted and suit to you: to your own trading style. In this lesson we will talk about the necessary components of a trading strategy (TS), why a trader needs it, and what questions should be asked when developing a system.
What is a trading strategy?
A trading strategy is a set of rules allowing to systematize trading, to give a trader a clear notion of when it is better to enter the trade, when it is better to exit it and when it is better to abstain from trading. Also, the system specifies the time and time frame for trading, currency pairs to use and the lot to trade. TS helps to switch off emotions and protect against their negative impact on trading.
Why create your own TS?
There are many ready-made trading systems on the market, both simple and quite complex and understandable only to professionals. Beginners, as a rule, start trading using ready-made TS, and not the most complex one. However, with time almost each of them understands that trading is really effective only with a strategy, developed personally, based on one's own experience and preferences.
Not always the TS is developed from scratch. Often (especially if it is the trader's first experience in creation of a strategy) a ready-made system is taken and some changes are made to it: some indicators are added, parameters of already installed instruments are changed, etc.
Regardless of whether the trader creates a strategy from scratch or modifies a ready-made one, it must be suitable for his/her character: scalping is unlikely to suit a thoughtful and rational person, while long-term trading is not suitable for other people due to their nature.
Essential components of a trading strategy
Each strategy must include certain points, which together will ensure the stability of trading:
• Logical reasoning. This is the basic idea on which the trading strategy is built. It is the foundation on which all other components are based;
• Currency pairs;
• Timeframe and time of trade.
• Rules of entry
• Rules of exit. How stop-loss and take-profit are set;
• Trading lot volume and risk limitation.
• If all of these parameters are taken into consideration, you can start testing the strategy on a history or demo account.
Timeframe
The timeframe choice depends on the time the trader is ready to devote to trading. While on the daily charts, the formation of a candle takes a whole day, and therefore only a few minutes a day will be required to assess the situation and make a decision, on M1, everything changes every minute, and the trader will need to be constantly present in the trading terminal. The smaller is the timeframe, the more signals will be received and the bigger is the potential profit. However, not everyone has the opportunity to devote all the day to trading, and for working people the daily chart will be the best option.
It is also believed that technical analysis works better on the daily charts than on the hourly and especially on the minute charts, so D1 will be the best choice for beginners. Most traders use D1-M15 charts, the five-minute and 1-minute charts are too unpredictable and only highly specialized professionals are able to make stable profits on them.
Currency pairs
In most cases it is optimal to choose EURUSD or another currency pair as a trading asset. In the trading terminal MetaTrader 4, you can select to display only the desired assets by right-clicking on the "Market Watch" field and selecting "Symbol Set"-"Forex".
If the idea is focused on a particular asset (for example, gold or the S&P 500 Index), the choice is even more obvious.
Choice of tools for analysis
Once the trading idea is clear, and timeframe and currency pairs for trading are selected, it is necessary to determine the tools for analysis and determination of entry/exit points. The main rule here is not to go overboard. As a rule, simple systems prove to be the most efficient in real trading. In the same TS, which are overloaded with indicators, various constructions and other signals, these tools often contradict each other, only confusing the trader and provoking him to make mistakes.
If the strategy is an indicator one, as a rule, it must contain from 2 to 5 instruments. The minimum required is one trend indicator which determines the trade opening direction and one overbought/oversold indicator (oscillator) which helps to avoid false entries.
If the strategy is focused on candlestick analysis, then the trader needs to be well-versed in Price Action patterns. If it is planned to use graphical analysis - a good knowledge of shapes (triangles, flags and pennants, double tops, etc.) is required.
It is also necessary to decide whether news and important economic events will be taken into account (if the TS itself is built on the analysis). If the system is based on fundamental analysis, you need to decide what kind of news to trade. News can be tracked with the economic calendar and special indicators.
Rules of entry and exit
First of all, you need to decide on what type of orders you will enter the market: pending or market orders. Pending orders, on the one hand, help to avoid false entries, but, on the other hand, take away a part of the profit due to the fact that the price passes a certain distance before the moment when the order is activated.
It is also necessary to decide in advance on what principle take profit and stop loss will be set. In some TC exposition of take profit is not necessary (for example, when using the trailing stop), but stop loss must always be exposed. Stop Loss is primarily a risk limiter, and protects the trader's capital from force majeure, such as from Internet or power outage.
Once all of the rules are defined, they must be necessarily recorded on paper or in a separate file - that is, a checklist is needed. Then you can begin testing the TC.
Testing on the history and on a demo account
First of all, the strategy should be tested on the history. It will give statistics and primary understanding of its profitability. However historical data loses its relevance over time, so the strategy behavior on the real market will give more useful information.
Before entering the real account, the TS should be tested on a demo account. The time of testing depends on the time frame: when trading on H1-H4 or, moreover, D1, it will take at least several months to determine the profitability, while the scalping strategy effectiveness can be determined in a week.
Conclusion
Every trader should have a trading system. Sometimes beginners think they can trade based solely on their intuition, especially if this delusion is confirmed by a couple of successful trades. Moreover, there are cases when experienced traders have opened deals based on intuition or against the rules of the system and earned huge money.
However, the key factor in this exception is experience. A professional trader is able to understand when intuition can be activated and when it is necessary to work strictly according to the system. As a rule, intuition is used very seldom, and rather not to enter the market by a signal than to open a trade against the rules and get a loss.
In any case, only professionals with years or even dozens of years of experience can afford such actions without serious risk for capital. There is only one correct way for beginners who are determined to learn how to earn on Forex - the way of systematic trading.
Besides, there is one point that is very often missed in their trading, even by experienced traders. This is the Logical Rationale for the trading strategy.
What is a trading strategy?
A trading strategy is a set of rules allowing to systematize trading, to give a trader a clear notion of when it is better to enter the trade, when it is better to exit it and when it is better to abstain from trading. Also, the system specifies the time and time frame for trading, currency pairs to use and the lot to trade. TS helps to switch off emotions and protect against their negative impact on trading.
Why create your own TS?
There are many ready-made trading systems on the market, both simple and quite complex and understandable only to professionals. Beginners, as a rule, start trading using ready-made TS, and not the most complex one. However, with time almost each of them understands that trading is really effective only with a strategy, developed personally, based on one's own experience and preferences.
Not always the TS is developed from scratch. Often (especially if it is the trader's first experience in creation of a strategy) a ready-made system is taken and some changes are made to it: some indicators are added, parameters of already installed instruments are changed, etc.
Regardless of whether the trader creates a strategy from scratch or modifies a ready-made one, it must be suitable for his/her character: scalping is unlikely to suit a thoughtful and rational person, while long-term trading is not suitable for other people due to their nature.
Essential components of a trading strategy
Each strategy must include certain points, which together will ensure the stability of trading:
• Logical reasoning. This is the basic idea on which the trading strategy is built. It is the foundation on which all other components are based;
• Currency pairs;
• Timeframe and time of trade.
• Rules of entry
• Rules of exit. How stop-loss and take-profit are set;
• Trading lot volume and risk limitation.
• If all of these parameters are taken into consideration, you can start testing the strategy on a history or demo account.
Timeframe
The timeframe choice depends on the time the trader is ready to devote to trading. While on the daily charts, the formation of a candle takes a whole day, and therefore only a few minutes a day will be required to assess the situation and make a decision, on M1, everything changes every minute, and the trader will need to be constantly present in the trading terminal. The smaller is the timeframe, the more signals will be received and the bigger is the potential profit. However, not everyone has the opportunity to devote all the day to trading, and for working people the daily chart will be the best option.
It is also believed that technical analysis works better on the daily charts than on the hourly and especially on the minute charts, so D1 will be the best choice for beginners. Most traders use D1-M15 charts, the five-minute and 1-minute charts are too unpredictable and only highly specialized professionals are able to make stable profits on them.
Currency pairs
In most cases it is optimal to choose EURUSD or another currency pair as a trading asset. In the trading terminal MetaTrader 4, you can select to display only the desired assets by right-clicking on the "Market Watch" field and selecting "Symbol Set"-"Forex".
If the idea is focused on a particular asset (for example, gold or the S&P 500 Index), the choice is even more obvious.
Choice of tools for analysis
Once the trading idea is clear, and timeframe and currency pairs for trading are selected, it is necessary to determine the tools for analysis and determination of entry/exit points. The main rule here is not to go overboard. As a rule, simple systems prove to be the most efficient in real trading. In the same TS, which are overloaded with indicators, various constructions and other signals, these tools often contradict each other, only confusing the trader and provoking him to make mistakes.
If the strategy is an indicator one, as a rule, it must contain from 2 to 5 instruments. The minimum required is one trend indicator which determines the trade opening direction and one overbought/oversold indicator (oscillator) which helps to avoid false entries.
If the strategy is focused on candlestick analysis, then the trader needs to be well-versed in Price Action patterns. If it is planned to use graphical analysis - a good knowledge of shapes (triangles, flags and pennants, double tops, etc.) is required.
It is also necessary to decide whether news and important economic events will be taken into account (if the TS itself is built on the analysis). If the system is based on fundamental analysis, you need to decide what kind of news to trade. News can be tracked with the economic calendar and special indicators.
Rules of entry and exit
First of all, you need to decide on what type of orders you will enter the market: pending or market orders. Pending orders, on the one hand, help to avoid false entries, but, on the other hand, take away a part of the profit due to the fact that the price passes a certain distance before the moment when the order is activated.
It is also necessary to decide in advance on what principle take profit and stop loss will be set. In some TC exposition of take profit is not necessary (for example, when using the trailing stop), but stop loss must always be exposed. Stop Loss is primarily a risk limiter, and protects the trader's capital from force majeure, such as from Internet or power outage.
Once all of the rules are defined, they must be necessarily recorded on paper or in a separate file - that is, a checklist is needed. Then you can begin testing the TC.
Testing on the history and on a demo account
First of all, the strategy should be tested on the history. It will give statistics and primary understanding of its profitability. However historical data loses its relevance over time, so the strategy behavior on the real market will give more useful information.
Before entering the real account, the TS should be tested on a demo account. The time of testing depends on the time frame: when trading on H1-H4 or, moreover, D1, it will take at least several months to determine the profitability, while the scalping strategy effectiveness can be determined in a week.
Conclusion
Every trader should have a trading system. Sometimes beginners think they can trade based solely on their intuition, especially if this delusion is confirmed by a couple of successful trades. Moreover, there are cases when experienced traders have opened deals based on intuition or against the rules of the system and earned huge money.
However, the key factor in this exception is experience. A professional trader is able to understand when intuition can be activated and when it is necessary to work strictly according to the system. As a rule, intuition is used very seldom, and rather not to enter the market by a signal than to open a trade against the rules and get a loss.
In any case, only professionals with years or even dozens of years of experience can afford such actions without serious risk for capital. There is only one correct way for beginners who are determined to learn how to earn on Forex - the way of systematic trading.
Besides, there is one point that is very often missed in their trading, even by experienced traders. This is the Logical Rationale for the trading strategy.
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bit.ly/3spSQqC
🔻FREE Telegram channel🔻
t.me/DeGRAMChannel
🔻Contact for Paid SIGNALS🔻
t.me/DeGRAMForex