The first step towards success in the forex market is systematic learning and preparation. However, one key component that determines your performance as a forex trader is the viability of your strategy or trading system. Devising a sound forex strategy is not that easy and it can be a long process with several trial and error. Having concrete goals and a well-defined trading plan is important to get a sense of direction in the dynamic currency market with constant price fluctuations.
In this article, I will be sharing the top 10 tips that can help you in devising a sound forex strategy and improve your chances of success.
- Trade like you are doing business
The first tip for building a profitable trading system or strategy is to have a professional and serious approach towards trading. You need to trade like you are doing business with a feasible plan and a lot of preparation before taking action to execute that plan. You need to devote your time and energy to learning about the forex market which is a very unique place in every sense making it attractive for millions of traders due to its round-the-clock nature, high liquidity and flexibility. It does take some time to learn the basics about the fundamentals as well as the technicalities of trading.
But having this basic know-how is important to dive in deep and dig for more information that is needed for navigating the volatile market like a pro. You need to study the characteristics of different currency pairs to find the best ones for trading based on your time zone and the active market sessions that you can take part in. It is very much like accumulating the resources for running a business. In trading, you will be relying on technology along with your own knowledge and skills for the most part. Hence, you need to come up with a plan of action and only start after finding the right set of tools.
This includes trading software, charting software, finding suitable indicators for technical analysis and more. You should also consider the forex broker you will be trading with as the trading conditions and tools they provide will also impact your trading experience and performance. Tools like profit calculators make it easier for you to estimate the potential results of a trade and set realistic targets based on that. You need to calculate the capital requirements, trading cost and more just like how you will plan for the funding in advance for the smooth running of a business.
- Assess your skills
The 2nd tip to follow for building a sound trading strategy is assessing your own skills. Executing your trading plan or strategy will be way easier when it’s well-aligned with your knowledge and skill level as a trader. For instance, a beginner should always start with a simple strategy and avoid complicated approaches at first as they can easily get confused while they are new to the market. You need to keep it simple and backtest your strategy to see how well it can work in a real market.
Later on, you should also make use of a demo account for testing your strategy in real-time market conditions while also evaluating your own performance as a trader. You can take your own time to practise and polish your skills on a demo account without being bombarded with losses that can happen due to the mistakes that you make as a first-time trader. Demo accounts are perfect for practical learning and help you obtain the relevant skills and confidence before going live with real funds.
- Mental preparation
Trading in the always-changing forex market will not be a flowery path for a beginner and you need to be mentally prepared for the ups and downs that will happen throughout your trading journey. Being disciplined and not making wrong decisions under the influence of emotions is the most important thing for becoming successful in the long run. You should learn to manage your emotions in a way that they don’t interrupt the logical thinking and decision-making process. You should be ready to overcome the challenges and have long-term goals to withstand the test of time.
- Deciding your risk level
Trading in the forex market is a risky venture to begin with but taking calculated risks is what takes you to success as a trader. For this, you need to be aware of your risk tolerance and decide the risk level before framing your strategy. You can use tools like a margin calculator to calculate the exact margin requirements according to your trading capital to manage your risk in a better way. Even the currency pairs you choose need to be in line with your risk appetite. Major pairs are the best when you want to take minimal risk and trade with ease.
- Setting clear goals
It is impossible to build a sound strategy without setting clear goals that have to be attained by following this strategy. But your goals need to be attainable and realistic. Many traders enter the forex market with unrealistic expectations and set vague goals without giving it much thought. Such an approach will lead you nowhere in the long run and hence you need to take your time to set your trading goals before you start working on the trading plan.
- Observe the market and the factors affecting it
Many people forget to get familiar with the market as they rush into live trading once they learn the basics. This can be a costly mistake as you are not used to the fast-moving market and will get intimidated by it if you jump into trading right away. You need to keep observing the market and learn about how it changes over time by understanding the factors affecting it.
This includes economic data releases and news events which impact the currency price prices along with the market sentiments. You should take your time to study the market as only then you will be able to make profits by entering trades when the market is about to move in your favour.
- Preparations for actual trading
Now, you can prepare for actual trading once you are satisfied with the results of both backtesting and demo account testing of your strategy. You need to customise your charts based on the timeframe you want to watch and also add relevant indicators for confirming your analysis. Don’t forget to keep an eye on the economic calendar as a sudden volatility can be expected when there are important events or news related to your currency pair. You should set alerts and be ready to enter the trade at the most favourable prices and time.
- Planning trade entry and exits
Most trades pay a lot of attention to their entry points and even place limit orders to initiate trades at a preferred price point. But they don’t give as much importance to the trade exits which is a common mistake that needs to be avoided. Your exit strategy is equally important for getting the desired results. So you need to decide the stop loss and take profit levels in advance before entering the trade. You can also use trailing stop loss if you want to remain flexible and adapt to the market when it is moving in your favour.
- Record your trades and analyse your performance
Keeping a trading journal is the best way to keep a record of your trades with all the relevant details and regularly review the same to analyse your performance. This habit will help you to keep track of all your trading activities and see your own progress by identifying and rectifying the mistakes you make in the initial phase. Such performance reviews are important to take timely action when you notice any deviation from your plan or expected results.
- Learn from other traders and their opinions about existing strategies
There are many age-old trading techniques and strategies that are still very popular within the forex trading community and you are free to try out these traditional strategies. However, you need to learn from the experience of other traders who are familiar with these strategies as you will get some valuable insights from their opinion.
In order to interact with like-minded and experienced traders, you can join forex forums or social trading communities where you get to engage in meaningful conversations and learn new things. Doing so will be useful to grow your mindset and develop a sense of belonging which also helps in minimising the stress that comes with trading.
Final words
So, these are the 10 tips that you can follow for building a solid strategy as a forex trader. All of this comes down to knowing what you want to achieve as a trader and finding the best techniques and ways to get the results. You are free to make your own rules and experiment while exploring the market in your unique way. But one thing that you should not compromise with is risk management and being disciplined surely takes you a long way.
