This article should have found its place as a lesson in the basic forex course but I realized the search for the best trading strategy is not restricted to beginners alone.
Point out a trader who is not looking for a best forex trading strategy and I will point out a white elephant. The raw truth is that, looking for the best forex trading strategy without taking yourself into consideration is a chasing after the wind. Google is tired of such a search term already; the searchers do not know that they are asking a wrong question.
The replies to wrong questions are either no answers or wrong answers. So it is likely that you are going to drain your trading account balance with that one superb forex trading strategy you just uncovered.
What to know when building a suitable trading strategy.
So you have studied the RSI, Bollinger Bands, Stochastics, Moving averages and all the other indicators. Or you have judiciously read about Candlesticks, Support and Resistance and all the ins and outs of Price Action. After these lessons you think you are good to go and you are going to make it big because you have all this knowledge in your trading arsenal.
However, you are more likely to fail than to succeed because you omitted just one thing, “YOUR SELF”. Knowing who you are can simplify your journey in trading.
In order to be a successful trader, you need to build a strategy. Of course, building a strategy can take months if not years; but you are covered, there are a thousand and one strategies out there. If you are like me and you lack the patience to build one, find one and tweak it to favor your personality.
To build or to tweak demands time and you really need to be committed to do that. Faintly committed people leave this industry earlier than expected, so utmost commitment is a must.
When hunting for a strategy you need to first of all familiarize yourself with the type of traders that are in existence before proceeding to make personal rules. All of the examples I will give concerning trading rules will be a bias towards price action. Mostly because it is what I use and I have forgotten almost all of the basic indicator trading rules.
Whilst fishing for the best forex trading strategy, you first need to know what scalping, day trading, swing trading and position trading mean. After you know what all of those terms signify, you choose one and stick with it before progressing. Now, what do all of these mean?
This is for traders who love rough action and fast paced trading.
The personality of a scalper: A scalper must be emotionally tough and alert. This kind of trader must have more than enough free time on his hands; even as it demands sitting in front of the charts as long as desired. He quickly enters and exits trades and the duration does not go beyond an hour most of the time. Some trades even last for seconds.
The timeframe for scalping is anything below the 30-minute timeframe. The major pairs are the only favorable currency pairs for scalping because of tight spreads. When you enter a trade, you pay for spread before realizing profits so it is only decent to trade pairs with small spreads when scalping.
No overnight risks such as gaps that go against a position.
Not paying for swap.
Fast way of making and keeping profits.
Not recommended for self-studying beginners.
Fast way of losing capital and accumulated profits.
It can be psychologically draining.
This kind of trader loves action as well but just not as fast as the above.
The personality of a day trader: The day trader does not have the whole day to himself but he can clearly spend some 30 minutes at the beginning of each trading day to analyze his charts. Some day traders also analyze the charts and enter trades within the day; as and when necessary.
The duration of a day trader’s trade never goes beyond a day. He is afraid of swaps and overnight risks such as gaps. The timeframe for day trading is 1-hour and seldom 4-hour and 30 minutes.
There is a thin line between day trading and scalping.
Slightly recommended for self-studying beginners.
No swaps and overnight risks.
Not benefiting from full moves.
This is boring trading; I highly recommend it even if you have enough time.
The personality of a swing trader: Patience is the mark of a swing trader. He must accept that this style of trading is slow and boring; it requires doing nothing for most of the time. This style also needs utmost discipline. It is the trading style recommended for people with a busy schedule.
The timeframe for swing trading is the 4-hour & Daily. The duration of a swing trade goes beyond a day to weeks; seldom exceeding a month.
It must be well noted that less busy people who lack discipline and are attracted to swing trading must find something to keep them busy. This is to prevent fiddling with trades which could have ended up in profit before.
Highly recommended for beginners. (the slow paced style goes easy on the psychology)
Benefiting from full market moves.
Overnight risks and negative swaps.
Running trades frequently alternating between profit and loss.
If swing trading is boring, this one is super boring. A huge capital is required to ever consider position trading. The huge capital is needed to sail through market fluctuations in the form of pullbacks or retracements. It is no wonder why famous millionaire traders favor this style the most.
Position traders hold trades for weeks, months and even years as and when needed. Analysis for position trading is done mostly in the weekly and monthly timeframes. To a position trader, the smaller timeframe is pure noise!
There is a only slight difference between position trading and swing trading. Position trading is extreme swing trading.
Building the best forex trading strategy.
A duck can walk, run, fly and swim; a horse cannot fly and swim. Which of these two animals is more important to man? It is clearly the one which is relevant for its running prowess. It is mostly advisable to be decisive on choosing to be one type of trader. However, some traders alternate between two types but trying to be a “duck” of all trades is setting yourself up for disaster.
Now, after deciding the kind of trader you would want to be, the next step is setting up rules to guard you against yourself. Yes, you against yourself because you can be your biggest trading demon. So even though a trading strategy has rules for buy or sell signals, you need additional rules.
Using price action as an instance.
Price action is broad, it entails candlesticks, support and resistance, chart patterns, breakouts, reversals, pullbacks and whatever I have left out. Some people purport that price action doesn’t work because it is in the public domain.
This idea stems out from a faulty theory that when many traders discover and use a winning system, the system begins to fail. If that were true, supply and demand would not move the market any more.
However, price action fails because traders try to implement all the concepts in it at the same time instead of focusing on one concept at a time. This is where the personal rules come in. Personal rules are needed for every trading strategy you want to adopt.
The following are rules that can help you build the best forex trading strategy.
So in order to find your best forex trading strategy you need to develop your rules like this;
- I will (scalp /day/swing /position) trade the markets because I am a………………
- I am going to trade based on supply and demand/ I am going to trade based on indicators.
With price action;
- I will just trade with candlesticks based on support and resistance.
- My trades will be based only on chart patterns.
- I will trade reversals only / break outs only.
- I will take no more than 5 trades per month.
- Keeping more than 3 trades running simultaneously on my account is a no no for me.
- I will focus only on the major pairs/ I will just focus on one pair (this works for some traders).
- I am not going to risk more than __% of my account on a single trade.
So even as you focus and stick to personal rules like these with discipline, you will not be very far from discovering your best trading strategy if you haven’t found it yet.
Finally, I hope this lesson helps in making you the successful trader you’ve always wanted to be! Your questions and inputs are welcome in the comment section.