Developing a Trading Strategy

Manage Your Risk


Forex trading can be tough because there is very little margin for error. And for this reason, you will not be successful unless you have an effective trading strategy. Really, what it comes down to is finding something that you can be comfortable with since this will help you to stick to your plan more efficiently and make fewer human-based errors. The downfall here is that there are many different strategies for you to choose from and trial and error is often the only way that you can really figure out what works for you in real life and what does not. Here are some basic things to remember when customizing your own trading strategy.

Cost

The vast majority of Forex brokers do not charge an upfront cost per trade, but Forex trading is far from free. You will pay the broker through what’s called the spread–the difference between the bid and the ask. Your best way to reduce this cost is to find the brokers with the lowest spreads. There are some out there with a difference as little as five pips. This is an often overlooked part of developing a trading strategy, but it should be the first thing you do. By eliminating some of your operating costs you are giving yourself far more potential to make money over the long term.

Trading Effectively

Your next step should be to figure out a way to balance your risk with your rewards. The problem that you will soon find yourself facing is that the strategies that give you the most potential to profit are the riskiest. This is because of the use of leverage. When you extend your leverage out, you can multiply your earnings in a huge way, but you also will find that your losing trades lose a lot more, too.

One way to alleviate this is to institute a rigorous stop-loss point application. This will automatically end a trade for you if prices go against you even if you are away from your computer at the time. This, again, is something that everyone should be doing, but a lot of traders skip this step because they think they know better. Even if you are an advanced trader, stop-loss points will help you to reduce error on your part and streamline your trading a little bit, allowing you to focus more on other things.

Customizing

There are tons of strategies out there that have already been proven effective. But they have not yet been proven effective for you. You will want to go with something that looks effective and fits your budget, but do not be afraid to tweak the things that do not work best for you. For example, a strategy that tells you to max out your leverage and never keep trades open for more than an hour is not going to work for someone just starting out for a few reasons. For one, maxing out leverage increases your risk, and if you’re just starting out, you will lose a lot more often than an advance trader would, thus multiplying losses and nullifying wins. And keeping trades open for over an hour is sometimes necessary for beginners since their timing will not yet be perfected. Yes, you want to focus on big movement, but if you’re new, you might not know exactly when this will happen. In other words, stay away from things that do not fit your trading ability and if you’re in a system that takes this away from you, you need to make the changes necessary to maximize your potential.