Developing a Forex Trading Strategy

How Do I Create My Own Forex Strategy?

How to develop a Forex strategy? Is a question that every newbie trader might have. Obviously, you want a successful trading strategy, the one that makes you a consistent profit.

Before going forward, you need to understand that there is no Holy Grail system or a special formula that’s going to get you some Forex profits.

The way you build up a Forex strategy is through hard work and multiple layers, it’s kind of like building a house. First of all, you need to dig the foundation, then you need to build the walls, then you need to put the roof on. In the same way, you’re going to develop your own forex trading strategy in a layering process. Without further ado, you’re going to learn the pillars of building a Forex trading strategy.

Type of Trader

What type of trader do you want to be, what forex session are you going to trade, what pairs, and what instruments are you going to trade? these are some of the things that make up the type of trader you are. Determining what type of trader you are is always correlated with your personality – you are the only one that can answer those questions.  Whatever your trading style, you need to make sure you have a broker that meets those requirements.

Set your Time Frame

After you’ve determined what type of trader you are, you can start to determine the optimal time frame you’re going to trade for your own strategy. Will you trade the 5-minute charts? The one-hour charts? Or are you more comfortable trading daily or weekly charts? The time frame is a very important and significant thing that you need to consider because it’s the foundation for your entry and exit rules. Try out different time frames and find your comfort zone.

How Much Should I Risk? (Risk Management)

A successful forex trading strategy is defined by your risk management strategy. Professional traders will only risk a predefined maximum amount of the account balance on each trade. Risk management is all about knowing your assets, knowing your limitations and having a positive risk/reward ratio. Last but not least your top priority must always be capital preservation. The profits take care of themselves.

Backtesting

Backtest your strategy. The only way to build confidence so you can smoothly execute your forex trading strategy is by backtesting your strategy this way you’ll know how well your strategy is performing. By this we mean test your strategy using historical data, and see how you would have done in the past with your chosen trading strategy. If it worked in the past it has a good chance of working well in the future. With confidence in your strategy, you can make informed trading decisions and remove subjectivity from your trading.

The Bottom Line

Use a trading journal. Markets are constantly changing and there are good chances that over time your trading strategy might stop working. You will need to adapt to the new trading environment. By using a trading journal, where you keep track of all the executed trades you can considerably improve your chances of discovering new exploitable patterns. At the same time, it will make you a better trader.