The Forex market is a place full of possibilities, as there are countless opportunities that one can tap into by becoming a trader. Your chances of success in forex trading are directly related to your knowledge and skill level. All beginners see the possibility for success and opportunities for profit while entering the currency market. But you also need to be mindful of the risks and potential losses. You must remain logical while making any decision, as giving into your urges and emotions will never end well in the volatile market. Thus, you need a sound strategy and risk management plan to turn the possibilities into reality. But creating a strategy from scratch is not that easy for a newbie.
But this beginner’s guide can make the process easier as you will get to know all the aspects that require your attention for building a profitable forex trading strategy.
- Choose Your Forex Broker and Trading Platform
Not many people pay attention to the forex broker and the trading platform while devising their strategy. But the broker and platform that you trade with have a big role to play in the trading process, and you need to ensure that the trading conditions being offered and the platform technology will complement the strategy because each broker gives you a different trading environment, which also impacts the overall trading experience. Not all brokers will support a specific trading style in the same way, and the same applies to trading platforms.
If you are into scalping, you must choose a broker offering tight spreads and fast execution and those who are into automated trading need to make sure the broker allows EA usage. I suggest you try their demo account first, and you will be able to tailor your strategy to make it work well on the selected platform or try a different platform if it fails to fit your trading plan. You need to look for platforms that provide all simple to advanced trading tools that can help you execute your strategy with perfection.
The regulatory status of the broker should also be checked, as you will need a good amount of security and transparency while trading on the decentralised market. There are incidents of newbies being exploited by scam brokers, and you need to be cautious during the selection process. Choosing a regulated and trusted broker would be wise as the regulatory oversight gives you a sense of safety.
- Setting Your Trading Goals
The next step in building a profitable strategy is setting your trading goals. Your goals and targets as a trader need to be clear and precise. Vague goals without a definite purpose will lead you nowhere in the fast-moving forex market. The complexity and risk will always be there, but you can simplify things by setting personal goals based on your own preferences and requirements. The best approach for a beginner is starting with long-term goals and breaking them into time-bound targets. But these targets need to be realistic and attainable.
Many times, we see new traders stepping into the forex world with sky-high expectations and unrealistic goals, which are far from achievable in the initial phase. While setting the goals, you should also consider the means or methods for achieving them. Otherwise, you will be disappointed and lose your sense of direction later on. The goals you set as a trader will be your destination in the trading journey, and your strategy will be the route for safely reaching this destination. The map or strategy needs to be clear enough, or you will surely get confused and stressed, affecting your trading performance.
When you plan your strategy, you need to pay attention to the details such as the techniques you will use, the time frame chosen, the method of analysis, the type of trade setups that you prefer, how many pips you target to earn from a trade or it can also be daily and weekly targets. Beginners can use trading tools such as the pip calculator to calculate the pip value in their account’s base currency, the profit calculator to calculate the profits in base currency and so on. This way, you can better plan your trades and assess the risks and potential rewards.
- Deciding Your Methodology and Sticking to It
The next step for building a profitable forex strategy is deciding your trading methodology. Your methodology is the backbone of your trading system and sets definite boundaries within which a trade must be taken and executed. It is a set of rules governing your trading decision and specific methods you will follow to arrive at a decision. There are 2 types of methodologies that you can follow for navigating the forex market. The first one is technical, where all your decisions are based on the patterns formed on price charts. The second one is fundamental, where you keep an eye on the economic news and events that influence currency prices.
Many traders adopt a combined methodology by considering fundamental and technical aspects while making trading decisions. However, those who follow short-term strategies like scalping and day trading can devise their strategy around pure technical analysis alone because fundamentals do not have much impact on the shorter timeframe. But you still need to keep an eye on forex-related news and key economic data releases. Because they impact market sentiments, you will often see the pairs becoming more volatile after a relevant news release.
Make sure you stick to the chosen methodology without any deviation, but this does not mean being rigid. The forex market is subject to abrupt shifts and unpredictable changes. So, you must be prepared to deal with it and adapt to the changing situations as and when needed. Sometimes, you may also have to revise your methodology, but you need to be cautious and make informed decisions.
- Define Your Entry and Exit Points
The result of any trade depends upon how you enter and exit a position. The difference between your opening and closing price can be profits or losses, depending on whether the market moves in your favour. A trade’s profit potential and risk level greatly depend on the entry and exit points along with the amount of trading capital used. For the right entry and exit points, you can take the help of the support and resistance levels, and for the right trading capital, you can take the help of a margin calculator, which helps you calculate the margin required to place a certain trade with your risks fully managed. So, you need to pay a lot of attention to the same while devising your strategy. You need to enter a trade at the right time and price, but you should also have an exit plan to make the trade work.
When it comes to exits, the best approach will be to make it automated with a properly placed Stop Loss and Take Profit. It removes the need to manually exit the trade, and you can let it run freely. A stop loss is like a safety net that protects you from excess losses as you will be out of the trade once it reaches the specified price, realising the maximum amount of loss that you can afford to take. Take profit is used to exit the trades at a profit and to avoid losing your profits if there is a trend reversal.
Those who are confused about setting optimal entry and exit points can make use of a profit calculator as it calculates the result of a trade-in advance, and you can decide the TP and SL based on the results. Such automated tools save a lot of time and effort while also eliminating the chances of manual errors in calculation.
- Calculate the Expectancy of Your Strategy
The last but most important step in devising a profitable strategy is expectancy calculation. Expectancy is actually a criterion to predict the success rate of a strategy based on past results. It actually tells you if the strategy is working well or not. You can do this by reviewing the demo account trading history or referring to the results you got while backtesting where you place trades with historical market data.
The result of the expectancy calculation will be a positive or negative value, which indicates the expected outcome of each trade on average. A positive expectancy means your strategy has the potential to be profitable, while a negative expectancy suggests that the strategy may result in losses over time.
Keep in mind that expectancy is just one metric, and it’s essential to consider other factors like risk management, drawdowns, and the overall performance of your strategy in a broader context. Additionally, past performance does not guarantee future results, so it’s essential to keep monitoring your strategy performance and modify it as market conditions change.
So, these are the 5 key steps for building a profitable forex strategy. One thing to remember while going live with any strategy is that no strategy is 100% perfect, and it will be trial and error. It would be better to play it safe until you become confident with your strategy.