Trading Strategy: In any endeavor, while there are beaten paths that others have gone down before, you can always make your own way and add your own taste to the equation. Similarly, while there are countless forex trading strategies already out there for traders to choose from, you can still create your own strategy that fits your own unique circumstances and needs.
Creating your own trading strategy is really advantageous since it is precisely designed and developed to be compatible with your situation and trading condition.
So if you are interested in creating your own forex trading strategy, read this article as we will present you with the steps that you can take to do so.
Step by Step Guide on Creating a Forex Trading Strategy
As it was discussed in the intro, in this guide we are going to present you with easy steps to follow in order to make your own forex trading strategy. But before we begin, you need to know that developing a trading strategy can involve many different steps. It might even involve coding and programming if you are using platforms such as TradingView where you are able to use their own proprietary editing and coding language to write a strategy or indicator. But as a whole, the following steps can be considered as the most important steps in the development of a trading strategy.
Specify the Timeframe of Trading
To begin with, you will need to specify the timeframe of trading. This means you need to define exactly how long you want to keep your positions open or in other words what time window you intend to consider for your trades.
The timeframe of trading can be anything from even a couple of minutes or seconds all the way to many months. But what is the importance of specifying the timeframe as the first stage? Well, it is the timeframe of your trade that defines the overall trading style. And on the other hand, it is the trading style that will ultimately define your trading strategy.
For example, we have trading styles such as scalping, day trading, swing trading, position trading. And with all of these styles the time frame gets larger and larger. So with scalp trading you have positions that are kept open for only minutes or even seconds. But in the case of position trading, you have positions that are kept for much longer time periods, such as weeks or most likely months.
Each timeframe and its relevant trading style will require a certain degree of expertise on the part of the trader. So choose this first step wisely.
Calculate Your Trading Capital and Your Risk Tolerance
After you have determined the timeframe of your trades, it is time to specify the most important thing – money.
With respect to money and your trading assets, you need to define two things. First of all, you need to calculate your starting capital, which is also known as your trading capital or your initial equity.
For a really low trading equity, shorter time frames might be more optimal since they can be a good way to accumulate profits and increase the capital faster. On the other hand for higher trading capitals longer term strategies might pay off better since they also offer better protection and more room for control to the trader.
The second factor to be defined with respect to money is the risk tolerance of your trading strategy. You need to ask yourself this question, how much money can you lose and still be able to continue trading in the forex market?
It really depends on your own capital. For someone it might be 10% only and for someone it might be 70% and they would still be able to deposit more money and keep on trading.
You should read: What is behavioral finance and how can traders’ behavior be analyzed?
Find Relevant Technical/Fundamental Indicators
So far the rough sketch of your new trading strategy can be seen. Because you have defined foundational aspects of your strategy, including the timeframe, the overall trading style, trading capital, and your risk tolerance, among others.
Now it is time to pick the actual tools of analysis which allow you to find out when you should enter a position, or open a new position, and when you need to pull out of one, or exit a position.
While there are literally hundreds and hundreds of various different indicators, there are two general approaches you need to keep in mind.
- first of all, when your trading style has a shorter time frame, it is clearly the case that it would be more reliant on technical analysis tools and indicators. This is because you need to depend on the patterns that have already occurred in the market in order to be able to make somewhat reliable and accurate predictions about the very near future of the market. In this way you are able to open and close positions in a small time frame.
- Secondly, it can be considered as yet another general approach to analysis that trading styles with a longer timeframe rely more heavily on fundamental analysis. This is because fundamental analysis allows traders to use large scale economic factors in order to predict the overarching trajectory of the economy. And so this type of analysis is more fitting with a trading approach that sets as its timeframe goal many months in the future.
After you have picked the overall analysis route, it is time to define the exact indicators you want to use.
You should read: Trading Mindset; How to Have a Trader’s Mind
Conclusion
As a professional trader, you have the chance to develop and create your own trading strategy. The advantage with that would be a higher degree of compatibility with your own unique conditions and circumstances of trading – i.e. your goals in trading. You can develop a unique trading strategy that is specifically designed to reach you to your trading goals. In this article we showed you the exact stages involved in making a forex trading strategy.
