It is actually quite easy to develop a basic trading strategy, but as you might have already discovered, it is a lot harder to come up with a trading strategy that is consistently profitable over time.
So in this article I want to share with you 8 simple rules that you should follow when creating a forex trading strategy because this will hopefully help you to become a successful trader.
Use Strict Money Management Rules
Money management is absolutely critical if you want to stay in the game and make some serious gains on a regular basis. It is impossible to be correct every time you trade, which is why you should ensure that any strategy that you come up with uses strict stop losses to minimize the harmful effect of any losing trades, and also maximizes the gains from your winning trades.
So if you were to use a stop loss of 20 points per trade, you might want to set your target profit at 40 points or more, or consider closing half the position at 40 points profit, and letting the other half run for as long as possible, moving your stop loss to break-even.
With either of these approaches, you will find that you don’t necessarily need a high win ratio in order to make money.
Avoid Using the 1 and 5-Minute Charts
There are some day traders who are able to successfully make money trading the short-term charts, such as the 1 and 5-minute charts, for example, but this is exceptionally hard to do on a consistent basis because the short-term price moves are often fairly random and unpredictable, and the spreads really eat into your profits when you are banking as little as 4-10 points per trade.
It is much better to increase your time frame and create a strategy that enables you to trade off the 1-hour, 4-hour or daily charts, for example, because the price moves tend to be more predictable when using technical analysis, and you don’t have as much noise to contend with. Plus you can attempt to make larger gains, which negates the effect of the spreads.
Use the Long Term Charts to Identify the Trend
Following on from my last point, it is always a good idea to keep an eye on the underlying trend on the long-term charts to place the odds firmly in your favour.
If you were trading off the 1-hour chart, for instance, you might want to look at the 4-hour chart to identify the trend, before going back to the 1-hour to pinpoint your entry point, ensuring that you are always trading in the same direction as this trend using your chosen strategy.
Pay Attention to Support and Resistance Levels
When devising a trading strategy, it is always a good idea to be aware of where the key support and resistance levels are, and maybe consider incorporating them into your strategy.
The main areas of support and resistance tend to be fibonacci levels, round numbers and established trendlines, and so because the price will often reverse at these levels, these levels are good places to set your profit targets and stop losses, and good places to enter new positions.
Focus on Breakout Trading
A lot of traders try to call the tops and bottoms of markets and profit from any reversals, but this is very hard to do in reality, even if you are using key levels of support and resistance as guidance and a few different indicators.
Some of the most profitable strategies focus purely on trading price breakouts from narrow trading ranges because these trades have a high probability of success and can often yield some big profits, so this is something to bear in mind if you are having trouble creating a winning strategy.
Avoid Trading Exotic Pairs
When you are attempting to develop a trading system, you should always stick to the major forex pairs because these have the smallest spreads.
If you start applying your new strategy to some of the more exotic currency pairs, you are only making it harder for yourself because the larger spreads will really eat into your profits.
Don’t Use Too Many Indicators
You should also try to keep things simple when developing a trading strategy. Many people naturally assume that if they use many different indicators, the odds of success are a lot higher if they are all in alignment, but that’s not necessarily the case.
Indeed if you use too many indicators, you may find that you have limited set-ups because you are always waiting for the perfect set-up when all of your system’s indicators are telling you to go long or go short, but the reality is that this rarely happens. There will always be conflicting signals that keep you out of a potential trade.
Be Flexible and Adaptable
The final rule is very important because you have to be flexible and adaptable when trading forex if you are serious about making a full-time living from this profession.
Even if you think you have developed a consistently profitable trading strategy, you have to be ready to adjust this strategy if market conditions change because you will generally find that no strategies remain profitable forever.
We all know that forex trading is a tough industry, and the majority of traders will ultimately fail, but if you can follow these 8 guidelines, you should hopefully find it a lot easier to come up with your own profitable trading strategy.
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