Most traders in the foreign exchange (forex) market begin by trading intraday charts, which display currency price changes in five- or 15-minute intervals, or daily charts, which display price changes over a single trading day. Novice traders who attempt to execute these techniques frequently fail. This is because, in general, shorter-term systems necessitate more experience and trading skill, but rather because traders could inadvertently be wagering against a larger, more significant overall trend when trading using a short-term chart—the kind of trend that weekly charts are more likely to reveal.
Trading against the trend, on the other hand, is a surefire way to lose money.
A trading system consists of more than simply a rule or collection of rules on when to join and leave a deal. It's a thorough plan that considers six key aspects, the most significant of which is your own personality. In this post, we'll go through how to create a rule-based trading system in general.
Step 1: Examine Your Mental Strength
Be aware of who you are: When trading the markets, the first thing you should do is look in the mirror and record your own personality features. Examine your skills and limitations, then consider how you would behave if presented with an opportunity or if your position were endangered. A personal SWOT analysis is another name for this. However, do not deceive yourself. If you're not sure how you'd react, ask someone who knows you well for advice.
Match your trading style to your personality: Make sure you're acquainted with the kind of trading situations you'll encounter throughout various time frames. For example, if you've concluded that you don't enjoy going to bed with open positions in a market that trades while you sleep, you might want to explore day trading so that you may close out your holdings before going home. You must, however, be the type of person who enjoys the adrenaline rush of continually staring at a computer screen throughout the day. Do you like being glued to your computer? Are you a compulsive or addicted person? Will you get obsessed with checking your postures and terrified of missing a tick if you go to the bathroom? If you're still not sure, go back and re-evaluate your personality. You will not love what you are doing until your trading style suits your personality, and you will rapidly lose interest in trading.
Prepare yourself: Plan your deal so you can execute it. Preparation is a mental run-through of your possible trades, similar to a dress rehearsal. You are establishing the ground rules as well as your restrictions by preparing your deal ahead of time. You can be impartial and step back from the fear/greed cycle if you know what you're looking for and how you plan to react if the market does what you expect.
Maintain objectivity: Don't get emotionally invested in your deal. It makes no difference whether you are correct or incorrect. What counts, as George Soros puts it, is that "when you are right, you make more money than when you are wrong." Trading is not about ego, however it might be unnerving for most of us when we design a move, apply all of our logical skills, and then discover that the market disagrees. It's a question of conditioning yourself to realize that not every transaction will be profitable, and that you'll have to take modest losses graciously and move on to the next opportunity.
Be self-disciplined: This includes knowing when to purchase and sell. Stick to your pre-planned approach while making decisions. You may cut out of a position only to discover that it reverses and would have been lucrative if you had stayed in it. However, this is the foundation of a really harmful habit. You can always go back into a position if you don't neglect your stop losses. Cutting your losses and accepting a little loss is more reassuring than hoping that your substantial loss would be recouped when the market recovers. This is more akin to trading your ego than it is to trading the stock market.
Be patient: Patience is a virtue when it regards to trading Learn to wait until the market reaches the point where you've drawn your line in the sand. What have you lost if it doesn't make it to your entrance point? There will always be another day when you can earn a profit.
Have reasonable expectations: This implies you won't lose sight of reality and expect to transform $1,000 into $1 million in ten deals. What is a reasonable expectation? Consider what some of the world's finest fund managers are capable of achieving—again, anything from 20% to 50% every year. Most of them accomplish far less and are highly compensated for it. Expect a reasonable rate of return when you begin trading; if you can consistently achieve a growth rate of 20% or more each year, you will be able to surpass many professional fund managers.
Step 2: Define Your Mission and Objectives
Any path will get you where you want to go in life if you wouldn't know where you're going. In terms of investment, this means sitting down with your calculator to figure out what type of returns you'll need to meet your financial objectives. The next step is to figure out how much you need to make in a deal and how often you'll have to trade to meet your objectives. Don't forget to account for deals that didn't work out. This may lead you to realize that your trading strategy is at odds with your objectives. As a result, it's vital to match your methods to your objectives. If you trade in conventional 100,000 lot sizes, a pip is worth roughly $10 on average. So, how many pips do you think you'll make each trade? Calculate your winnings by adding up the winners and losers from your past 20 trades. This may be used to forecast the profitability of your existing technique. You can determine whether you can attain your objectives and whether you are being realistic after you have this knowledge.
Step 3: Make Certain You Have Enough Funds
Cash is the fuel that allows you to begin trading, and if you don't have enough, your trade will suffer from a lack of liquidity. Cash, on the other hand, is a safety net against lost trades. You won't be able to resist a temporary loss or give your position adequate breathing room while the market swings back and forth with fresh trends if you don't have a cushion. Cash cannot be obtained from sources that are required for other key events in your life, such as your college savings plan for your children. Money in a trading account is considered "risk" money. This money, also known as risk capital, is an amount you can afford to lose without negatively impacting your lifestyle. Consider exchanging money in the same way you'd save for a vacation. You understand that the money will be wasted once the trip is done, and you are ok with it. Trading entails a significant amount of risk. Treating your trading capital as extra salary does not imply that you are not concerned about safeguarding it; rather, it means mentally releasing yourself from the fear of losing so that you can make the trades necessary to develop your capital. Perform a personal SWOT analysis once again to ensure that the required trading positions do not conflict with your personality profile.
Step 4: Find a Market That Trades Consistently
Choose a currency pair and experiment with it over various time intervals. Begin with weekly charts and work your way down to daily, four-hour, two-hour, one-hour, 30-minute, 10-minute, and five-minute charts. Determine if the market turns at crucial points, such as Fibonacci levels, trendlines, or moving averages, the majority of the time. This will give you an idea of how the currency trades across various time ranges. To observe whether any of these levels cluster together, established support and resistance levels in different time frames. The price at a 127 Fibonacci extension on a weekly time frame, for example, may be the same as the price at a 1.618 extension on a daily time period. The support or resistance at that price point would be strengthened by such a cluster.
Rep with several currencies until you discover the one that you believe is the most predictable for your process. Remember that trading requires passion. You must enjoy what you are doing in order to test your settings repeatedly. You may learn to effectively judge the market if you have enough passion. Once you've found a currency pair you like, start reading about it in the news and in the comments section. Try to figure out if the fundamentals back up what you think the chart is saying. For example, since gold is a commodity that is often positively connected with the Australian currency, if gold rises, it will likely benefit the Australian dollar. If you believe gold will fall, wait for the right period on the chart to short the Australian dollar. Before you make the deal, look for a line of resistance to be the right line in the sand to gain timing confirmation.
Step 5: Check for Positive Results Using Your Methodology
This phase is arguably what most traders consider to be the most crucial aspect of trading: a system that only enters and exits lucrative transactions. There will never be any losses. If such a method existed, a trader would be wealthy beyond their wildest dreams. But the fact is that such a system does not exist. There are good, excellent, and even below-average approaches that can all be employed to produce money. The trader is more important than the system when it comes to a trading system's success. A skilled driver can get to their location in almost any vehicle, while an inexperienced driver will almost certainly not make it, regardless of how nice or quick the vehicle is. Having stated that, it is vital to select a methodology and test it several times in various time frames and marketplaces in order to determine its success rate. A system may only be a successful predictor of market direction 55%–60% of the time, but with adequate risk management, a trader may still earn a lot of money with such a method.
Personally, I like to adopt a technique that maximizes return while minimizing risk, which means that I like to search for turning points at support and resistance levels because they are the simplest to detect and measure risk. Support isn't always strong enough to stop a market from dropping, and resistance isn't always strong enough to reverse a price increase. However, a method based on the principle of support and resistance may be developed to provide a trader with the necessary edge to be profitable. It's critical to test your system's expectancy or dependability in a variety of settings and time frames once you've created it. It may be used to timing entrance and exit in the markets if it has a positive expectation (it creates more successful trades than losing ones).
Step 6: Calculate Your Risk-to-Reward Ratios and Limits
The first line to draw in the sand is where you would quit your position if the market went against you. This is where your stop loss will be placed. Determine how many pips your stop is from your entry point. If you trade a regular lot and your stop is 20 pips distant from the entry point, each pip is worth about $10. (if the U.S. dollar is your quote currency). If you're dealing between currencies, a pip calculator can help you figure out how much a pip is worth. Calculate the proportion of your trading capital that your stop loss would be. For example, if your trading account has $1,000 in it, 2% is $20. Make sure your stop loss isn't more than $20 from where you started. If 20 pips equals $200, you're using too much leverage for your trading capital. To get around this, you'll need to downsize your trade from a conventional lot to a mini-lot. A single pip in a mini-lot is worth around $1. To keep your risk-to-capital ratio at 2%, your maximum loss should be $20, which means you should only trade one mini-lot.
Now, on your chart, add a line where you wish to take profit. Make sure it's at least 40 pips distant from your entrance. This will result in a profit-to-loss ratio of 2:1. Because you can't predict if the market will reach this level, slide your stop to break even as soon as the market goes past your entry point. At worst, you'll scratch your transaction and keep your entire investment. Don't give up if you're knocked out on your first try. It's common for your second entry to be right. "The second mouse receives the cheese," as the saying goes. If you're buying, the market would often bounce off your support, and whether you're selling, the market will retreat from your resistance, and you'll join the trade to see if the market would trade back to your support or resistance. Then you'll be able to benefit the second time around.
FOREX TRADING STRATEGIES THAT WORK
In order to develop a trading strategy that works for you, you must consider a number of elements. There are a plethora of tactics to choose from, but comprehension and familiarity with the plan is critical. Every trader has different aims and resources, which must be considered while choosing the best approach.
Traders can assess the appropriateness of different tactics using three criteria:
1. Time is an important resource.We've created a bubble chart to make it easier to compare the forex strategies based on the three criteria. The ‘Risk-Payoff Ratio' is plotted on the vertical axis, with strategies toward the top of the graph providing a bigger reward for the risk incurred on each transaction. The approach with the highest risk-to-reward ratio is often position trading. The time investment on the horizontal axis reflects how much time is necessary to actively monitor the deals. Because of the high frequency of transactions executed on a regular basis, scalp trading is the approach that requires the most of your time resource.
2. The frequency with which trade opportunities arise
3. Typical goal distance
You'll be able to choose a suitable currency pair by combining psychology, fundamentals, a trading approach, and risk management. All that's left is to practice trading until the technique becomes second nature to you. You may become a successful trader if you have the enthusiasm and determination.