Building a Solid Trading Strategy

Forex trading strategies guide 2022 – At the core of every successful trading routine lies a well crafted and tested trading strategy

While successful traders all have different personalities and different styles which they bring to the profession daily, one thing that they all have in common is well thought out and precisely executed trading strategies. With a proper strategy in place, a trader is able to take some control over their account and movements in the market and while circumstances can never fully under control (the market will do what the market wants to do), a great strategy gives you some level of control. 

Conversely, without a solid strategy, traders may find themselves lost and subjected to the will and whim of the market. Without the prepared tools and actions laid out in a strategy, all traders can do is cross their fingers and hope instinct can guide the way. Unfortunately, this almost always ends in disaster. 

What is a Trading Strategy?

Crafted around your specific strengths and weaknesses, the trading strategy is the planned manner in which you determine to buy and sell based on pre-planned actions and reactions. The strategy includes what to do in your day to day trading as well as what to do in emergency situations and scenarios. When you craft a well-made trading strategy, you create a roadmap to guide you through your trading career. 

Why Forex Trading Strategies are so Important

As we touched on earlier in this article, without a comprehensive trading strategy, a trader will be lost. Sure, a trader might keep their head above water initially, but given enough time, trading by the gut and instinct will almost certainly lead to unnecessary risks and reactions and ultimately destruction of an account. 

We used the word roadmap because while the trading strategy can’t predict the future, it can tell you where to go and when. Imagine trying to navigate without a map. You might turn left, you might turn right, you might end up at your destination but there’s also a chance you get so lost that you never do. This is like trading without a strategy and why it’s such an ill-advised method. 

How to Build a Solid Trading Strategy 

While it may seem like a daunting task, building a trading strategy is not actually that hard. Any trader can competently put together the guidelines and rules under which they plan to trade. The hard part here is creating a strategy that will be profitable over the long run. 

This isn’t to say that trading strategies are static though. The opposite is true. As your trading evolves, so should your strategy. Tweak and change things based on successes and failures and always be willing to modify your routine according to what works best. 

• The first step in building a trading strategy should be to understand why and how you think you can succeed in the market. What makes your personality and skills primed for lucrative returns and manageable losses? Understand your personality and highlight your strengths and try to minimize your weaknesses. 
• The next step should be to choose a trading timeframe. Is your personality and work ethic more suitable for swing trading, scalping, or day trading? 
• After this, you should consider what tools you need (or don’t need) in order to identify trends. Will you be using price action tools like pivots and trend lines or will you only trade when you see a pin bar?
• Once you know what you’re looking for in the market, determine your entry trigger. This will be the point that you enter a trade. Conversely, determine your exit trigger. This is the point you’ll be leaving a trade. 
• With all of that set out, determine your risk management strategy. This is absolutely the key to your trading strategy. This core piece can save you if you stick to it or ruin you if you neglect it. 
• Now that you have a solid strategy taking shape, it’s time to backtest. After backtesting, go through the results and find ways you can improve the strategy. Look at what worked and what didn’t. Based on those results, what can you change to improve your strategy? Tweaking and improving is so important. Your strategy should never be set in stone. 

Long term forex Strategy

The composition of a long term trader doesn’t differ from the outline under the previous header. The difference here is that the trader will be laid out over a longer period of time. While some trading strategies can be designed to carry a trader week to week, a long term strategy lays out goals and milestones over a longer period.

Swing Strategy

Unlike the long term trader, a swing trader is keyed in on individual moves (swings) in the market. The concept is to get out of trades quickly in order to avoid the inevitable swing down and negative pressure it brings with it. Basically, grab your profits and get out before the market dips.

Scalping Forex Strategy

This strategy centers around taking profits off of small price changes. These gains usually come shortly after a trade has been entered and requires the trader to have a very strict exit plan. Any traders who practice scalping must be incredibly disciplined and exit a trade when the trading strategy says to do so. A scalper who fails to follow his/her exit plan and is tempted by the idea of greater profit will ultimately suffer heavy losses.

Testing a Trading Strategy

Before you implement a trading plan, it is essential that you test it before running it in a live scenario. It doesn’t matter how well you learned it or how well you think it will perform. Until you test the plan in a real-world scenario, you should not move forward with it.

Imagine this for a moment – you learn a new method and immediately implement the strategy. It looks so good on paper that it just has to work, right? Wrong. After a month or so you’ve lost 15% of your account and in a fit of rage, you toss out the trading plan and hastily substitute in a new one. The same thing repeats itself and you’re now down 30% and stuck in a loop of failure.

This could have been resolved had you just tested the plan to make sure it worked.

In addition to determining whether it’s sound or not, testing a trading plan can let you know if your strategy has a positive expectancy, can give you the confidence to execute your trades, and can show you an estimation of the expected results.

When is it Time to Change Trading Strategies?

If you think you crafted a good strategy, backtested and made changes but something is still not working out, it might be time to consider changing your forex trading strategies. Certain market conditions might not work in your favor or preexisting conditions just might not materialize in order to make your strategy viable. Rather than do the same thing over and over again (the literal definition of insanity), it could be an indication that you should change your strategy. Generally, if you’ve been doing the same thing for 6 to 8 weeks and it’s not working, it’s time to change your strategy. 

Forex Trading Strategies The Bottom Line

A good trading strategy is the bedrock on which a successful trading career is built. The guidance, safety, and consistency afforded by a thorough trading strategy can carry a trader through good times and save an account through bad times. Focus on what works and be sure to tweak and change what needs fixing. Follow the predetermined rules and ride a well-made trading strategy to frequent profits and wins.

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