10 Steps Create Forex Strategy Works
Before you can create your own forex strategy you have to be aware of different approaches and understand all the factors that affect the currency movement then use it to your advantage. Since currency pair moves in sets of wave-like motion, the best analogy could be somehow similar to the behavior of the sea. Sea waves are produced from the wind, and it depends on the speed and direction of the wind that constitutes the product of the waves produced. Probably you have seen the sea waves being in a choppy manner which is caused by inconsistent speed and direction of the wind? Well, the same goes to currency pairs! At the times when the amount of people buying and selling the currency is inconsistent, you can see the forex market seems more turbulent compared to when there is more obvious sentiment which favors the price to move in specific direction. The factors which move the currency are not numerous; you will learn more about that as you experience trading.
Creating your Forex Strategy
As you have read more on the technical and fundamental theories of the forex trading, now it’s time to apply them in the market. Most traders have their own style and preferences when choosing their approach in trading. That is why it is very important for you to have your own goal in trading; whether you want to close your trade within minutes or hours or even days, whether you like to trade when its morning or night time and etc. Below are the few approaches you can consider when placing a trade:
Time forex strategy:
You might want to choose to trade when the market is in the active period if you prefer to trade within few minutes or hours. For example; if you are trading GBP/USD or GBP/JPY, the market is active from 8.00 am UTC+0 to around 1.00 pm when its lunch break in London. A very specific strategy includes London Close Strategy.
Technical forex strategy:
This is a set of strategy for people who like to spot patterns and draw conclusion from the previous pattern. This strategy is purely Chart-pattern based and traders use few indicators which translate into the price sentiment. By doing this, you can approximately spot and expect any reversal or break-up in trend, any increase in the rate of the change and so on. The few tools you can use for this are Exponential Moving Average (EMA), Moving average convergent divergent (MACD), candlestick pattern, trend lines and so on.
Fundamental forex strategy:
This strategy comes into close understanding of the economic scenario and awareness of the factors that change price action and currency value. This includes interest rate, inflationary pressure, import & export and gross national product of the country. For tips, most of these values are simplified for traders in many websites.
For beginners, I would suggest a more simple approach in placing a trade. Don’t place your trade blindly. Instead look for the best point to start any action of the day. You can focus on whether you want to wait for any price break-up from the support and resistant lines or you can look for the reversal or bounce of the price from the lines stated earlier. There are forex traders who like to follow the price trend and make decision based on the direction of the price movement. But this approach works more with a bigger time scale rather than the short one.
Common mistakes done by Forex Traders
After all the studies of forex strategy that you have read somewhere, the market do not behave exactly like how you perceive them; they are not a fix or rigid environment. So do not put 100% reliance on theory.
When you have your strategy framework ready, do not assume and jump into trade too fast. Instead wait until you see it has already started to happen before putting any trade.
Make sure you have a clear goal and avoid using strategies which are too complicated to abide. And it’s better to start small on your early trades. The bigger money you placed, the more emotional you can become. It is not going to be healthy for you and your trade if you let your emotion conquer you.
Part of a strategy which are usually overlooked
Most of beginner traders think that the more sophisticated tools they use, the better they can understand the currency. However most ended more confused than they have ever before. The golden rule is always come back to basic. Sometimes simpler is better.
Choose a ground which you can experiment your theories and ideas from the past forex data. For that, back testing is highly advisable for most beginners. It allows you to create, test and refine your forex strategy for manual and automatic trading. This vital tool helps you determine if your strategy works or not. Forex back testing software simulates your strategy on historical Forex data and provides a back testing report, which allows you to conduct proper analysis. Since price history is a cycle and tend to repeat over and over again, you should really take advantage of this method.
Simple steps where to start and how to create a forex strategy
Whether you are on a demo or active account, the first basic start is to prepare your mindset. Ask yourself what is your weakness and your strength. Have a clear goal about the trade. Do not trade if you don’t see any opportunity of winning. Always remember that winning does not correlate with the amount of time or frequency of trade. That said, the more you trade the more experience you have. However you might want your experience to be significant, so be picky about that. Build your framework. When you open the chart, the candle sticks will not make any sense to you, but with a framework you will any pattern more clearly and start to understand. Use simple support/resistant lines and well known indicators for start. Back test your theories and ideas first.