If you are into forex trading, then you must be already aware of how important a trading strategy is. In order to succeed in forex trading, you need to devise some proven strategies. They are also called a forex trading plan or risk management policies. In this article, you will get to know how to build your own forex trading system that proves to be lucrative, no matter whether you’re a novice or an experienced forex trader.
Choose a time frame
Choosing a time frame for your trading is the very first thing you should do when it comes to making your own trading system. For this, you must analyze if you are an investor, a swing trader, or a day trader.
Plus, you must know the time frame for which you would like to keep your trading positions, such as for one minute or a month. You must also know whether you would prefer to check the charts on a daily, weekly, monthly, or annual basis.
Furthermore, you must ensure you pick a time frame as per your requirements. All this will assist you to select your trading time frame. Your primary time frame will help you in searching for a trading signal, although you can still check out multiple time frames.
Pick a currency pair/pairs for trading
The second step is to pick a currency pair or pairs for trading, like EUR/USD, JPY/AUD, etc. You must also be aware of the forex currency group to which your selected forex pair belongs to since currency pair groups have individual features. These groups include major, minor, and exotic currencies.
You must try to get the basic information about the currency pair(s) you pick, such as their most active trading hours. For instance, exotic currency trading only takes place during business hours at selected OTC markets and banks.
Understand technical and fundamental analysis
You must research and understand both technical and fundamental trading analysis. Technical trading analysis deals with charts and price charts in order to evaluate the market’s direction. It mainly focuses on price actions and trends. Moreover, technical analysis facilitates the identification of entry and exit points for forex trading positions.
On the other hand, fundamental analysis provides a complete picture of the strengths and weaknesses of the market to assess its direction. It examines the key events that can affect the strong and weak aspects of a particular currency.
Find indicators for identifying new trends
In order to recognize new forex trends, you must make use of indicators that can aid you do so quickly. You can employ moving averages, which is a popular forex indicator among traders for discovering new trends easily and quickly.
Generally, traders utilize two moving averages, including one quick and one slow. Traders wait till the quick moving average passes below or above the slow moving average. This is called the “moving average crossover” method. Apart from this, there are additional indicators for recognizing new trends; however, moving averages is the simplest.
Select indicators that confirm the trends
After you pick up certain indicators to recognize the trading trends, you must ensure that your trends are right, not fake. This means you should choose indicators that can assist you in verifying your trends so you can avoid false trends. For this, you can employ technical indicators such as:
- RSI
- MACD
- Stochastic
You can read about other indicators as well and then choose the ones that fit your trading requirements.
Define your entry and exit points
There are several trading risks that forex traders have to deal with, regardless of the trading approach they employ. Therefore, you need to comprehend the price action so you can be aware of the right time to enter and exit your trading position in order to earn maximum profit out of it.
For entry points, you can employ chart patterns, candlestick patterns, or bar patterns so that you can enter the market confidently. Plus, you can opt for indicators such as stochastic and RSI. Additionally, there are percentage retracements, Fibonacci levels, trailing stops, etc. to capture more profits.
For exit points, you must have a stop-loss so you can exit the forex market when it does not work in your favor and you can suffer losses. You must also be aware of when you should exit the market even if things are working in your favor since that won’t be the case for a long time. Hence, you must place a target to gather profits and exit.
Manage your trading risk
Since the forex industry is volatile like other trading markets, it involves risks. This means if you would like to earn huge profits from it, then you better be prepared to take on huge risks as well. You can minimize your trading risk and losses by:
- Putting stop-loss orders
- Avoiding overtrading
- Position sizing
With this, you must also decide the amount of money you can bear to lose per trade.
Test your trading strategy
In order to check your trading plan, you should keep a manual record of your trades and replay the price action in the market. Testing can become quicker if you have an automatic trading plan with coding; however, here you are making a manual trading plan. When you check your trading strategy, you enhance it.
In order to ensure that your trading strategy is efficient and lucrative, you must try and test it. Only after testing your strategy, you should put your money in forex trading. A demo trading account comes in handy for analyzing your plan.
Write down your strategy and follow it
You should note down your trading strategy, even if you think you can remember all the important points. Writing your trading plan will make you consistent and disciplined in forex trading. You can confidently trade with a written plan without any hesitation. Plus, it serves as a record, which will make it simpler to improve your strategy. Apart from writing your strategy, you must stick to it as well.
The bottom line
Your trading strategy will help you avoid losses in the market. Use the tips mentioned above in order to build a simple trading strategy that fits your trading style. After building your own forex trading strategy, you must ensure that you adhere to it. Plus, you must test it, which can take a while. Therefore, you must be patient with your trading strategy if you want to earn lots of money from it eventually.
