7 Steps for Creating a Winning Forex Strategy
- Winning Forex strategy requires a professional approach
- You need to align different indicators
- Every winning strategy has a good money management plan
- Trend is your friend
What is a Winning Forex Strategy
Creating a professional and reliable trading system or a strategy is not enough. So many things you need to consider if you want to develop an edge in Forex trading. Many new traders usually ask what is required in order to create a trading strategy, and I always tell them about the process itself.
Why is it Important for Forex Traders
When you decide to make or follow a sound trading system, follow these steps to assess it’s profitability.
- Proper Risk and Trade management Plan
This is the most crucial step in the creation of a winning Forex strategy.
Thus, I have put it in the first place.
Proper risk management is another crucial part of skilful trade management. You seldom want to risk more than 3% of your account on any trade. If you risk more, it will be much harder to come back from a loss.
Forex trading is about how much you are willing to lose, not how much you will win.
- Use Price Action Methodology with Only a Few Indicators
To understand the market, it’s not enough to rely on a bunch of different indicators to tell you where the price might go. Remember, you want to trade like the big banks, and institutional traders do. No matter which indicators traders use, almost all of them look at charts with Japanese candlesticks, bar charts, maybe even line charts.
Once you learn to read the price action, you’ll see the one thing common for all trading systems. Knowing how to make decisions based on the price action will leave you rest assured that other traders see the same thing.
Source: Milton Markets 15m XAU/USD chart
You don’t need a flashy chart in order to be profitable. What you need is to follow only a few indicators and to filter out the rest. A good trading system consists of:
- A leading indicator
- A lagging indicator
- Dynamic or static support and resistance indicator
- An entry indicator
Combining more than four indicators might have a really bad effect on the overall success of a trading system. Remember, all the indicators take the data from the history of MT4/MT5 or any other trading platform.
Indicators don’t show you anything except calculations that have been derived from that same history of the data on any platform. One of the biggest mistakes that novice Forex traders and even more advanced traders make is to follow flashy indicators on the trading system. The more, the merrier. Actually, it’s quite the opposite. The more, the worse results will become.
- Follow the Trend
Thus, if everyone else can see the price and wants it to go in a specific direction – e.g., market makers, big banks, institutions, prop and even retail traders – the odds are that the price will be pushed in the right direction simply because many traders will be trading to make it that way. You’ve got all the chances to win! Remember, Trend is your friend!
- Combine Support and Resistance Indicators
Source: Milton Markets 15m USD/JPY chart
Support and resistance are integral to any financial market. Market participants define these levels: supply and demand, or the order flow, which can rapidly shift. It is here that the bulls and bears oppose, with a winning side prevailing. The price can be submissive or reactive to a price level, where buyers or sellers match each other.
There are hundreds of methods to locate support and resistance (S&R). If a trader decides to place all of the lines on the chart, they would not even see the price on the chart. Why? Because the price would vanish behind the bars.
- Use Compounding
Compounding is the process of capitalising on the number of gains on the initial investible fund. In the process of compounding, the first profit taken is added to the account balance to create a new, higher account balance; the subsequent gain is based on and added to a new higher balance, etc.
The result is the exponential growth of a sum of money by continuously re-investing profits. See the example below.
Before you start trading, please consider the following:
- What time of day are you going to trade?
- How much time will you need to set aside to trade your system successfully?
- How many pairs do you plan to track?
- How will you follow those pairs to make sure you don’t miss your entries?
- How much lead time do you need to be completely prepared for your entries?
Your trading plan is how you execute your trades from the beginning to the end of the process.
- Develop Your Trading Plan
I once assumed that knowing my trading plan by heart was as good as writing it down. I was wrong and inevitably either forgot or confused my trading moves until I put pen to paper.
Nothing prepares you as well as writing down your trading plan, from start to finish. Why? Because in the heat of the trading battle, there should be no shred of doubt about how to react and respond.
Writing down your trading plan improves your chances of:
- initially learning it, plus
- correctly practising it, and
- regularly improving it.
So if you don’t already have a plan, write one now before reading further.
What Did We Learn from the Winning Forex Strategy Article
Most of the so-called celebrity traders, pro-traders, and system sellers are nothing but marketers trying to sell you their systems and grab your money. Have you seen them trading live? Have they ever traded live in front of an audience to buy their systems? Do they have any fully verified MyFXbook account? There are exceptions to the general rule but, unfortunately, the majority don’t trade at all. They only sell.
So, I invite all of you, no matter how experienced you are, to scalp and day trade with professionals, so you can learn more.
Detailed Info on a Winning Forex Strategy
How can You Improve Your Winning Strategy?
Traders can’t take the heat of too much money being on the line at a time. As a rule, a person can’t handle the pressure of a significant loss if traders took the whole loss. They also can’t hold for the total win, just capturing the win they already have not to take any loss.
This may negatively impact your trading plan and doesn’t allow you to stick to a proper risk/reward plan you now know essential to succeed. Compounding is one of the strategies you can use to make money in Forex currency trading.
How Can you Avoid Being Scammed and Further Improve the Winning Strategy?
Many snake oil sellers want to sell you a PDF system of 97$ without anything you might find helpful regarding trading hours and trading times.
For example, a trend following strategy could result in many trades on a single day where the market being traded trends. When a market is range bound, the trend following system will produce few or no trade signals. Even worse, it might make many false signals leading to a significant loss on your account.