Key steps to create a working forex strategy

The popularity of the forex market is borne out by its total value, which grew from $1.934 quadrillion in 2016 to an even more staggering $2.409 quadrillion just three years later.

However, the forex market is also incredibly volatile and prone to wild price fluctuations, making it challenging for new or novice investors who are new to the wild world of trading.

With this in mind, you’ll need to create a working forex strategy if you’re to be successful. Here are some of the key considerations when building a viable strategy.

1. Determine What Kind of Forex Trader you are?

This is the first step to take when creating your strategy, as you’ll need to determine the type of trader that you are and how this impacts on your investments.

For example, day traders and swing traders adopt very different approaches when forex trading, from the way in which they analyse data and execute orders to the length of time that they intend individual positions.

By posing these questions to yourself, you can effectively create a trading profile that underpins your wider investment strategy.

A key element of this is the precise time-frame that you’ll use to trade, as while you may use multiple time-frames over time, this will be the main entity that you will use when attempting to identify viable trade signals.

2. Trend Exploration and Identification

Another central objective for any investor is to identify key trends as early as possible, and specific indicators can be used to achieve this goal.

The most popular indicator used for this purpose is moving averages, with two such metrics used to identify viable trends and inform the execution orders.

Usually, one slow and one fast moving average is used, as investors wait until the latter crosses over or under the former to make their move.

This offers a fast and easy to understand measure of new trends, which is ideal when attempting to profit in the volatile and real-time forex market.

3. Define Risk Along With Your Entry and Exit Points

Once you’ve identified and confirmed your trends, the next step is define the level of risk that you’re willing to encounter. This is a key element of your trading philosophy, while it’s also central to the strategy that you deploy.

More specifically, you’ll have to determine precisely how much you're willing to lose on each trade, based on your capital holding and the potential profit from the position in question. Remember, losing is a common hazard when trading volatile markets, while you can also utilise stop loss measures to regulate losses when trading via an online broker.

Stop losses are key to setting the exit point of a particular trade, as you look to cap losses at a predetermined level and manage the margin-based nature of currency trading in the process.

When establishing entry points, this can be done either as soon as the indicators match up or at the end of the so-called “candle”, but this will depend on your trading style and innate level of aggression as an investor.

The key is that all entry and exit points are clearly defined and well thought out, as otherwise it’s incredibly difficult to balance risk and reward and optimise potential profits.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes