Successful trading in forex markets tend to call for traders to follow specific trading strategies. The concept of trading in markets can generally be difficult in practice. However, using a strategic approach can prove to be advantageous instead of trading with just hunches and pure whims.
There are several ways to creating strategies. The critical step would be to determine the primary areas which traders turn to when they start building strategies of their own. Initially, traders need to establish which market condition they want to take advantage of and then create a method around it.
Markets exhibit three primary conditions: Breakout, Trend, and Range. These market conditions demonstrate different tones.
Range conditions may often happen during quiet markets. The support and/or resistance that characterizes ranges become broken when the price ‘breaks out’, which is usually from some form of news or stimulant.
A breakout happens very quickly or unexpectedly and this in turn causes traders to utilize stops to limit their losses. Breakouts often turn volatile. The moment the market settles down, the trends will finally settle in. Since trends are long term, it calls for different strategies to be taken by a trader.
Longer-term trends will develop when a bias has started to set in the market. This is considered as a unique condition that calls for an approach that is different from range or trending markets.
Developing strategies is different for every forex trader. Some use strategies which have constantly been used by many, others use a combination of strategies, and lastly there are others who build a new one of their own. The most beneficial strategy to use would be the one you are most comfortable with in order to yield better results.
Here are a few pointers to remember when building strategies of your own:
Test and Modify
Traders will often come across a strategy that has been recommended by experienced and analysts however, it will be wise to not use them straight away. Instead of immediately applying it in real time trading, it would be better to use it in a demo account first.
The strategies should be modified to your situation and the resulting effects should be observed. Building your own formula could bring about the best results and will also improve your trading skills.
Observing long-term trends
In order to correctly gauge where the market is headed, it is crucial to observe the longer time frames. These are considered as the true indicators of market movement.
Several traders have made money from short-term fluctuations, however, these short-term signals will not give you a clear picture of the overall market condition. Therefore, it would be better for one’s interest to check out long-term trends since they are more important.
Using different time frames
It's important for a trader to observe different time frames. Watching daily or weekly data will give you a different input compared to only observing hourly trends. Similarly, short-term data can also prove to be more profitable compared to longer-term data.
Fundamental analysis is crucial
Economic events tend to drive the overall direction of the forex market. In these circumstances, fundamental analysis should be incorporated in every trader’s strategy.
Economic growth figures and interest rates are significant indicators which traders should be aware of because they have an impact on the forex market. A trader will benefit on studying daily reports from forex experts once when they start developing their own strategy.
Pay attention to market volatility
Some currency pairs are highly volatile compared to others. It's important to watch out for these currency pairs since their prices jump up or down very quickly. When trading with such currency pairs, it would be wise to invest with only small amounts. A good reminder will be to set stop stops at points farther from support and resistance levels in order to produce the best results.
The most crucial part to developing and observing your own strategy is to test it extensively. A trader needs to be patient because this will likely take a period of time. It's important to remember that a well-tested forex trading strategy will have the potential to bring in more profits for a trader that uses it in the longer term.