What is Forex Trading Strategy? A Forex trading strategy is a set of analysis the forex trader uses to determine whether to buy or sell a currency pair at any time. Forex trading strategies based on the technical analysis, fundamental or chart analysis. The trader's currency trading strategy is usually made up of trading signals that trigger buy or sell decisions. Forex trading strategies are accessible on the internet or may be developed by traders. Forex Trading Strategy Breaking Down Forex trading strategies can be either manual or automated method for the generating trading signals. Manual systems involve a trader sitting in the front of the computer screen, looking for the trading signals, and execute traders on it own. The recent systems take human emotion out of the equation and improve the performance. Traders should exercise the caution when purchasing off-the-shelf forex trading strategies since it is difficult to verify the track record and many successful trading systems are kept secret. Creating the Forex Trading Strategy Many of the forex traders begin developing a trading strategy by starting with something simple. For example, they may notice that a particular currency pair tends to rebound from a specific support or resistance level. They may later decide to add other elements that improve the accuracy of trading signals over time. For instance, they require that the price rebound from the specific support level by a specific percentage or number of pips. Several Different Components of an Effective Forex Trading Strategy: 1. Selecting the Market Traders must decide what currency pairs they trade and become experts at reading those currency pairs.
2. Position Sizing Traders must decide how large each position is to control for the amount of risk taken in each trade. 3. Entry Points Traders must develop rules governing when to enter a long or short position in a given currency pair. 4. Exit Points Traders must develop the trading rules telling them when to exit a short or long position, as well as when to get out of the losing position. 5. Trading Tactics Traders should have set rules for how to buy and sell currency pairs, including selecting the right execution technologies. Traders consider developing the trading systems in programs like MetaTrader that makes it easy to automate the follow the rule. Also, these applications let the trader’s backtest trading strategies to see how they would have performed in the past. Traders should also be ensured to paper trade any strategies to ensure that they work in real life, even if they showed signs of the success in backtesting and on a theoretical level. Time to Change Strategies The forex trading strategy works well when traders follow the rules. But just like anything else, one particular strategy may not always be a one size fits all the approach, so what works today may not necessarily work tomorrow. If a strategy isn't proving to be profitable and isn't producing the required results, traders may consider the following before changing a game plan: 1. Match the Risk Management with Trading Style If the risk vs. reward ratio isn't suitable, it may be caused to change strategies. 2. Market Conditions Evolve A trading strategy depends on specific market trends, so if those change, a particular strategy may become obsolete. This could signal the need to make tweaks or modifications. 3. Comprehension If a trader doesn't understand the strategy, there's a good chance it won't work. If a problem comes up or a trader doesn't know any rules, the effectiveness of the strategy is failed. Changing the forex trading strategy too often can be costly. If you modify the strategy too often, you could lose out. Bottom Line A forex trading strategy is a set of analysis that a forex trader uses to determine whether to buy or sell the currency pair at any given time.