How To Choose The Right Forex Strategy
There are many trading strategies available, but going through them one by one is not practical. Instead, traders should focus on the following key things when choosing a trading strategy.
Your search should start with the question “How much time do I have”. If you can sit behind your desk for hours watching charts, you’ll be able to choose from the whole set of forex trading strategies, including those that were developed for day trading and scalping.
If this is not your case, you should focus on longer timeframes. Such strategies will allow you to set alerts at key entry points in advance, and you’ll be able to trade according to your plan while taking a look at markets from time to time rather than staying glued to your screen all day long.
It’s important to note that you should be frank with yourself. Markets will not wait for you to come back home from your daily job. If you try to use a strategy that does not fit your schedule of life, your results may be disappointing.
Traits Of Character
Your forex trading strategy should fit your personality. This is a very important point as success in trading is very dependent on the psychological strength of the trader.
If your trading strategy is uncomfortable for you for whatever reason, you will become anxious, get tired and make mistakes that will cost you money.
If you are able to make fast decisions but patience is not your strength, you’d be better off searching among strategies for shorter timeframes, like the ones created for day trading or scalping. In the opposite case, you’d look into strategies developed for swing trading or positional trading.
A forex trading strategy that fits your personality will make your trading much easier so you should not neglect this important part when choosing which strategy to use.
Some forex trading strategies are rather risky (but offer higher potential returns), while other are more conservative. Your forex trading strategy should fit your risk tolerance level, or you’ll set yourself up for trouble.
Your risk tolerance depends on your psychological traits (some traders are more conservative, while others are risky and are ready to experience material losses in pursuit of big profits) and financial situation.
If you plan to supplement you current income with trading, you’d be better off choosing more conservative strategies. In case your goal is to grow your account aggressively and you have other sources of income that support your lifestyle, you could try strategies that involve bigger drawdowns.
In any case, if the risk of your forex trading strategy exceeds the level of your risk tolerance, you will not be able to execute the strategy correctly and your results would be poor. In this light, aligning your trading strategy with your financial goals is very important for your future success in trading.
There are two basic types of market behavior – a trending market and a ranging market. You must evaluate the type of market before choosing your forex trading strategy.
Using strategies that tend to perform in a trending market when the market is in the range may lead to a disaster. For example, various strategies based on breakouts will fail time after time in a true-ranging market since you’ll get caught in many false breakouts.
The same is true for using strategies for the ranging market at a time when the market is moving in a strong trend. Your attempts to buy at support levels or sell at resistance levels will fail in a trending market since these levels will likely get breached.
In this light, you should learn to distinguish between a trending market and a ranging market and have a forex trading strategy for each type of market behavior.
Recent Performance Of The Forex Trading Strategy
Past performance is no guarantee of future results – you have probably heard this statement many times. This is true as trading strategies that worked in the past may not work in the current market environment.
However, this does not mean that you should not back-test the forex trading strategy that you are going to use. If you have correctly identified the current type of the market (trending or ranging) and selected the appropriate forex trading strategy, you should take a look at how it would have performed in recent weeks or months.
If you see that the strategy would have delivered positive results, you should try it in real trading. However, if your analysis shows that the strategy was not working in recent weeks, you should search for another forex trading strategy that had better performance.
Putting It All Together
Now that we’ve discussed the main things to consider when choosing a forex trading strategy, let’s take a higher-level view on this process.
The most important thing is to stay realistic when choosing a forex trading strategy. There is no need to rush. You should take your time and carefully evaluate your personal financial goals, time available for trading, current preferences in trading and the current state of the market.
You should also prepare for various market conditions. At a minimum, you should have a plan at hand for a trending market and a ranging market. Ideally, you should have several strategies for each type of market so that you can quickly switch between them if you see that one of your strategies does not perform according to your initial expectations.
You must also keep in mind that any strategy needs time to show its true performance in current market conditions so you should be patient and give it some time before you draw final conclusions.
If you do everything correctly, you’ll have a set of trading strategies that could be tweaked over time to suit your needs.
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This article was originally posted on FX Empire