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How to Develop a Forex
Trading Strategy
Someone rightly described forex as world's #1 most
powerful home-based business. Another said, "It's like
having your own ATM machine in your own computer." These
statements are true insofar as you have a good trading
system with at least 60% winning odds. Else, forex
trading can be the death-knell of the unprepared.
What is a trading system?
An important component of the trading plan of a
successful forex trader is a working trading system. A
trading system comprises a set of rules, methods,
strategies that serve as a guide for a trader, which
enables him/her to enter and exit the market at the most
opportune moments.
Success in forex trading is all about entering the
market at the right time, picking your gains and exiting
before the market has had time to change its erratic
mind. Your trading system should therefore have good
entry and exit triggers.
Getting a trading system
There are two ways of going about getting a trading
system. If you are in a bit of a hurry to start trading
soonest, you want to purchase a forex trading software
or robot. This is a computer program that is scripted
into your broker's trading platform, such as MetaTrader.
The scripts are known as Expert Advisors (EAs). Some
conduct hands-free trading, while others require the
trader's attention as their trade progresses.
The other way of getting a trading system is to develop
your own. If you do not have clear ideas on how to
start, you may visit forex forums, and ask for
assistance. Many members will be too willing to help
with useful ideas.
Components of a good trading system
Here are a few tips to keep in mind when developing your
own trading system: • The best systems combine chart
patterns with technical indicators. • Moving Averages,
P-SAR, Bollinger Bands, Stochastic, MACD and Fibonacci
retracements are the commonest indicators and very
popular among traders. Try to incorporate at least two
of them in your system. • Use Fibonacci Retracement tool
to estimate future support and resistance levels; these
are your profit targets.
Backtest Your System
Now that you have a trading system, it's time to test
its effectiveness. MetaTrader is a good trading platform
for backtesting. Sign up with a broker who uses the
software, and trade your system for a period of at least
two months. Write down your observations - what's
working and what isn't. Also write down your entry and
exit strategies, stop-loss and take-profit levels under
different time frames.
You should be able to ascertain the best time frames for
your system through backtesting. Subject your system
under different conditions of volatility, consolidation
or congestion. Continue testing and tweaking your system
until you have achieved 65 - 70% success rate. Only then
should you put your system to live trading.
Conclusion
There are physical and psychological challenges that you
must overcome to succeed trading forex. Are you
prepared? It requires a certain amount of resources to
meet these challenges.
People who try short-cuts in forex quickly join the
losing 95% in leaving the market early. There are no
short-cuts in forex. Success in the business requires
patience, persistence, consistency and discipline.
About the Author
The author has been trading forex online since 2001. In
the course of those years, he has developed and used
many forex trading strategies which he has made
available to anyone who is just coming into the forex
world. These may be downloaded freely from:
http://www.RealForexPips.com.
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