The word ‘Strategy’ itself is intimidating to novice traders as there are no foolproof techniques to create a flawless strategy. You might have a tight grip over the concepts of trading, but that doesn’t come in handy when creating a strategy. So, here are the basics to help you create a strategy.
Step 1: Identify the trader in you
The first factor to consider before developing a trading strategy is the time frame in which you can trade. In Forex, you can trade at your convenience, but sticking to a routine will help you make an effective strategy.
Day traders are those who can spend most of their time reading charts and numbers. They make over a dozen trades in a day. Swing traders hold on to a stock for a few days, and the time they spend is only to keep themselves up to date.
Step 2: Foresee the trend
The better you know the trend, the better are your chances of profit. The trend is the way in which the market moves. Remember, you can make profits from both uptrend and downtrend.
Moving average is one of the simple ways to identify the trend. There are a number of chart analysis indicators which can help you confirm the trend.
Step 3: Workout the risk
A good trader is always calculative of his risks. Know how much you can spare for the trade and never dump everything you have in a single trade. Always be aware of what can happen when things don’t go your way.
Your strategy should reflect on how much you can afford to lose in a trade and should get you out keeping your losses low.
Step 4: Determine your entry/exit points
Your strategy should define when to enter a trade and when to exit. Some traders get out even with a marginal profit, while some tend to hold on to it longer. The charts can go either way, so know your entries & exits, and stick to your plan no matter what.
Without calculating your entry & exit, it is easy to succumb to the disposition effect.
Step 5: Write it down and stick to it
Once your well thought out strategy is ready, write it down and stick to it, at least for a considerable amount of time. Discipline plays an important role to not connect to your investments emotionally. A number of traders have lost a fortune stepping out of their strategy after giving in to emotions.
There is no strategy to win you profits in every single trade, so feel the need to change & update your strategy according to the trend.