2 Essential Keys To Building The Best Forex Trading Strategy

November 13th, 2010 Christina Hall No Comments »

There are essentially 3 parts of trading:  money management, trading psychology and strategy development.  When you boil trading down to its essential elements, these are the three components that make up the trading experience.  If a trader truly wants to develop the best forex system, then he needs to develop a holistic approach to the forex market that includes each of these essential elements.  A trader must have a detailed money management plan that specifically outlines position sizing and risk management, and he must be very tedious and thorough in his trading psychology.  In this brief article, we are going to discuss the third essential element:  how to develop the best forex trading strategy.

Self-Awareness

Surprisingly enough, one of the most essential elements to developing a powerful trading strategy has nothing to do with having the best forex trading software or inside secrets of the trading pros.  In fact, the first step to developing a winning strategy has very little to do with charts, indicators, or anything related to technical or fundamental analysis.  Instead, the first step to developing an effective trading strategy is discovering who you are as a trader.  Self-awareness is essential to long-term trading success.  Trading coaches have proved repeatedly that if a trader tries to trade a strategy that is not in-line with his personal trading psychology, the trader will make very little money, if any, and the most likely scenario is that the trader will lose money.

It is essential that a trader first understand who he is as a trader in order to develop an effective trading strategy.  That realization will most likely take months to discover.  In the meantime, the best thing to do is to experiment with several types of trading styles such as scalping, intraday momentum trading, intraday momentum-fading strategies, swing trading, position trading, etc.  Once a trader experiments with several types of strategies, he will slowly begin to discover what is right for him, and this is one of the greatest realizations a trader can make in his journey.  This realization of this secret is infinitely more valuable than even the best forex trading platform.

Keep It Simple

The best trading strategies are often remarkably simple.  Remember the basics.  Never buy at resistance and sell at support.  That is one of the most common mistakes that new traders make on a consistent basis.  In fact, a very simple, but powerful trading system is composed of only a few steps.

  • Step 1 – Conduct technical analysis in order to determine the direction of the trend on the H1 Chart. You can use your choice of indicator or simple price action analysis.
  • Step 2 – Whenever price begins to retrace against the trend, simply look for key areas that will offer support in an uptrend and resistance in a downtrend. Common technical tools to identify these areas can be fibs, horizontal support/resistance, trend lines, MACD, RSI, Stochastics, etc.
  • Step 3 – As price comes into a level, fade the market momentum in direction of the overall trend.

A strategy this simple sounds too simple, but the reality is that if a trader were to apply himself to developing a strategy around the core ideas just shared in steps 1-3, he would be developing at trading system around ideas that are time-tested.  Of course, historical results can never guarantee future results.

These two keys are essential to developing the best forex trading system.  A trader must find out who he is in terms of trading psychology, and then he must develop a strategy that is simple and based on common sense. And always remember, there is no such thing as a consistently successful or guaranteed strategy, trading always involves risk.

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