How to Develop an Effective Trading Strategy

Many people believe that markets are random, so they prefer to trade on a hunch that relies entirely on their instincts. Sometimes it is possible to make large profits on a single trade by relying solely on their intuition. However, experienced traders rely on their carefully crafted trading strategies. They know that although there might be some deviations in exchange rates, they follow certain patterns. Therefore, it is necessary to have a strategic approach to trading. That is why we invite you to build your trading strategy.

Benefits of having a trading strategy

-         A strategy is a set of rules. It helps a trader to avoid destructive emotions during trading, but only if he follows his strategy without deviations.

-         A strategy can be backed up in historical data, so you will have proof that it can work.

-         A strategy reduces the time of market analysis. As soon as the strategy provides signals, a trader begins to act.

It is not necessary to have several years of trading experience to design your strategy. However, you should know such basic things as: 

-         How and when exchange rates move: For example, you should know that currencies can go up and down due to central bank meetings and important economic data releases.

-         Where the profit opportunities are: what kind of economic events/technical setups will lead to specific moves in the market.

-         How to read Forex charts and use technical indicators.

Steps to build your trading strategy

One of the most important decisions an investor must make is to choose a trading strategy. There are several different types of trading, the fundamental differences of which are based on the time frame over which they are employed, and the profit margins sought. Some investors seek large profits from long positions, while others are satisfied with small profits from short positions.

However, there are common factors among trading strategies. For example, each gives you the option to go short as well as long, allowing you to profit from both market rallies and market declines.

That said, let's take a look at the four best trading strategies:

Day trading

Day trading is an investment strategy in which an investor opens and closes all of his positions before the market closes. By doing this, some of the added risks and costs associated with holding an open position overnight are avoided.

Day traders can carry out a large number of small value trades on the same day. Therefore, they should pay attention to market news and perform regular analysis if the results are positive. This type of trader will try to make profits quickly from small price movements, which means that this type of trading is best suited to those who are full-time traders, i.e., those who have enough time to pay constant attention to the markets.

Day traders, because of the short time frame, cannot cope with short-term movements against their positions. This implies that they need to cut their losses quickly to ensure that their profits are not too badly affected if they incur them. Day traders often employ stops and limits to keep potential losses to tolerable predetermined levels.

Position trading

Position trading is the opposite of day trading and involves holding an asset or keeping a position open for a long period, which can last from weeks or months to years. Position trading differs from the other types of strategies discussed in this article in that it is not a short-term or one-day strategy.

As such, investors employing this strategy do not worry about market fluctuations and typically ignore short-term declines, as they expect to profit once the market recovers.

Position traders will make far fewer trades than day traders, but their trades will have more value and they will keep them open longer. As the potential profit increases, so does the investor's exposure to risk.

There are different trading strategies within position trading, such as range, pullback, and breakout strategies. Typically, investors employing this strategy will rely on technical and fundamental analysis, and will often use tools such as Fibonacci retracements, which allow them to identify periods of support and resistance.

Swing trading

The swing trader uses a mixture of technical and fundamental analysis to identify "swings" in the price movements of an asset. A swing high occurs when the price of an asset swings upward, while a swing low is the opposite. Unlike the previous two strategies, swing trading does not have a fixed time scale, although it is generally employed by investors between two days and one week.

The general objective of swing trading is to identify a trend and take advantage of swing lows in buying periods and swing highs in selling periods. Investors employing this strategy usually look for markets with high levels of volatility, as these are the markets in which swings tend to take place.

Scalping

Scalping is a form of intraday trading and involves opening and holding a position for a short period (usually lasting a few minutes, but sometimes it can even be seconds). Investors who employ the scalping strategy are known as scalpers.

Unlike swing traders, scalpers tend to avoid markets that move spontaneously and exhibit unpredictable trends. They need volatility in the markets, but only as long as it moves the market in a way that is consistent with their previous patterns. In addition, since the profits per trade are usually small, scalpers usually trade in markets with high liquidity.

Final Thoughts

You can find several trading strategies on the internet. But before using any of them on a live account, test them on a demo account first. Have realistic expectations - some trading strategies are better than others, but none of them will offer you 100% profit.

So, even though there are hundreds of strategies to apply, you can try to build your own. Its undeniable advantage will be that it will consider your approach to trading.  

Source: multibankfx