3 Tips To Devise Your First-Ever Forex Trading Strategy
Once you set your feet in the forex world, you will have to make a lot of important decisions daily. All these decisions need to be taken based on analysis and calculations as that is the only way to ensure precision in the trading process. This precision is crucial for making profits as a trader in the forex market. But this decision-making process can be complicated with the number of options that you get to choose from. Because of this, you need to start by devising a strategy that can help you make sound trading decisions with a structured and rule-based approach.
Building a strategy from scratch can be a challenging task for a beginner and this blog can make it easier for you as I am going to share 3 powerful tips to help you create your first-ever forex trading strategy.
- Set Rules For Risk Management and Money Management
The first tip that can help you devise your first forex strategy is setting some rules for risk management and money management. Before setting these rules, you need to assess your risk tolerance and also decide the capital requirements. Risk tolerance is the highest level of risk that you can deal with as a trader and it will be different for different traders. Some traders have a high-risk appetite as they can afford to lose more before they become profitable. However many traders are risk-averse as they want to limit the potential losses even if it reduces their profitability.
The capital requirement for forex trading is the amount of funds that you are going to deposit into the trading account. This is not just about the minimum deposit requirement set by the broker but also about the margin that you will have to maintain for placing the trades. It is the minimum account balance needed for executing the trades based on the leverage availed and position size. It also depends on the currency pair that you have chosen for trading and the base currency of your account that you use to fund your account. When you are trading with currency pairs with different base currencies, then you can use a currency calculator to find the exact value of any currency in your preferred currency based on the real-time exchange rates for better trade placement.
In order to develop a solid trading strategy, you need to understand the difference between risk management and money management. Risk management is focused on minimising the account drawdown by reducing the potential losses. This is done by managing the risk in a way that you get to earn more profits while taking calculated risks. But money management is wider in scope as it is about how you handle the funds and what you do to optimise the profits that you earn from trading. Money management can be considered as a long-term approach.
Risk management is essential to preserve your trading capital and money management is important for growing your account over time. Setting a stop-loss order and limiting the risk per trade to 2% is risk management. Trading with a favourable risk/reward ratio is also a key aspect of managing the risk. But how you utilise your profits for trading activities and what steps you take to keep the trading cost to a minimum comes under money management.
- Take Advantage of Breakouts
There are a lot of different strategies and trading techniques that you can apply in the forex market. You can depend on technical analysis or focus on fundamental analysis for making trading decisions. But following a combined approach is best in my opinion as you will be able to consider all the aspects that can influence the currency pair prices. Thus, you will be able to anticipate the price fluctuations with more precision which also makes the trading process easier for you.
There are strategies like trend trading, range trading, pullback trading, carry trading, news trading and more that you can follow after considering your trading goals and preferences. But the tip I want to give you here is to take advantage of the price breakouts that you see on the chart. The point at which the price breaks out can be an optimal entry point for your trades and this is known as breakout trading. This strategy can yield good results when you identify a breakout or potential breakout.
But even when you see a breakout, you need to consider the pip count and price levels before planning the trade. For such calculations, you can try out various trading calculators that are offered by forex brokers and trading platforms for free. They work using algorithms to give accurate results right away once you enter the required details. This simplifies the calculation process and also eliminates manual errors. Accuracy is essential for devising a sound trading plan or strategy.
One thing to keep in mind while considering breakouts for trading is that there are chances of false breakouts. Actual breakouts can tell us about the direction in which prices will move as the price breaks out above the resistance level or below the support level. But false breakouts can mislead us into entering trades while anticipating a price movement that does not happen. Hence, confirming a breakout is important when you integrate it into your strategy.
- Use Charts with Longer Timeframes For Analysis
The third and last tip that you need to follow while devising your first-ever forex strategy is to use charts with longer timeframes. Many beginners want to make quick profits from the forex market and thus they try trading styles like scalping or day trading. Because the timeframe for analysis and duration of trades are shorter, it makes it look like an easy and convenient option. However, analysing the market for a shorter duration and finding trading opportunities is harder as you are not familiar with the high volatility resulting in frequent price fluctuations.
Analysing the minute charts can be a tough task for a novice trader as the price changes happen in a short period and interpreting the market situation is not easy with the short-term price movements. When you rely on charts with longer timeframes, you will be less stressed and you will get to learn more about the forex market. This knowledge is helpful for those following short-term strategies too. Many traders will be combining both short and long-termframes to confirm their analysis.
4-hour charts will be ideal for a first-time trader and you can outline your strategy based on this timeframe. Swing trading can be a considerable option for beginners as the duration of trades is not too long but also not too short. This trading style is less stressful and you also get a lot of trading opportunities as well. You just need to pick the suitable currency pairs after considering their liquidity and volatility. You can start with a major pair to minimise the risk.
Conclusion
So, these are the 3 simple yet powerful tips that you can follow for creating a well-defined strategy as a new trader in the forex market. Once you finalise the strategy and trading style, you can open a demo account and test your trading techniques in real-time market conditions, before going live.
