Profitable Forex Strategy
In the wild jungle that is the Forex market, success can only be achieved using a well-thought out and solid strategy. A profitable strategy is one that limits trading risks but also boosts profitability. There are numerous trading strategies out there, but it is always important to develop or adopt one that is compatible with your personality and will enable you achieve your trading goals.
A profitable strategy will detail the following important aspects in its methodology:
- Type of Analysis
A profitable strategy will outline how you will detect trading opportunities in the market. You can decide to be a fundamental or technical trader, or even combine both. Again, this will depend on your personality. Fundamental analysts forecast future prices by assessing and tracking economic, social and political forces that affect the supply and demand of various currency pairs in an attempt to predict future price behavior; whereas technical traders, attempt to predict future price action by analyzing past price movement.
- Trading Times
People have different time commitments as well as different favorite currency pairs. It is important to determine the ideal time to trade your favorite currency pairs; or the ideal currency pairs to trade when you are free. The Forex market is open around the clock because of the difference in time zones. For instance, the London market is open from 0800hrs-1700hrs GMT, and this could be the best time to trade European currency crosses, such as EURUSD, GBPJPY and EURJPY.
- Chart Time Frame
Trades in Forex are opened off charts, and it is important to determine which timeframe suits you, your personality as well as your strategy. Technical traders usually focus on shorter timeframes such as 1-hour charts or below, whereas fundamental traders usually focus on longer timeframes such as 4-hour charts or above. Additionally, traders with a higher risk appetite can consider trading off shorter timeframe charts, while the more risk-averse traders should trade off higher timeframe charts.
Risk management is an important pillar of any profitable strategy. In the dynamic Forex market, it is virtually impossible to have a foolproof strategy. Any strategy, no matter how good, will sometimes generate losing trades. As such, long term trading success can only be achieved when a solid risk management plan is in place. It is always advisable not to risk more than 5% on any one particular trade or 10% in any particular trading session or day. Forex traders should also always trade with a stop-loss strategy and outline how they will tweak their strategies in the event of a drawdown or a long losing streak.
When trading currencies, real money is always on the line. There are therefore bound to be emotions involved. Emotions are usually the biggest hindrance to successful Forex trading. A profitable strategy can easily be undone by emotions; and therefore, it is very important to master your trading psychology. Create a trading plan and follow it with strict discipline and patience - this way, emotions can be kept away from your trading activity.
In the end, the success of any profitable strategy will depend on its user - the trader. It is the trader that implements it. A trading strategy is like a brush and paint, and the trader is like a painter. It is his skill, vision, commitment and discipline that will create a magnum opus - a wonderful piece of art.