Building a trading strategy: how to develop your own Forex strategy

Why are forex trading strategies so important?

When traders just start working on the currency market, often due to lack of experience and knowledge they trade without a system – by intuition, visual assessment of the chart or signals from third-party sources. If these signals are of high quality and bring profit, it is good, but this is not always the case.

Experienced traders and investors know that successful trading of currency pairs requires a personal trading strategy. It is necessary to clearly understand on what principle you open a position and when you will close it, with profit or loss. This is important for:

• Risk management
• Consistent trading
• Evaluations of results
• Informed decision-making
• Psychological stability of a trader

Trading strategies are a structured and disciplined approach to decision making. Let’s take a look at how to create, test and implement them in your work on the currency market.

What is a trading strategy?

Forex trading strategies are a set of rules and methods combined into a structure that a trader uses to make decisions about buying and selling currency pairs. Their main purpose is to systematize the trading process, manage risks and increase the probability of profitable trades.

Effective forex strategies should contain the following elements:

• Conditions for opening a position
• Rules for closing trades with profit and loss
• Principles of capital management
• Maximum loss amount
• Psychological aspects

A trading strategy should be well developed, based on personal preference and risk capacity, and regularly adapt to changing market conditions.

How to choose a trading strategy

Creating your own tactics on the currency market can be a time-consuming but interesting process. You don’t always have to start from scratch – you can pick up and adjust an existing strategy. First, decide on four parameters:

• Frequency of market entry: short-term (5-20 trades per day), medium-term (from 5 to 45 days), long-term (from 2 months). Medium-term strategies are often recommended for beginners.
• Type of currency pairs: major or cross rates. They differ in volatility, trading time and spread.
• Method of market analysis: technical or fundamental. Choose the one you understand better.
• Risks: determine how much of your deposit you are willing to risk in a single trade and in total.

First, choose a suitable strategy from the existing ones and test it. Then, if necessary, adapt it to your needs.

Stages of Forex tactics development

If you decide to create your own system, stick to the following steps:

• Determine trading objectives: profitability and risk level.
• Select the tools and methods of analysis: technical, fundamental or a combination.
• Develop criteria for entering and exiting trades.
• Define risk management rules: percentage of capital per trade, stop loss and take profit sizes.
• Test the strategy on a demo account or in a tester on historical data.
• Analyze your results regularly and adjust your strategy.
• Define the rules of emotional discipline.

Main parts of the indicator trading strategy

When developing a strategy based on technical analysis, pay attention to the following parts:

• Asset settings: suitable currency pair, working timeframe, transaction duration.
• Indicator combination: use different types of indicators to confirm signals.
• Rules for different phases of the trend: different trading styles in moments of active trend and consolidation.
• Trading time: choose the most active time to trade the selected currency pair.

Testing and optimization process

The market is constantly changing, so traders must periodically make changes to their strategies. Test and optimize them to match current market conditions.

Using the tester: check strategies in the tester, which is available in many trading terminals.
Trading on a demo account: test the strategy in real market conditions without risk.
Analyze results and adjustments: evaluate profitability and efficiency, make necessary changes.

Conclusion

Building your own Forex trading strategy requires a careful approach to every component: pair selection, timeframe, analysis method, trading time, capital management. You can use a ready-made strategy or develop your own – it all depends on your knowledge and capabilities.

Test a ready-made strategy first in a tester, then on a demo account. Once you have accumulated sufficient statistics and confidence, move to a real account.