The saying goes: A journey of a thousand miles starts with a single step. Put another way, the implication here is that there is always a place to begin in whatever one does. For one looking to trade Forex, especially for beginner traders, that first step is building a Forex trading strategy. This essentially refers to a plan on how the trading will go, and it entails, first, the identification of the analytical ways the trader will utilize to know the currency pair trend. Secondly, it also entails the identification of how to manage the money in the trading account.
Having said that, below are the general steps to take when building a Forex trading system:
Identifying Time Frame
It is important – and possible – to monitor each currency pair over a certain time interval range. However, the time interval range varies, and it is important for the trader to decide which one he/she prefers: minutes, hours, days, weeks, or even months. A time interval range of one minute, for example, means that the trader monitors the value of the currency pair every minute, with the results displayed on the Forex trading chart/graph as opened and closed values – the opened and closed values refer to the currency pair at the start and end of the time interval respectively.
However, the choice of time interval range is not merely a matter of the trader’s whim. Sure, part of it has to do with the trader’s personality. For example, while some traders may be okay checking the charts every minute, others may find this boring and instead prefer hourly (or longer) intervals. However, another part of it – perhaps even most important – has to do with the prevailing (Forex-related) external conditions. Such external conditions may include how much the trader has in his/her trading account. Another important external factor is the availability of the trader, i.e. whether or not he/she has other commitments that may keep them from monitoring the value of currency pair in short time interval ranges. For example, a trader may be too busy with other commitments to check the charts frequently. For such a trader, minute or hour intervals may not be suitable. Instead, they may have to choose longer time interval ranges, such as days or weeks, or even a month.
But of all these conditions, the amount of money in one’s trading account is the most important. Longer time intervals (including days and weeks) are more likely to experience more fluctuations in the value of currency pair, leading to more floating losses. Simply, the more a trader has in his/her trading account, the longer the time interval he/she may need, and those with less money often – if not always – need to use smaller time intervals if they are to withstand fluctuations in the currency pair they choose.
Identifying Analytical Techniques and Tools
The Forex market is highly volatile, and the key to successful trading is the ability to predict currency pair trend. It means that a trader should be able to read trends and anticipate changes, and this anticipation means that they are able to avoid bad surprises and losses, and instead earn money. Thankfully, though, there are valuable techniques and tools for analyzing the market.
To begin with, there are essentially two techniques for Forex market analysis: fundamental analysis, and technical analysis. Fundamental analysis involves the trader tracking economic news of the countries whose currencies they trade, and use that news to not only measure the economy of those countries, but also predict potential changes in currency value trends. On the other hand, technical analysis utilizes Forex trading charts directly to predict potential changes in currency pair trends. The Forex trading charts provide traders with huge tools that enable a more intelligent reading of the charts. The application of these tools also depends on the Forex context in question. Regardless, the most common ones include moving averages, the MACD, the pivot point analysis, the stochastic tool, and the RSI indicator.
However, the choice of analytical technique to use also depends on many factors, including the choice of time interval range. For example, fundamental analysis is relatively slower as it relies on the examination of data over a stretch of time. As such, this technique is only suitable for long-term trades that utilize large time intervals, e.g. weeks and months. On the other hand, as already evident above, technical analytical techniques and tools provide more instant results. Therefore, technical techniques are more effective for traders with shorter time intervals, such as every minute or hourly.
After a trader decides what analytical techniques to use, it is equally important to use the relevant tools appropriately. It is always advisable to use fewer tools – using many tools complicates the analysis process. Two or three tools are often enough. In technical analysis, for example, all a trader needs is to identify two or three tools from the ones listed above, add them to the chart, and then study the chart to know the currency pair trend.
Choosing and using analytical techniques requires careful planning. In fact, this is arguably the most important part of building Forex trading strategy. It involves analyzing the curve of the currency pair price that one trades. It also involves using technical schemes to understand the history of currency pair price, and use that knowledge to predict the likely movement of that price in the future.
Another part of planning that many traders ignore – at their own risk – is money management. This refers to the determination of the percentage of the Forex account traded, the profit and stop limit, as well as risk to reward ratio.
Finally, the trader must determine his/her entry and exit point. These refer to when a trader should enter and exit a trade respectively. The decision on this depends on what technical techniques he/she uses to study the currency pair he/she trades. For example, when a trader uses pivot point as his/her trading strategy, the pivot point line would be the entry point, and the exit point may be the first resistance level they experience.
It is important to remember that a trader may need to go further to understand the true nature of these aspects of building a Forex trading strategy. Still, this article provides a valuable background story to get a beginner trader going.