Forex Trading Strategy - Building and Planning
When starting to trade Forex, the trader must build first his own Forex trading strategy. This is important especially for beginner traders. The Forex trading strategy is considered like a plan that identifies how the trading will go. This includes identifying the analytical ways the trader will use to know the currency pair trend. It also identifies how the money in the trading account will be managed. Here are considered general steps to build your Forex trading system.
1. Identify your time frame: each currency pair can be monitored over certain time intervals. The time interval can be in the range of minutes, hours, days, weeks, or months. When mentoring over a time interval of one minute for example, the value of the currency pair is monitored every one minute and displayed on the graph as an opened value and closed value for every minute on the Forex trading chart.
The opened value is the value of the currency pair at the beginning of the time interval while the closed value is the value of the currency pair at the end of the time interval. What interval length is chosen depends on the trader personality and his external conditions. It also depends on the amount of money in his Forex trading account. Many traders can be busy and cannot look at charts very frequently. This makes the minute or the hour intervals difficult to use. Also it depends according to the personality where some traders can be bored looking at the chart very frequently while others can be happy looking at the charts every hour or every two hours.
The most important thing when determining the interval value to monitor the currency pair over is the amount of money in your trading account. Longer interval times such as days and weeks will result in more fluctuations in the currency pair and more floating losses. This means that larger-valued accounts must use the larger time intervals. Forex trading accounts that have less money must use smaller time interval in order to be able to withstand the fluctuations in the currency pair chosen.
2. Identify your analytical techniques: in Forex trading, currency pair trend prediction is the key to be successful in Forex. If you are well able to predict where the currency pair will go in the future, you will be able to earn money.
There are two basic ways to use: fundamental analysis and technical analysis. Fundamental analysis means to track economic news of the countries that own the currency you are trading and use the news you are reading or hearing to measure the economy of that country. This way is suited for long term trades or trades that uses large time interval such as weeks or months.
On the other hand, technical analysis uses the charts directly to predict the trend of the currency pair you are trading. Every Forex trading chart supplies you with huge tools that allow you to read the chart more intelligently. These tools can be studied in any Forex contexts but the most common are the moving averages, the pivot point analysis, the MACD, the stochastic indicator, and the RSI indicator.
In analytical analysis, you just identify two or three tools from the tools mentioned above and add them to the chart. This will allow you to study the chart and know the currency pair trend. When choosing the analytical tools, you must not use too many tools because this will make the analysis complicated. Only two or three tools are sufficient.
Second, the analytical methods which will be used during Forex trading must be planned carefully. This step is considered the most important one in the Forex trading strategy. It can be fundamental or technical schemes. The technical analysis depends on analyzing the curve of the currency pair price which will be traded. It uses technical schemes in order to predict the price movement in the future based on the history of the price. The most popular schemes are simple moving average, exponential moving average, stochastic, Relative Strength Index, MACD, and pivot point trading. The fundamental analysis depends on economical news analysis
Third, money management planning must be considered as part of the Forex trading strategy. What meant by money management is to determine the percentage of the Forex account which will be traded, the profit limit, stop limit, and risk to reward ratio. This is very important in the Forex trading strategy although it is ignored by many people.
Fourth, the entry and exit points must be determined according to the analysis used in trading the Forex. This means to determine when to enter a trade and when to exit. This will deepens on the technical analysis used in studying the pair. For example, if pivot point is used as a trading strategy, the entry point may be the pivot line and the exit point may be the first resistance level.
Once the trader determined the four above points, then the Forex trading strategy is built. An important thing to do after building it is to follow it carefully and respect the rules inside the Forex e trading strategy.