Why is it important to build an effective income scheme?
Establishing a good Forex trading strategy requires a clear understanding of your financial goals. This should include a reliable assessment of your tolerance, or, in other words, resistance to various risks, as well as understanding of your real financial needs. This includes both tasks designed for quick and short-term execution, as well as tasks for a longer term, which can be time-consuming and complex.
This material will be useful for both beginners and experienced traders who want to either develop an effective Forex trading strategy from scratch or improve existing trading algorithms. The skill of identifying and building an intuitively correct trading strategy will allow you to better understand the internal mechanisms of the market, therefore, finding an entry and exit point along with the ability to correctly calculate the optimal moment for this will become a necessary component of an effective Forex trading strategy.
In our today’s review, we will look at the factors affecting the profitability or loss-making of a trading strategy. Being aware of these realities is important because of its ability to persuade you to make a decision about a deal. Lack of information about trading strategies leads to the formation of a false idea of the economic situation on the stock exchange. Therefore, many people interested in this topic are looking for an expert advice on how to create effective Forex trading strategies.
In this article, you will learn why your tolerance to a hypothetical risk is the key to the effectiveness of a trading strategy, as well as correct goal setting, which includes an objective threshold of financial claims. In addition, we will explain the importance of derivatives such as futures and options for building an underlying financial portfolio. And finally, you will become familiar with the concept of technical analysis, because successful Forex trading presupposes possession of data on market trends.
Risk and its impact on a trader’s psychology
Speaking about the psychological side of Forex trading, we should mention the fact that it is common for any person to go through certain changes in their personality, depending on age, life experience, career ambitions and other reasons. Some people are more reckless by nature, while others, on the contrary, are less prone to rash and impulsive actions. One way or another, no one is insured against losing money, especially when it comes to taking risks.
So what is the essence of tolerance, or, in other words, resistance to risk? Your potential risk resistance is directly related to your investment goals. If the project is long-term, then the degree of risk increases, and as a result, you should look for opportunities for Forex transactions in the most volatile periods. If your project is designed for a short period of time, then the best solution is to use low-risk assets.
An effective Forex trading strategy is not possible without periodically evaluating your risk capital. This is especially true for newbie traders, since at the initial stages of Forex trading, they need to learn how to limit the risk capital from their main portfolio so that this amount does not exceed 10% of all trader’s funds. This rather simple measure is highly effective and can save you from losses.
If you have been trading Forex for a long time and are well aware of all the processes occurring in the foreign exchange and cryptocurrency market, then allow yourself to risk no more than 25% of your investment portfolio. Of course, we focus here on the fact that you have a long experience of conducting transactions on Forex and you clearly understand what exactly you are at risk of. Such meaningfulness of each step does not give a 100% guarantee against unprofitable trading, but significantly reduces the risks.
Impact of the choice of trading products on your strategy
Many newcomers to Forex are wondering if there is an interconnection between choosing trading products and building an effective Forex trading strategy. Yes, there certainly is such a correlation. It lies in whether you understand the value of a particular trading product and whether you are ready to make this particular product the driving force of your strategy. What to choose: futures, options or securities and shares? Let’s take a closer look at each of the products presented.
It is believed that futures carry a fairly high degree of risk, and therefore, working with them requires a well-calibrated, carefully calculated strategy. However, despite the level of risk, futures continue to be an attractive product due to their high liquidity and access to various instruments, for example, commodities, currencies and stocks. If you manage to find an effective Forex trading strategy, then futures even compensate for market fluctuations.
Options, like other products, contain a certain percentage of risk. Traditionally, they are considered difficult for beginners to understand, but, nevertheless, the strategic potential of options is revealed in their flexibility and not very high requirements for initial investments compared to stocks. If you understand in detail the nuances of performing transactions with options, then an effective Forex trading strategy will surely bring profit over time.
Trading stocks can act as an independent Forex trading strategy, despite the fact that a couple of decades ago the stock market was considered accessible only to professional investors. Today, stocks as a trading product can be combined with other products, the main thing is to maintain a healthy balance in the search for favorable transaction conditions. The universal basis for the best Forex trading strategy will be to regularly review your behavioral tactics.
Benefits of technical analysis for finding a Forex trading strategy
Backtesting
Forex backtesting software provides any user a unique opportunity to know their chances of success as a trader. As mentioned above, it is really important to have such knowledge in order to understand what heights you can achieve in trading based on your initial data. Technical analysis can help you decide on the appropriateness of certain actions.
Artificial intelligence
Artificial intelligence calculates market movements, measures the strength of their fluctuations and, as a result, the theoretical impact of external factors on the profitability or loss of your Forex trading strategy. A beginner trader may be far from understanding the various technical parameters on the basis of which the data is analyzed, but the software does this work for a person, using the relative strength index, balance volume, stochastic oscillator and other indicators.
The computer mind is immeasurably faster than the human’s one, therefore the technical analysis of a Forex trading strategy acts as an assistant, motivating you to make a deal or consciously reject it. The software for testing your trading opportunities generates the so-called entry and exit points when making a deal, that is, it fixes the optimal times for buying or selling on Forex.
Choosing an effective Forex trading strategy can be complicated by the fact that a beginner trader is often tempted to use the largest number of indicators when organizing technical analysis. This should not confuse the user, because only the choice of the most relevant indicators plays a role in the formation of the best Forex trading strategy. With the selective use of indicators, there is no need to change the strategy; only changes are made to it taking into account the current situation.
Best Forex Trading Strategies in 2021
If you have already decided what your personality type is or what it might be, and if you understood your predisposition to one or another style of Forex trading, it’s a high time to talk more specifically about concrete strategies that can contribute to your enrichment. In general, these techniques are divided into short and long trading strategies on Forex. Which of them is right for you in particular, you can decide by reading the most effective of them, and these are:
- day trading;
- scalping, HFT;
- positional trading;
- swing trading.
Day trading
The first two strategies listed here are short-term ones and can be actively used by traders with low risk tolerance, as advised above. Day trading assumes that the trade will be closed before the end of the current day. This factor is favorable for the trader because there is no need to worry about possible negative events on the market, which will fundamentally change the alignment of forces overnight.
Scalping, HFT
Scalping also acts as a good Forex trading strategy due to the fact that the duration of transactions can reach up to only a few minutes. Overtaking the difference in buy and sell price, for example, when trading cryptocurrency, can be very profitable. Again, you should remember about a reasonable ceiling of your financial desires and timely close a deal and stop trading in order for the strategy to bring you success.
Positional trading
From the long-term Forex trading strategies, we want to highlight positional and swing trading. How do they differ from each other? Positional trading is characterized by long-term observation of the trend, tracking all accompanying changes and analytical processing of this information. A significant drop or rise in price, as a rule, creates a large difference, which the trader plays on, getting the maximum profit from the trade.
Of course, it is quite expected that such a trader is already well acquainted with different trading strategies on Forex and came to positional trading deliberately, since it is more suitable for him for a number of reasons. Examining the end-of-day charts requires a lot of concentration and patience. Swing trading is represented by positions that are at the same indicators for several days, but in this case the profit is brought to the trader by short-term price models.
Swing trading
Summing up our today’s review, we want to emphasize the importance of understanding your initial financial conditions in conjunction with your psychological characteristics in order to choose an effective Forex trading strategy in 2021. Considering all these parameters, you will be able to adhere to those algorithms that are able to bring you profit and grow you as a professional trader.