This article is the first in a series on how to develop a successful trading system and profit from the Forex markets. It is meant for traders of all levels of experience not just beginners. The first step is to choose a trading strategy. The choice of strategy is critical for success but it is often overlooked. This is unfortunate because it is one of the most important factors in trading successfully.
There are many different strategies available to prospective traders, including mechanical strategies which monitor price action; technical strategies which use technical analysis and fundamental strategies which rely on economic news to generate trading opportunities.
Profitability is not necessarily the most important factor for success. Successful implementation is arguably more important. This is because the chances of making a profit are greatly enhanced if the strategy can be implemented correctly. If there is a way of automating execution then that is even better as it will further minimize implementation problems.
Human error, slippage, missing trade set-ups and making errors are all risk factors which erode profitability. There are four factors to consider from the point of view of the individual trader when assessing potential strategies:.
It is better for a trader to take every set-up rather than just a few because if he or she cherry picks a few they may be more of the losers which could affect his or her emotional equilibrium. Temperament is also important and mainly relates to issues around patience.
For a strategy to work for a trader it needs to be in harmony with his or her temperament. There is little point in an impatient trader trading a longer-term positional strategy as he will not be able to tolerate all the waiting. Risk Tolerance is a sub-section of temperament and relates to how much the trader can risk before fear and greed begin to impact on implementation.
There is no point in trading outside of your risk comfort zone, even if you need the money. A trader out of his or her depth is more likely to interfere with an open position before it has reached its target or its stop which interferes with the goal of pristine implementation. If a trader cannot tolerate large trade sizes than he or she may wish to consider widening the number of strategies traded to make up for the lower returns from each trade. Traders need to enjoy what they do for the activity to be sustainable.
Trader A goes on an expensive course and decides to trade the strategy he was told was highly profitable by the course provider. He begins trading this system but soon finds he is not making any money from it.
After some analysis he discovers the reason why, is that he is not taking every trade set-up which develops. This is because he gets distracted by his other job. He discovers, moreover that the system is profitable but because of implementation problems he cannot trade it successfully. The problem is that the system requires more vigilance than he has time for; the solution is that he should find a strategy which requires less vigilance.
Trader B learns to trade a long-term position strategy but finds he gets impatient waiting for the set-ups to reach their target so he has a problem of always exiting trades too soon. The strategy has been back-tested and proven profitable but Trader B cannot profitably trade it. The solution is for the trader to find a strategy which is shorter term and enables him to enter and exit trades more quickly. It is quite possible an intraday or short swing strategy might suit him better.
Trader C has a patchy trading record despite using a profitable-on-paper trading system. The problem is that she cannot stop herself interfering with trades before they have reached their predetermined stop or profit levels.
This is because she has so much money riding on each trade that she is often tempted to close losing trades too early for fear of losing.
She also closes winners out before they have reached their target because she fears they will not reach their targets. After some analysis she realises the root problem is that she is trading too large positions and needs to scale down the position sizes so she can remain in control of herself and let the trades run. The bottom line when assessing how to trade the markets — what strategy, what timescale, what analysis techniques and what money management, is to be realistic about the long term suitability of the strategy to your individual lifestyle, habit, temperament and risk tolerance.
Traders should aim to be as honest as possible from the start. How much time do they think they will be able to spend studying the markets? What are their likes and dislikes? Do they like trading large amounts or small? Do they mind waiting for their profits or are they impatient by nature? Do they like certain analysis techniques more than others? The more honest they can be in putting up a mirror to themselves the quicker they will find a strategy they can implement successfully.
This is because successful application is being able to follow the paper results as closely as possible. The first lesson in trading is find a strategy you can live in harmony with because every conflict created by trading and life results in a material loss or a sacrifice. It is up to each individual trader how they wish to construct this payoff, but possibly the best way may be to maximize the gain for the minimum of sacrifice by finding the strategy with the best fit. I am a forex analyst, trader and writer.
I have had a career writing articles for websites and journals, starting in the travel sector and then in Forex. I use a combination of technical and fundamental analysis in my forecasting. When I joined Forex4you in I thought it was a great opportunity to work as an analyst for an international broker. I provide technical forecasts with clear entry points and targets as well as articles on fundamental and trading themes. Good luck and happy trading! Featured October 2, , November 30, , Featured November 23, , August 5, , July 9, , June 25, , Forex Tips Forex Walkthrough.
Featured July 17, , 8: July 7, , July 4, , 8: June 30, , 8: By Joaquin Monfort on April 18, , There are four factors to consider from the point of view of the individual trader when assessing potential strategies: Conclusion The bottom line when assessing how to trade the markets — what strategy, what timescale, what analysis techniques and what money management, is to be realistic about the long term suitability of the strategy to your individual lifestyle, habit, temperament and risk tolerance.
Joaquin Monfort Forex4you analyst. Previous Article How profitable are the signals generated by Ichimoku Cloud charts when trading Forex? Next Article The SR Combo strategy — a rough diamond for making regular returns trading the forex eurodollar pair. Joaquin Monfort Website I am a forex analyst, trader and writer. May 26, , 7: April 1, , 8: Thank you Your feedback has been received.More...