How to build A forex trading Strategy?
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Forex trading strategy
A set of tested trading strategies, also known as a trading plan, and reliable risk management guidelines must be followed in order to trade forex successfully. Here are 5 steps you can follow to develop and evaluate the profitability of your own forex trading strategy, regardless of your level of experience.
1- Understanding technical analysis
Technical analysis examines the direction of the market using price charts and indicators. You can find potential entry and exit points for your trading positions with the aid of technical analysis.
Technical analysis, as opposed to fundamental analysis, primarily concentrates on market patterns and prices. On the other hand, fundamental analysis focuses on the variables that influence market prices. You can use these two analytical techniques separately or in combination.
Technical analysis is frequently regarded as a neutral tool because it focuses on timing and price patterns. You must evaluate the price of the market at the moment and decide on potential target levels in order to find forex trading opportunities using technical analysis. Although it cannot guarantee results, technical analysis calculates the likelihood of various market movements.
2- Importance of technical analysis
The majority of traders use technical analysis to predict the future direction of the market. The movements of the market are not totally random. There is a good chance that many other people are also aware of an emerging pattern when traders notice it. You could think of the trend as being almost self-fulfilling. In that sense, you can say that traders help create the patterns found in market prices.
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3- Understanding fundamental analysis
You learned in the previous sections that trends and price movements are the main subjects of technical analysis. A different method of evaluating the markets is through fundamental analysis, which provides a comprehensive picture of market strengths and weaknesses.
A fundamental analyst looks at significant developments that might influence the strength or weakness of a particular currency. These consist of statistics on politics, the economy, and natural disasters.
In short, a fundamental analyst assesses the strength of a currency using all available data. Key economic reports and data, such as GDP and unemployment data, production data, and interest rate announcements, are the main areas of focus.
4- Fundamental factors that affect forex prices
1-Natural disasters
The fundamental strength and weakness of a currency can be significantly impacted by natural disasters like hurricanes, tsunamis, and flooding. The tsunami that hit Japan in 2010 is a prime example. It severely disrupted the production of automakers and the mobile technology sector, crippling the nation’s manufacturing sector.
2- International trade
When demand for products and services from a specific country increases, the demand for that country’s currency also increases.
3- Economic output and growth
The GDP of the nation is one of the most significant measures of economic expansion. It provides data on the performance and economic strength of the nation by providing an overview of the country’s production of goods and services.
4- Inflation – This factor has two key indicators:
A- Consumer Price Index – This measures the change in average cost of goods and services to consumers.
B- Producer Price Index – This measures the change in the cost to produce goods and services for producers.
5- Interest rates
Prevailing interest rates are probably one of the major factors affecting the value of a currency, because they determine the flow of global capital in and out of a country or economic region.
6- Political conditions
Political unrest typically has a negative effect on a nation’s currency demand. Politically unstable nations and currencies are typically avoided by investors.
7- Fiscal policies
Investors’ decisions about whether to invest or not can be influenced by a country’s fiscal policies, which include government spending, budgeting, and taxation.
8- Monetary policy
Whatever monetary policies central banks adopt, they have a significant impact on short-term currency demands.
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Now that you know how to build a forex trading strategy,
5- Choosing your entry and exit points
Regardless of their strategy, forex traders are subject to trading risks. Understanding price action is essential for choosing when to enter trades and when to close out positions. Here you will discover the four primary price action ideas used in forex trading to choose entry and exit points.
- Support & resistance: Support and resistance are significant trading levels that the price has repeatedly touched and retested. They serve as important intersections where supply and demand collide.
- Breakouts: A breakout, is a break through an established support or resistance level. Breakouts are strong signals, especially when confirmed by other indicators like gaps.
- Gaping action: Gaps are important since they signify that buyers (upside) or sellers (downside) are making their moves. But, you have to make sure to confirm a new trend using multiple indicators before you jump in.
- Sideways market: A forex market that trades sideways refers to price action within a narrow range of strong support and resistance levels. When a market trades sideways, traders are preparing for a breakout.
6- Managing the trading risk
You should be aware by now that there are risks involved in forex trading. Since the market is quite volatile, the risk increases as your potential gain does as well. Here are some clues for managing risk.
- Avoid over-trading
A good rule of thumb is to refrain from risking more than 2% of the balance of your trading account on any single trade, despite the appeal of volatile markets. More trading would put you at risk of losses that are difficult to recover.
- Set up stop loss orders to minimize losses
Success in trading does not consist of winning trades only. On the contrary, it is the aggregate of winning and losing trades. That’s what makes stop-losses a key factor when it comes to profitability. Placing stop-loss orders will also eliminate the need to constantly monitor your position.
7- Test your trading strategy
Even though you cannot replicate the risks associated with trading with real money, a demo environment can help you test the effectiveness of your investing strategy. Before you can confidently invest your hard-earned money on a new strategy, it must first go through a period of trial and error.