Online Forex Trading is NOT GAMBLING. There’s a reason why only a small percentage of CFD traders are profitable over the long term; Without a clearly defined Trading Strategy, it’s very easy for retail investors to lose their trading capital within a short frame of time. There’s an old expression in business, that if you fail to plan, you plan to fail. It may sound cliché, but people who are serious about being successful, including forex traders, should take heed to this as if they were cast in stone; Developing a successful forex trading strategy is a must. Without carefully planning your strategy, it is almost impossible to know the markets to trade, and the price at which to take a profit (or loss). There are several facets to developing a successful CFD trading strategy, and ultimately any trading plan for retail investors, especially beginner traders, must be a SMART one – Specific; Measurable; Achievable; Realistic, and Time-Bound.
To keep it simple, a trading plan is an organized approach to executing a trading system developed by an outlook and analysis of the market, while factoring in risk management and personal psychology. The main idea behind planning your strategy is to develop a set of rules you’re going to adhere to, as well as how you’re going to implement them; Hence, a trading plan should outline your investment goals, risk tolerance, and strategy for achieving these goals. It would be difficult to stay disciplined and stick to your chosen strategy without a trading plan.
It takes time, research, and a lot of effort to develop a trading strategy that works in the financial markets; and while there are never any guarantees of success, by carefully planning your trading strategy, you will have eliminated a major roadblock. Planning your strategy enables you to define the parameters of your ideal trade, and make logical trading decisions, helping you avoid making emotional decisions in the heat of the moment. Successful forex trading strategies tell you what to do so you can maintain discipline and consistency while keeping losses in check. In this article, we discuss the important things to keep in mind before and while planning your trading strategy.
DISASTER MANAGEMENT 101
In our article, Facts to Know About the Most Successful Traders in Africa, we discussed the fact that Forex Trading is a business, and if you want to succeed you have to treat it as such. Watching a few YouTube videos, buying a charting program, and then going ahead to start trading with real money immediately, is more of a recipe for disaster and not a forex trading strategy.
A trading Strategy is a comprehensive decision-making tool for your trading activity. It helps you decide the What, When and How Much of your online forex trading. A successful forex trading strategy should be developed with clear signals that are not subject to change – while you’re trading- but subject to re-evaluation when the markets are closed. As market conditions change, and as your trading skills also improve, you can make modifications and adjustments. Try to employ your personal trading style and goals, and not blindly copy other people’s strategies, as this may not reflect your personal characteristics. No two forex trading strategies are the same, as no two traders are exactly alike. Hence, each approach will reflect important factors including trading styles and risk tolerance.
The essential components that a trader must consider when developing a successful forex trading strategy include the following:
SKILL ASSESSMENT – EVALUATE YOURSELF:
You want your strategy to be as tailored to you as possible. Consider your goals, expertise, strengths and weaknesses, and preferred trading style (We discuss this at length in our blog post – The 4 Types of Forex Traders). The critical question to ask yourself is whether you are ready to trade forex online. Have you acquired enough Forex Trading Education? Have you tested your strategy on a Demo Account or by Paper Trading? And do you have confidence it will work in a live trading environment? Can you follow your signals without hesitation?
Trading the market is a battle of Give-and-Take; the Pros who prepare themselves, take profits from the masses, who, due to lacking a strategy, tend to “give money away” as a result of costly mistakes. In view of this, there is so much you can learn from our Forex Trading Academy, where we have real forex trading experts and analysts to get you on the right path.
MENTAL PREPARATION
Your state of mind is critical when it comes to engaging in online Forex trading. You should ask yourself: How do you feel? Have you had enough sleep or rest? Do you feel up to the challenging task ahead? If you do not feel emotionally and psychologically ready to take on the market, we advise you to take the day off. Doing otherwise, is almost an assurance of loss, especially if you’re angry, preoccupied, or simply distracted from the task at hand. You can refer to our post – Common Mistakes Forex Traders Make for an in-depth discussion on this.
Some successful traders adopt a mantra they remind themselves of, to help get them ready as they begin to trade. You can find one for yourself that puts you in the trading zone too. It’s also important to free your trading area of distractions; Remember, as we keep saying, Trading is a business, and must be treated as such. Thus, distractions of any kind can be very costly.
DO YOUR HOMEWORK AND SET REALISTIC GOALS
Far too many beginner Traders enter the forex market with visions of grandeur and begin to trade with very little Forex Trading Education and no trading plan whatsoever. Before the market opens, to help you plan your strategy, find out what is going on around the world, especially on the Economics, Business, and Political fronts. Find answers to questions such as – Are S&P500 Index Futures Up or Down? Because Futures contract day and night, they are a good way of gauging the mood before the market opens. Others you can also find out are- Which economic or earning data are due, and when are they due. Think and decide, whether your strategy should include trading ahead of an important report release. For the most part, it’s advisable to wait until after reports are released, rather than taking unnecessary risks associated with the volatile periods during the release of such news. Our posts – Why Education and Training in Online Trading is a Must before Trading Forex as well as Market Volatility and How to Handle it in Forex- discuss these points in great detail.
As you develop your trading strategy, it’s important to set realistic goals or targets and Risk/Reward ratios. Consider the minimum risk or reward acceptable to you. For instance, some traders will not take a trade unless the potential profit is at least three times greater than the risk. To give an example, if one’s Stop Loss is $1 per share, your goal should be $3 per share in profit. When planning your strategy, set weekly, monthly, and annual profit goals as a percentage of your portfolio and reassess them on a regular basis.
TRADE PREPARATION – SET ENTRY AND EXIT RULES
In our article Common Mistakes Forex Traders Make, we discuss this point at length. Whatever trading system or program you use, make sure to set alerts for entry, and exit signals, label major and minor resistance levels on the charts, and make sure all signals can be easily seen or detected with a clear visual or auditory alert. A typical Entry rule could be worded in the following manner: “if signal A fires, and there’s a minimum target at least three times as great as my Stop Loss, and we are at support, then buy X contracts/currency or Shares”.
Your strategy should be detailed enough to be effective, and simple enough to facilitate very quick decisions. If you have about fifteen conditions that must be met, and more than ten of them are subjective, you will find it difficult, (if not outright impossible), to take trades.
Most traders concentrate their efforts on looking out for Buy Signals but pay little attention to where and when to exit a trade. The challenge many face is selling when they are down, as they do not want to make a loss. You should learn to accept loss as part of trading and get over it quickly. The probability of making losses in trading is very high, so don’t take it personally. Instead, develop your strategy with Risk management tools, so you can still make profits, nonetheless.
When planning your strategy, know your Exits. There are at least two possible Exits for every trade; Your Stop Loss and Your Take Profit Levels. Your Stop Loss will be activated when a trade goes against you, whereas your Take Profit Level will be activated, signaling you to exit once you reach your profit target. Consider this your insurance policy in Forex Trading.
KEEP DETAILED RECORDS
As part of developing your trading strategy, in order to be a successful forex trader, you need to keep detailed records. When you win a trade, you want to know exactly how, and more importantly, the same, when you lose, so you don’t repeat unnecessary mistakes. Take notes of details such as targets, Entry and Exit of each trade, time, Support and Resistance Levels, daily opening range, and market open and close for the day. Add comments about what prompted you to make the trade and what lessons you learned.
Keeping detailed records as part of your strategy also enables you to go back to a particular system to analyze your performance such as your profit or loss, drawdowns, average time per trade, etc.
CONCLUSION
While there are no guarantees a trade will be profitable, developing a robust strategy, in addition to Forex Trading Education, and developed skill set, is crucial, if you want to be consistently successful in the Online Forex Trading business. Also remember that the market environment is not static; it’s dynamic and constantly changing. Hence, as conditions change, you will need to revisit your trading plan. That is how successful traders strategize.
CFD Strategies for online forex trading provide better discipline for your investments. It manages the mental pressure points that come with trading, managing positions, and accepting losses as an inevitable part of the industry. Simply put, without a strategy for your forex trading, you’re planning to fail.
Plan Your Trade and Trade Your Plan.
Brought to You by Geldex Invest on behalf of Growell Capital.
