How to Create a Winning Forex Trading Strategy
There are two reasons why you will fail to become a successful trader:
Trading without a strategy
Trading your emotions
I will share everything I know about developing and trading a profitable Forex strategy on this page. Visit my Overcoming Trading Emotions page if you would prefer to learn about managing trading emotions.
"Having a profitable trading strategy is harder than you may initially think. The internet is full of misleading information and traders that expect too much from a strategy, which makes the process even harder! Let me teach you everything you need to create a profitable trading strategy for Forex trading"
Trading Strategies 101
Let's start with the basics:
What is a trading strategy?
A trading strategy is a set of trading rules that provide an edge.
Following a profitable trading strategy puts chance in favour of the trader, which results in a long-term positive return.
Trading strategies can also be referred to as trading plans or trading systems.
The difference between a trading plan, system, and strategy
A trading strategy, trading plan, trading system, and trading rules all mean the same thing - a set of instructions to profit from the Forex markets.
Why is a trading strategy needed?
With a clear set of rules to follow, a trader trades their emotions (fear, greed, impatience). This will always result in long-term failure.
Fear, greed, and impatience can be minimised by having a clear trading plan. Without rules to follow, traders often become emotional and illogical. Emotional-based trading is hazardous and often leads to significant losses or blown trading accounts.
Being consistent, managing risk, and logically approaching the markets are crucial to being a successful Forex trader. A trading strategy, system, or plan provides these needed components.
Obtaining a trading strategy
When it comes to trading Forex, there are two ways to have a profitable trading strategy:
Develop your own strategy.
Learn a strategy used by another trader or trading educator.
This page will cover both options in detail.
"It doesn't really matter if you create your trading strategy or learn an existing one, just as long as the strategy works and is profitable... Sticking to the strategy will be your next obstacle. Negative trading emotions are real, and the psychological challenges of Forex trading are tough to beat"
The Beginners Guide to Creating a Profitable Trading Strategy
Developing your own plan for trading the markets takes work, but I am here to help you!
There is a lot to consider when developing a trading strategy. It will require a lot of patience and technical skill, but trading requires these things anyway, so this should be familiar.
You must know the basics of Forex trading and have some trading experience.
Step One: Decide the basis of your trading strategy
There are so many ways to trade the Forex markets. The key is to develop a trading strategy based on how you like to trade and what makes sense to you.
You will know how you like to trade by what you feel most comfortable trading. Ask yourself:
How do I analyse the market?
Do I like trading price patterns?
Do I like using indicators?
Do I prefer volatile markets?
Can I analyse the market from both a technical and fundamental point of view?
Do higher time frames make more sense than lower time frames?
Can I comfortably hold overnight positions?
Answering the above questions will provide some insight into the type of trading strategy you should develop:
A day trading strategy
A swing trading strategy*
A strategy based on price action
A strategy based on technical analysis
A strategy based on fundamental analysis
A strategy based on a combination of analysis*
A strategy that uses a single time frame
A strategy that uses multiple time-frames*
*I use this, and I recommend you do the same.
Support and resistance. Diagonal, horizontal, and dynamic.
Channels. Bullish, bearish, and horizontal.
Price reversal patterns. Head and shoulders, inverted head and shoulders, double-tops, double-bottoms, etc.
Price continuation patterns. Flags, pennants, triangles, etc.
Consolidation breakout trading.
Moving averages. Crossovers and dynamic support and resistance.
Overbought and oversold RSI's.
Cross currency analysis.
Other indicators. Bollinger Bands, volume, etc.
Candlestick setups. Single, double, and triple candle setups.
If you are going to trade using fundamental analysis, you can base your analysis on the following:
Interest rates and inflation.
Economic news events.
Step Two: Keep it simple, but not too simple
You may have heard of the trading acronym 'KISS'. Keep It Simple, Stupid.
Having a simple trading plan is best. A trading plan cannot be too simple, however. Otherwise, it will not provide an edge.
A common mistake that many new traders make is that they learn an aspect of technical analysis, such as moving average crossovers or head and shoulder patterns, and then trade those things solely on their own. The result is a bunch of losing trades or a blown trading account. If you are a beginner, don't be sucked into believing that trading is as easy as using just a simple indicator, pattern, or technique. Forex trading is never going to be like an ATM - it will never be about just clicking a few buttons and you have instant cash!
You must layer several trading techniques with strict risk and money management to have a trading edge. By layering, I mean combining multiple principles, indicators, and time frames. Only through layering can you create a unique trading strategy that works.
For example, you may like trading 1-hour time-frame divergence. A trading beginner would see the divergence and enter a trade. However, this is not going to be successful in the long term. Divergence alone will not provide a sufficient edge to make money from trading.
To make divergence trading successful, a trader must create a trading system that combines (layers) several items. This could involve combining 1-hour time-frame divergence with higher time-frame support or resistance, a change in volume and a Japanese candlestick setup. This combination will likely provide a higher win rate and a profitable trading strategy.
To help you keep your trading systems simple - but also to provide a sufficient edge - I suggest you break your trading plan into three areas:
Direction. Find a way to quickly and accurately analyse market direction.
Entry. Use a combination of techniques to decide where and when to enter trades.
Exit. Use a combination of techniques to decide where and when to exit trades. Either to exit in a loss or a profit.
"Trading any price action pattern, technical indicator, or news event by itself will not make you profitable... Only through combining and layering price action, indicators, and other things will you truly have a trading edge"
Step Three: Leave no room for emotion
This may seem contradictory to 'keep it simple', but it's not.
A trading plan should be as simple as possible but also needs to be as detailed as possible - simple detail.
A detailed trading system guides a trader through the whole trading process from beginning to end. If any part of a trade is unclear, it leaves room for a trader to make their own trading decisions. This often leads to a trader becoming emotional.
A strong trading strategy leaves little to no room for trading emotions. Trading emotions leads to significant losses.
To leave no room for trading emotion, your trading strategy must cover all trading aspects, including:
Which pairs to trade
What times or sessions to trade
How to analyse the charts for direction, entry, and exit
The criteria for opening a position
Where to place the stop-loss
Where to place the take-profit
How much to risk per trade
What to do during major scheduled news events
What to do during times of spread widening
Risk and money management
If your trading strategy has clear guidance on the above, then your plan is complete.
But what about trading with discretion? Sorry to burst you bubble, but there is no such thing as a profitable trader that trades based on discretion.
Step Four: The Holy Grail doesn't exist
Traders often exclaim, "All I want is a strategy that will provide $300 a day". Unfortunately, trading results are not that consistent. A trader seeking the $300-a-day strategy will never find it as it doesn't exist.
No matter how good a trading strategy is, you will have losing trades, and lots of them. Even a trading strategy that is right 60% of the time will have consecutive losing trades. Sometimes five or six consecutive losing trades.
The table below should have you with your losing expectations.
Don't expect anything from trading, or at least lower your expectations. Think longer-term. Expect your strategy to make a profit every year, not every day or every week - as this is unrealistic.
Having the right expectations will help you develop and stick with a trading strategy more efficiently. Too high expectations may result in system hopping - moving from one strategy to another.
Expectation is the root of trading emotion. Change your expectations, change your feelings.
Step Five: Check that the strategy is actually profitable
This should be obvious to most, but back-test to ensure that the strategy, system, or plan makes money in the long term. If it does, test the approach by trading live on a demo or with a small amount of capital.
Try back-testing at least two years of trading data and live-testing for at least six months.
Learning a Trading Strategy
So, you've watched a YouTube video or purchased a course. In other words, you have learned someone else's strategy.
Learning a trading strategy from others is fine (I teach others how I trade Forex in my Forex course), but there are some things to be aware of:
Ensure the trading strategy is complete
Many YouTube videos and online courses only teach part of a trading strategy, usually entry and exit. As mentioned above, a trading strategy should cover more: what sessions to trade, what pairs to sell, how to analyse charts, what to do around news events, etc.
Any trading strategy you learn should cover all bases. If it doesn't, find something else or complete the strategy by filling in the gaps.
Ensure there are verified results
This is not vital, but it sure does help.
Seeing previous performance, verified results, or even live trading examples can help build your confidence in the strategy and help you avoid trading scams.
If you don't have confidence in the strategy, you will likely get more emotional when trading and will be more likely to abandon the plan.
Stick with it long-term
This is a BIG one.
One of the main reasons most traders never become profitable is that they need to stick with a trading system or plan longer. After a few weeks of losses, they give up. They judge the long-term performance of the strategy by their short-term experience. This is not logical. Stick with a plan for six months to get a good gauge of its performance and for you to feel comfortable trading it.
Another reason why people give up quickly on a strategy is because of their emotions. Because of emotional trading, they don't stick with their trading strategy and divert from its rules. This leads to losses and frustrations. Sometimes, this then leads to even more emotional trading!
Whether you create your own trading strategy or learn one from a professional trader, I wish you all the best.
TradingView charting software
Forex Tester back-testing software