Trading Strategies 101 - Your Ultimate Guide to Forex Trading Strategies
There are 2 reasons why you will fail to become a successful trader; trading without a strategy and trading your emotions...
On this page, I will share everything I know about developing and trading a profitable Forex strategy. If you would prefer to learn about managing trading emotions, please click here.
"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 know about trading strategies, including top tips on how to create your very own strategy"
When it comes to trading Forex (or any other financial market), there are 2 ways to have a profitable trading strategy; learning a strategy used by another trader or educator, or developing your own strategy. This page will cover both options in detail...
Trading Strategies 101
What is a trading strategy?
Why is a trading strategy needed?
Obtaining a trading strategy
Let's start with the absolute basics...
A trading strategy is a set of rules that provide an edge. Following a trading strategy should put chance in favour of the trader, which should result in a long-term positive return. Trading strategies can also be referred to as trading plans or trading systems.
Without a clear set of rules to follow, a trader is left to trade his emotions. This will always result in long-term failure.
Emotions such as fear, greed, and impatience, can be minimized by having a clear trading plan. Without a set of rules to follow, traders often become emotional and illogical. Emotional based trading is highly risky and often leads to large losses or blown trading accounts.
Being consistent, managing risk, and approaching the markets logically are crucial components to being a successful Forex trader. A trading strategy, system, or plan, provides these needed components.
Creating a Profitable Trading Strategy
Creating your very own plan for trading the markets is not easy... 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 nothing new!
#1 Deciding the basis of your trading strategy - trade what you like
There are so many ways to trade the Forex markets, especially when it comes to technical analysis. The key is to develop a trading strategy based on how you like to trade. You will know how you like to trade by what you feel most comfortable doing. Do you like trading patterns? Do you like using indicators? Do you prefer volatile markets? Do higher time-frames make more sense than lower time-frames? Answering questions like this can help you identify what and how you like to trade.
Strategies can be based on a number of things, like...
Horizontal support and resistance
Diagonal support and resistance
Bullish and bearish channels
Dynamic support and resistance
Higher time-frame support and resistance
Price action reversal patterns - double tops, double bottoms, head and shoulder patterns, inverted head and shoulder patterns, etc
Price action continuation patterns - flags, pennants, triangles, etc
Price action consolidation patterns - ranges, horizontal channels, etc
Analysing economic figures
Predicting rate statements
Predicting CPI figures and other economic data
Moving averages - support and resistance, crossovers, etc
Overbought and oversold RSI's
Multiple time-frame analysis
Cross currency analysis
Bollinger Bands, volume, and other technical indicators
Single candlestick setups - continuation, reversal, etc
Double candlestick setups - continuation, reversal, etc
Triple candlestick setups - continuation, reversal, etc
London session open
New York session open
Trend reversal trading
The list is BIG. You have a lot of choice.
I suggest learning most of the above. Whichever you find easiest to understand, is likely the best option for your trading strategy.
#2 Keep it simple, but not too simple - layering is key
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 though, otherwise it will not provide an edge...
A common mistake that a lot of 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 machine - it will never be about just clicking a few buttons and you have instant cash!
In order to have a trading edge, you will have to layer a number of trading techniques with strict risk and money management. By layering, I mean combining multiple price action principles, multiple indicators, and/or multiple time-frames. Only through layering can you create a unique trading strategy that actually works.
For example... You may like 1 hour time-frame divergence. A trading beginner would simply see the divergence and enter a trade. In order to make divergence trading successful though, a trader is going to have to create a trading system that combines (layers) a number of 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 is likely to provide a higher win-rate and a trading strategy that actually makes money.
"Trading any price action pattern, technical indicator, or news event by itself is not going to make you profitable... Only through combining and layering price action, indicators, and other things will you truly have a trading edge"
#3 Leave no room for emotion - be as detailed as possible
This may sound like a contradiction 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 strong trading strategy leaves little to no room for trading emotion, as trading emotion leads to losses, sometimes big losses. To leave no room for trading emotion, your trading strategy needs to cover all aspects of trading, including...
Which pairs to trade
What times or sessions to trade
How to analyse the charts
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 spread widening
Risk and money management (to learn more about this, click here)
If your trading strategy does not have clear guidance on all of the above, then your strategy is not complete.
But what about trading with discretion?
I have never met a profitable trader that trades with discretion. I don't believe purely discretionary traders exist.
Traders that profess to use discretion usually mean that there are areas of their trading strategy that are discretionary. They will always have some sort of plan or system in place most of the time though.
#4 Don't expect too much - the Holy Grail doesn't exist
I often hear traders exclaim, "all I want is a strategy that will provide $200 a day". Unfortunately, trading results are not that consistent. A trader seeking for the $200 a day strategy will never find it. In fact, they are more likely to lose $200 a day in bad trades, courses, and EA's!
No matter how good a trading strategy is, you are going to have losing trades, and lot's of them. Even a trading strategy that is right 70% of the time is going to have consecutive losing trades. There is no reason why a strategy like this could have five or six losing trades before having a profitable trade.
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 just unrealistic.
Having right expectations will help you to develop and stick with a trading strategy with greater ease. Having 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 emotions.
#5 Check that the strategy is actually profitable - back-test and live-test
This should be obvious to most, but back-test to ensure that the strategy, system, or plan actually makes money long-term. If it does, then test the strategy by trading live on demo or with a small amount of capital.
Once you are trading live, your real challenges will start... Trading emotion! You can learn all about trading emotions and trading psychology on my trading emotions page.
"It doesn't really matter if you create your own trading strategy or learn an existing strategy, just as long as the strategy actually 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 extremely hard to beat"
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.
In my opinion, learning a trading strategy from others is absolutely fine (I teach others how I trade in my course), but just some advice...
#1 Ensure the trading strategy is complete
#2 Ensure there are verified results or some sort of performance data
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 so much more; what sessions to trade, what pairs to trade, how to analyse charts, news events, etc, etc.
Any trading strategy you learn should cover all bases. If it doesn't, either find something else or complete the strategy yourself by filling any gaps.
This is a BIG one.
One of the main reasons why most traders never become profitable is because they don't stick with any trading system or trading plan long enough. 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 strategy for 6 months to get a good gauge of it's 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 it and divert from the strategies rules. This leads to losses and frustrations. Sometimes, this then leads to even more emotional trading! Instead of learning how to discipline their trading emotions, or reduce their emotions through tweaking the strategy, such as lowering risk or the amount of trades, they decide to abandon the strategy. This leads to strategy hopping and never actually making money, because they are constantly changing the strategy rather than dealing with their emotions.
#3 Stick with it long-term
This is not vital but it sure does help.
Seeing previous performance, verified results, or even live trading examples, can help to build your confidence in the strategy.
If you don't have confidence in the strategy, then you will likely by more emotional when trading and will be more likely to abandon the strategy.