How to Develop a Successful Trading Strategy
BY Chris Andreou
|December 17, 2020Having a sound and stable forex trading strategy is essential if you want to get serious about seeing consistent returns on your trading investments.
To create a solid trading strategy, you need to find a plan that ensures you win more money than you lose, and includes steps to implement proven risk management strategies.
So, why do you need a trading strategy?
Without one, you won’t know how to spot new trading opportunities or how to respond to the ever-changing market conditions once you’ve already placed your trade. Not only will you develop a consistent routine, but your ability to spot new opportunities will largely improve.
What are the essential components of a trading strategy?
- Establishing directional bias and qualifying the entry
- Determining stop-loss & take-profit targets
- Utilising trading & risk management
- Defining your preferred time frame
Is the asset going up or down? Which way will the markets swing? Establish a directional bias before you trade, which will ultimately help you to determine the trend direction and simply whether you’ll go long or short.
Understand why you’re placing your trade
It’s important to understand the fundamentals of any trade you’re doing, even if technical analysis forms the basis of your trade.
Make sure you’re up to speed on the latest news surrounding the forex, stocks, or precious metals that you’re trading. Find reliable news sites that you can trust, and try to get a feel of where you think the price shouldbe headed based on fundamentals, and then try to match that analysis up with your technical view.
Establish your key technical levels then watch out for the price to either break them or retrace from those levels.
Choosing your Preferred Time Frame
This generally depends on each individual trader. If you’re the type of trader that likes to be in control of your trades and you’re just looking to cash in quick profits, then lower timeframe intraday charts are probably right for you. Anything from 1 minute to 30 minute periods should suit you fine.
If you’re trading outside of your day job, then it’ll most likely be difficult to focus on the low time frames, such as the 15-minutes chart.
If you’re only checking in every so often during the day – the best time frames to use are 1 hour and above. That will ensure you’re operating in the medium to longer game markets.
There is no right or wrong time frame to trade, it’s something each trader must decide for themselves.
Stop Loss & Take Profit Targets
This is easily the most important part of any strategy. Establishing how much you’re willing to risk and how much profit you’re aiming to make (within reason) are the most important aspects of your plan that you’ll need to stick to no matter what.
Determine your stop loss and potential profit target before you even place a trade. Once you start thinking of where your stops should be, you’ll establish whether your trade is sensible from a risk-reward standpoint.
Establishing a protective stop loss will help you to minimise any potential losses. What’s more, you’ll be able to know in advance how much you’re going to lose should the markets go against you (consider using a protective tool on trades gone wrong such as the TIOshield, an innovative risk-management tool only offered by TIOmarkets).
Keep up to date with price action movements to get a feel for and an understanding of how the asset behaves – but don’t deviate from your pre-set stop loss and take profit targets.
Risk Management Strategy
If you want to be a successful trader and develop a strong trading strategy, it’s vital to place very strict money management parameters in place.
What does this involve?
Rules. For example, ensuring your potential profit is twice as big as your potential loss. The higher the risk to reward ratio, the less risk there is at loss. Using this rule, you’ll be profitable even if your strategy generates wins less than 50% of the time.
If you know the 2% money management rule, it’s worth noting. This guides traders to never risk more than 2% of your account balance on a single trade. It reduces the chances of losing your entire balance and also helps to manage your losses in general.
Ultimately, the goal of trading is to earn, reduce the chance of loss and risk, and develop your trading skills long term. Having a sound risk management strategy is critical to achieving this.
Understanding yourself, your habits and your own personality are important parts of your trading routine. Understanding yourself will help you to spot the correlation between your strategy and your habits. Every trader is different, thus it’s essential you do your research and understand yourself in order to reach your personal trading goals.
Thinking of entering the world of forex? Or just need a helping hand? Sign up today with TIOmarkets. We offer a secure, fast and cost-effective trading environment, as well as a library of educational materials to help you land on your feet.
Risk disclaimer: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Never deposit more than you are prepared to lose. Professional client’s losses can exceed their deposit. Please see our risk warning policy and seek independent professional advice if you do not fully understand. This information is not directed or intended for distribution to or use by residents of certain countries/jurisdictions including, but not limited to, USA & OFAC. The Company holds the right to alter the aforementioned list of countries at its own discretion.
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