Forex Strategy Secrets: Build a Profitable Trading System
A Forex trader buys or sells a currency pair. The idea is to profit from its volatility. This is why traders favor major pairs and not crosses. This represents only one of the Forex strategy secrets successful traders use. On top of that, traders search for a trading system to eliminate fear and greed.
Unfortunately, this sounds easier than it is. The first thing traders need to do is to cope with losses. Trading without taking losses doesn’t exist. The holy grail in trading doesn’t exist either.
Secondly, profitable traders strive to find a balance between life and trading. Between winners and losers. Between greed and fear. There’s nothing more frustrating than closing a trade earlier. Or letting your losses mount.
To reach this, a daily Forex strategy is not enough. Traders need to approach trading differently. To look at the market from a different angle, and to make sure the trading system works.
For this to happen, a trader must have a trading system. This may be a technical idea or a fundamental one. Or both. Regardless, a trade comes only after back-testing it. If the past can predict the future, trading results will prove that or not.
A trading system that works should consider everything. The time frame used, the spread, the target, the trading style, the slippage…everything matters here. Moreover, it should consider you as a trader. Are you an impulsive person? If yes, scalping is for you. Is patience your thing? If yes, your personality fits to swing trading and investing.
While everything about seems rubbish (who cares about this, I only want to make money asap!), it holds the key to winning and losing. To a profit and a loss. Not everyone is made to be a trader. But if you are trading material, this article is for you!
How to Build a Profitable Trading System
Believe it or not, knowing where the market will go is not enough to make money in the Forex market. This may work from time to time, but on the long run, traders will fail. A trading system considers every aspect related to it. Market psychology is one thing. Another is knowing when to enter a market, how to avoid correlations, and so on.
Moreover, trading expectations play an important role in a trader’s success. Or, to be more exact, what is it that you look from trading?
For some, the answer is not money. Reputation, for once, might be as good an answer as any. Furthermore, the ambition to succeed. Statistically, retail traders fail over eighty percent of the times on their first deposit. As a result, they lose confidence and faith in their trading system. Beating the system is something many traders strive to do.
Probably all retail traders use technical analysis. Therefore, a Forex trading system that works for retail traders contains at least some technical indicators. Or, a trading theory, like the Elliott Waves, Gartley, Gann, and so on.
Fundamental analysis has its role, no doubt about this. But one should not focus too much on understanding everything. Focus on the basics, like the interest rates and currencies relationship, and use the economic calendar. This is just a small trick part of any Forex strategy secrets guide.
All these make up for a great trading system. There’s not one more important than another. If treated as a whole, they’ll be part of a trader’s success.
A profitable trading system is one that works. That is, it must work day in and out, month in and out. Not all trades must be winners, though. However, the profitability ratio must be positive.
The Trading Style Involved
A profitable Forex trading system should start from the trading style. Scalpers, swing traders, and investors – these are the three trading styles to start from.
Scalpers look for a quick buck as fast as possible. They enter and exit the market multiple times a day. Because of that, scalping fits retail traders the most. Scalping may start from the lowest time frame possible (1-minute chart) and go all the way up to the daily. However, scalpers rarely look at time frames bigger than the hourly one.
A Forex scalping strategy must use the appropriate broker. While a system may work on paper or when back-testing, it may fail in a real environment. Therefore, the Forex broker type matters. Look for things like if the broker is a market maker or a non-dealing desk, what technology uses, etc.
Scalpers prefer higher commission in the detriment of super-accurate execution. In a way, it is no wonder. Most of the times, their trades take a few minutes to a couple of hours.
Swing traders like to believe they’re better. Most of the times they look at bigger time frames, above the hourly and all the way to the daily chart. They either count waves with the Elliott Waves Theory or have a pattern recognition approach. No matter the trading tool, a profitable Forex strategy for swing traders is more time-consuming.
Investors, on the other hand, don’t care about time. That is, as long as they are right about the general direction. They have both the time and resources needed to survive a small drawdown.
For these traders, Forex strategies that work deal mostly with central banks‘ monetary policy decisions. Since these decisions move a currency, this is what matters the most. Rest of the economic news is dust in the wind.
Trading Expectations with Your Strategy in Forex
Why do traders want to trade? What attracts them to the Forex market? Is it only money? Or there’s something else to it?
No matter the answer to these questions, this is the result of human nature. People have always wanted to earn an extra buck, with little or no effort if possible. Unfortunately, this is the main reason why traders join a Forex broker.
In reality, this should be the last reason to trade. Any Forex system poised to make money will do that over the long run. If traders come to the Forex market with a $100 account and expect to turn it in a million bucks in a month, that’s not possible. In theory, it is. In reality, it’s a daydream.
The discussion should start from knowing the forces you’re facing as a trader. Retail traders represent only a small proportion (very small one!) of the whole Forex market. Other market participants move prices. Or, to be more exact, prices move because of other market participants actions.
Such participants are central banks (they do have a trading desk, to the surprise of many!), liquidity providers, Forex brokers…and so on. Commercial banks and other financial institutions come and complete the list. Not to mention here the HFT (High-Frequency Trading) industry. Imagine the Forex strategy resources these entities have access to!
Any Forex strategy that works must have a realistic approach. This starts with having realistic expectations. Imagine that trading goes like life goes: with its good and bad ones. One day you’ll have a hard time to find a good entry, but the next day it will be easier. What matters is the account to grow.
Technical Analysis in a Forex Scalping System
It goes without saying that a successful Forex trading strategy for scalping deals with technical analysis. On the low and very low time frames, traders use technical indicators to buy or sell. Out of these, oscillators work best.
Don’t expect a straight line for your account’s balance. Look at it more in terms of the result of an ongoing activity, rather than a money-making opportunity. As a trader, you have to understand losses are part of the process. Moreover, they come naturally.
Oscillators work best for scalping for multiple reasons. Firstly, they consider multiple periods before plotting a value on the designated chart.
Secondly, their aim is to identify when the price makes a fake move. If that is the case, quick trade results. The smaller the time frame is, the sooner the reaction will be.
Many traders face a difficult problem in their trading activity. In theory, as a trader, you’re not supposed to try picking tops. Or bottoms, as a matter of fact. This is risky business.
That is on one hand. But on the other hand, if you wait for a confirmation of a top or a bottom, the new trend already started. If you trade with the Elliott Waves Theory, the market already made the first wave. By the time you enter, the market starts correcting the move. Hence, you lost the first train.
One of the best kept Forex strategy secrets when scalping is the trading size. How much is enough and how to determine the size? Here, you have to look at the leverage of your account, the maximum drawdown your trading system has, etc. Scalping Forex strategies that work must have a very small drawdown.
Technical Analysis in Swing Trading and Investing
A trading strategy Forex traders use must be the result of a disciplined approach. Ideally, the trading systems and methods involved should result in a trade with a stop loss and a take profit. The bigger the risk-reward ratio to it, the better.
A great tool to accomplish this is the Elliott Waves Theory. According to Elliott, the market is the result of human behavior. What better way to express a market’s moves than incorporating human nature?
For this reason, this is one of the most powerful trading theories ever invented. That is, if applied correctly. So many books were written on the subject, that traders find it extremely confusing.
Yet, it gives fabulous returns due to the trading rules it has. Using it requires discipline, patience, and pending orders. Well, these are the ingredients of any trading system Forex traders want.
Elliott said that the market moves in cycles – impulses and corrections. An impulsive move is a five-wave structure and a corrective one is a three-wave structure. Together, they form a cycle.
Therefore, a bullish cycle is five waves up corrected with three waves down. Can something be easier?
The problem comes from the following aspect. Each wave in these impulsive and corrective structures is made of waves of a different degree. For this reason, the theory becomes complicated.
However, it fits to swing trading and investing. These traders use Forex strategies without indicators, and this is one of them. All they need is historical data to spot different cycles.
Based on that, a top/down analysis results in the right market positioning. This process allows Forex traders knowing where to start the count from on the lower time frames.
Fundamental Analysis Part of a Trading System
A very simple Forex strategy that works deals with interpreting the economic data. This is where fundamental analysis kicks in. When trading, there’s a saying: the market needs a reason to move.
Without a reason, a breakout strategy Forex traders might use will simply not work. The market participants will align with the central banks’ interests. This is the only way to gain a competitive advantage in today’s markets.
However, fundamental analysis is not only about economic releases. It is about understanding what happens in the world. It is about geopolitics, as well as macroeconomics. Large investing funds “play” with vast Forex strategies resources to reach a fundamental conclusion. This may lead to the opening or closing of a trade.
The reason is as good as a technical one. Having said that, retail traders must understand the complexity of fundamental analysis. It is not about buying on a positive data and selling on a negative one. It is about understanding what is going on in an economy.
Luckily, retail traders can ignore it, to some degree. This is one of the reasons why retail trading is speculating on short to very short-term time frames.
Trading strategy examples based on fundamental analysis are at every corner. The most famous one is when George Soros “cornered” the Bank of England in a billion pounds trade. This was fundamental analysis.
Fundamental analysis works great as a Forex divergence strategy. For this, the trading system is contrarian. Such a system works more often than people think. However, while being a contrarian works, such an approach is risky.
Still on the fundamental reasons to take a trade, there are plenty of trading strategy examples that work. For instance, the classical example comes from inflation. Fundamental traders simply wait for inflation data and trade accordingly.
Keep it Simple
Traders have a strong tendency to over complicate things. With so many technical indicators available, they look for the holy grail. In trading, this concept calls for the perfect setup: only winners, no losers.
Because of that, the strong belief is that the more indicators in a trading system, the better. Wrong!
Keep in simple and you’ll end up on the right side of the market. Sometimes all you need is to simply watch price action. This simple thing, putting the hours in front of the screens, is sometimes enough for analyzing a market.
One of the most powerful trading systems and strategies considers chart pattern recognition. Patterns repeat themselves in time. If a pattern forms on the hourly chart, the same pattern may appear on the monthly one. However, with different implications.
To keep the strategy simple, just follow the same rules from lower time frames when treating a pattern on the bigger ones. The results will end up being outstanding.
FREE GUIDE: 3 Forex Strategy Cornerstones
And now you have the wonderful opportunity to get a Free Strategy Guide that will improve your Forex trading. At the left side of this paragraph you will find a button that will bring you to the download page of the guide. You will get an easy-to-use Forex strategy pdf that will help you take control of your trades. Get that guide and visualize your strategy options.
The guide is totally free and it is only two clicks away from you. Therefore, I strongly recommend you to support your Forex system approach by adding it to your toolbox.
Simply click the button and you will be taken to the download page of the guide. Take advantage of the free download and and get your guide now!
Any profitable trading systems Forex traders use, must be discretionary. This means the results do not depend on and are not influenced by human nature. To be honest, this is wishful thinking. At least when it comes to retail traders.
Because of the way people are, it is impossible to detach completely from a trade. Or, from an idea. For example, imagine you sell the U.S. dollar. This is based on expectations the Federal Reserve will cut the rates. However, when the Fed does cut the rates, the outcome may differ.
The market will always position itself ahead of the main event. These days central banks use forward guidance. The idea is to communicate market participants as best as possible central bank’s intentions. Because of that, there are many trading strategy examples that fail to succeed.
This communication process is so powerful that by the time the decision comes, the market will ignore it. Or will move in the opposite direction, just to trip some stops.
Traders look for Forex strategy secrets to be profitable. Many come to the trading arena with huge expectations. A few months later, they end up being disappointed. How about learning some about the industry, what moves prices, how trading goes, etc.?
This way, rookie mistakes have no room in any trading system. Moreover, there’s no holy grail in trading. Success is the result of hard work and discipline. A profitable trading system starts and ends with you as a person. On top of it, with how you’re treating trading.
If you treat trading as a hobby, it will end up remaining one. If you treat it seriously, chances to survive increase. To sum up, the worse enemy to any Forex system is you, the Forex trader.
GET STARTED WITH THE FOREX TRADING ACADEMY
Damyan is a fresh MSc International Management from the International University of Monaco. During his bachelor and master programs, Damyan has been working in the area of financial markets as a Market Analyst and Forex Writer. He is the author of thousands of educational and analytical articles for traders. When being in bachelor school, he represented his university in the National Forex Trading Competition for students in Bulgaria and got the first place among 500 other traders. He was awarded a cup and a certificate at an official ceremony in his university.