Choosing the right forex strategy is crucial for earning profits from trading. There are many forex trading strategies that are used by beginners as well as experts, but none of them can be called the most useful one. The best strategy for a user depends solely on him and his trading technique. Traders often panic when they see a strategy is working for others, but not for them. There is no need of being troubled, you can develop your strategy slowly after picking a style.
However, every trader needs to consider two factors while choosing an appropriate forex strategy, the strategy must have consistency and profitability which are the key elements of forex trading.
To choose the right strategy for you, you need to know about the type of strategies.
Most used forex trading strategies include:
- Scalping trading: These trades are held for only a few minutes and the scalper earns a profit by beating the bid/offer spread.
- Day trading: These trades are opened and closed by the traders within the same day which eliminates the chance of waiting overnight for a large move.
- Swing trading: Also known as trend following trading strategy among traders, this strategy holds the positions of trades for several days.
- Position trading: These traders follow long term trades, so, it requires great knowledge about market fundamentals, as well as discipline and patience.
Tips to choose the right forex strategy
The personality of the trader plays an important role in his trading success and it is easy to personalise a trading strategy that is proved. So, you should experiment with several methods to discover the forex trading strategies that will work for you.
This is how you should choose your strategy:
- Choose The One Suitable For You
You will find a lot of trading strategies online. If you are a student or you are working full-time, then there is not enough time in your hands for day trading. The ideal option for you, in this case, would be the long term swing trading. on the contrary, if you are an experienced trader, then you can go for day trading or scalping. Some traders also go for indicator based trading, and some prefer price action trading. So, the first step is to consider your trading habit and choose the strategy according to it.
- Match Trading Psychology With Your Strategy
When it comes to earning a profit in forex trading, trading psychology is a huge deal. If you fail to match your trading strategy with trading psychology, then it is impossible for you to make profits. According to most of the forex analysts, the success rate of the forex market depending on trading psychology is nine out of ten. If we compare the strategies, we can see that the possibility of hitting the stop-loss is higher in scalping that it is in swing trading.
If you are a beginner, then you cannot handle the stress of scalping, so, you should start with swing trading. Keep in mind that every trader goes through four stages, such as unconscious incompetence, conscious incompetence, conscious competence, and unconscious competence. To improve your trading psychology, you must familiarise yourself with these stages and understand trading strategies better. Another important thing is freeing your mind from any bias before you enter a trade. The pressure of your personal life may affect the trading decisions, so, some meditation can be useful.
- Be Careful About Risk-Reward Ratio
Many trading strategies have good track records, but their risk-reward ratio is not good. Keep in mind that it is never wise to take the risk of 100 pips only for a profit of 20 pips. Standard risk-reward in forex trading can be 1%-2% maximum per trade, with a 1.5 times return goal minimum. However, it is better to use a 2% risk per trade. Thus, the risk can change the lot size. The trader can choose a price action based strategy or an indicator-based strategy. You must ensure to follow a proper risk-reward in all trades. There is no fixed method for it, you need to experiment and grab the opportunities.
- Learn money management
If you try to trade with investments too small, then you may be forced to use broken money management styles. So, be careful and avoid money management mistakes. Keep in mind that not all brokers offer negative balance protection.
So, you have to be within your limit and not invest more than you can afford to lose.
- Backtest strategies
You need to understand that just because a trading strategy is working well for impulsive trends, it does not mean that it will also work well in the volatile market environment. So, only choose the strategies that have proven track records in any type of market condition. Be careful not to follow fake traders on social media that share results showing 100 % return with just one or two orders. If you cannot get to see track results, then backtest your strategy manually.
- Consider market context
Considering the market context is also important. The market is always changing, and some strategies fit perfectly in a condition and fail in the other. So, keep yourself updated about the market context and use that information to choose the right strategy.
Keep these tips in mind and compare the required time investment to choose an appropriate forex strategy for your trading.