Trading: the act of buying and selling financial positions like spot forex, is only a small part of what it takes to be successful as a trader. Anyone can sign up on a broker, open an account, fund some money and trade it away. Successful traders take a different route, a route in which the trade is just about the last thing they do. This post lays out in a step by step fashion the anatomy of a winning strategy.
- The Fundamentals – I know many people engaged in forex are strictly technical traders but let me tell you, the fundamentals are of utmost importance. If you are watching a chart of price action, that action is driven by the underlying fundamental conditions of the market. It only makes sense that if you have a grip on what market conditions are you will have a better time reading the charts. If you aren’t keeping up with the economic news on a regular basis you should be — it’s a great source for trading opportunities and the beginning of any successful deal.
- The Technicals – The technicals are the charts, the indicators, the trend lines, support and resistance; price action and how you read them. If there is one thing I have learned time and time again is that commonly accepted technical signals are ridiculously accurate. Why? Because they are generally accepted, a lot of people use them, so many that it becomes a kind of self-fulfilling prophecy. The charts say one thing, so people do what it says and then it happens. Learn the technicals, apply them to the fundamentals and you’ll begin to recognize the profitable entry and exit points.
- Strategy – Strategy is extremely important because it gives a baseline for success. A strategy is a systematic approach to solving a problem. The Oxford dictionary defines strategy as “a plan of action designed to achieve an overall goal”. The overall goal is to make money with forex; the strategy is the plan to achieve it. If things don’t go according to plan, you go back and find out what part of the plan broke down, fix it, and test it all over again. A good strategy will include both the fundamental and technical analysis but also specific rules for when to enter and exit a trade. For example, in an uptrend only take entry on stochastic bullish crossover when price is bouncing from a moving average. Consider the chart below.
- Risk management – Successful traders always know exactly how much they are going to place on the next trade, no questions asked. This is because they use some form of risk management that prevents them from the dangers of trading so much that one trade, or even a string of losing streaks, could wipe them out. Some traders use a Percent Rule. This means they only risk a fixed, set percent of the account on any trade. This way, if the rule is for 3%, the amount of money that is placed on each trade will grow as the account grows but will never be too large for the account to handle if the trade goes bad.
- Place the trade – This part is smooth sailing if the first four conditions are met. You will have started from a solid foundation, used it to make a good analysis, waited patiently for the right signals for entry and are trading just the right amount, not too much and not too little. At this point all you have to do is enter your order, execute, and wait to see what happens.
- Monitor the trade – Even with risk management and stop-losses it is a good idea to monitor what is going on. You may want to take profits early if news is not what you expect or choose to raise your profit targets if price action looks good.
- Close the trade – The lesson that I learn repeatedly is that you do not make money until you close the deal. Even if it means closing a bad trade at a loss, it is better to save a little than lose it all. This is especially true with profits. If profits are showing and they are enough to make you smile it is time to sell. You might make more if you hold, but you also might make less, or lose all the profits or worse, the entire trade.
- Do it all again – For true success you have to do this over and over until your account grows to a size it can support your lifestyle. There will be losses, but they will be small compared to the gains.
NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future
GENERAL RISK WARNING
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.
76% of retail investor accounts lose money when trading CFDs.
You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.