Monday, January 9, 2012

Forex Trading Strategies

Every newbie trader in the world wants to put down their first trade and win the lottery. They are told how easy it is to trade FOREX and that they can be the next over-night millionaire. It could happen but without a complex strategy and the leverage to put the money down it probably won't. Some literally believe they will whip out a few thousand dollars and in a few days they will be wealthy playboys/girls.

9 trading tips!
Criteria for a good trading strategy when charting with Metatrader:
1. As a bare minimum a trader must have rules for entry and exit - possibly re-entry points (add or subtract from a position if your a multi-lot trader). Additionally these
rules can contain what-if scenarios that I call plan B's if the trade doesn't
work as expected but to keep it less complicated you can just firmly stick to stop losses and target points. I neglected to say that part of your exit is either a target price or a stop loss.
I often take a break after a stop loss
to avoid making the same mistake twice.

2. Use at least 1 indicator that provides a strong signal that predicts a reversal point. One of the most important part of a good strategy is the initial signal.

3. The signal indicator should then be confirmed by a confirmation indicator. I actually have a stand alone indicator that I use but I set levels to provide strong signals for it. In other words it doesn't need a confirmation if used properly but most indicators need further confirmation - it's great to have a sharp signal but a sharp signal can be nothing without a confirmation. It goes back to the old carpentry rule - measure twice and cut once.

4. The strategy is not so complex that the chart is filled with clusters of indicators. As a rule of thumb I only will have 3 windowed indicators and 3 on-chart indicators for a total of 6 indicators. I also try to not use indicators that do the same thing or nearly the same thing. I then set up my trading rules for each of the indicators. If I can't think of a rule for a particular indicator I then weigh it's specific use and will likely get rid of it if I can't define a trading rule for it. *I can sometimes break the rule of 6 total indicators if they are luxury indicators that make the chart look better such as pretty candles or enlarged price - in which case they are indicators that don't help to make decisions.

5. Your trading strategy should be tweaked for the particular time-frame(s) you trade such as scalping, daytrading, swing, or long term. For instance: A long term strategy will not have the same stop loss/target price as a scalping strategy - if so something is not right because a 10 pip stop-loss might work for a scalp but must be much deeper for a long term. Finely tweak the trading strategy to a time-frame and don't try to negotiate. If you have a 100 pip stop loss and are taking 10 pip gains something isn't working right.

6. Practice in the strategy tester (Ctrl+R in your trading terminal) and then when you got the strategy down use a demo account with practice money before going live. Almost all Metatrader Brokers have demo accounts (I haven't seen one that hasn't). Take advantage of the demo feature before losing real money.

7. This seems simple but if the trading strategy is not working change it until it does or find a completely different one all together.

8. Master technical analysis. Trading without concrete understanding of the technicals is not very wise. I always notice the easy patterns such as Head & Shoulders - anyone who hasn't isn't taking trading seriously.

9. Not following any one of these tips can be a serious mistake and lead to a short trading career. These rules apply to trading stocks, currency pairs, futures, or options. So follow these tips with concrete discipline and put yourself a step ahead of most of the competition who won't.

By Neal Vanderstelt
Forex Trader, Market Analyst, Trading System Designer

6 comments:

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