How to Create and Manage an Effective Forex Trading Strategy

What Is a Forex Trading Strategy?

A forex trading strategy is a technique used by a forex trader to determine whether to buy or sell a currency pair at any given time.

Forex trading strategies can be based on technical analysis or fundamental, news-based events. The trader’s currency trading strategy is usually made up of trading signals that trigger buy or sell decisions. Forex trading strategies are available on the internet or may be developed by traders themselves.

Basics of a Forex Trading Strategy

Forex trading strategies can be either manual or automated methods for generating trading signals. Manual systems involve a trader sitting in front of a computer screen, looking for trading signals and interpreting whether to buy or sell. Automated systems involve a trader developing an algorithm that finds trading signals and executes trades on its own. The latter systems take human emotion out of the equation and may improve performance.

Creating a Forex Trading Strategy

Many forex traders start with a simple trading strategy. For example, they may notice that a specific currency pair tends to rebound from a particular support or resistance level. They may then decide to add other elements that improve the accuracy of these trading signals over time. For instance, they may require that the price rebound from a specific support level by a certain percentage or number of pips.

There are several different components to an effective forex trading strategy:

1. Selecting the market: Traders must determine what currency pairs they trade and become experts at reading those currency pairs.
2. Position sizing: Traders must determine how large each position is to control for the amount of risk taken in each individual trade.
3. Entry points: Traders must develop rules governing when to enter a long or short position in a given currency pair.
4. Exit points: Traders must develop rules telling them when to exit a long or short position, as well as when to get out of a losing position.
5. Trading tactics: Traders should have set rules for how to buy and sell currency pairs, including selecting the right execution technologies.

Traders should consider developing trading systems in programs like MetaTrader that make it easy to automate rule-following. In addition, these applications let traders backtest trading strategies to see how they would have performed in the past.

When Is It Time to Change Strategies?

A forex trading strategy works really well when traders follow the rules. But just like anything else, one particular strategy may not always be a one-size-fits-all approach, so what works today may not necessarily work tomorrow. If a strategy isn't proving to be profitable and isn't producing the desired results, traders may consider the following before changing a game plan: 

1. Matching risk management with trading style: If the risk vs. reward ratio isn't suitable, it may be time to change strategies. 
2. Market conditions evolve: A trading strategy may depend on specific market trends, so if those change, a particular strategy may become obsolete. That could signal the need to make tweaks or modifications.
3. Comprehension: If a trader doesn't quite understand the strategy, there's a good chance it won't work. If a problem comes up or a trader doesn't know the rules, the effectiveness of the strategy is lost.

Although change can be good, changing a forex trading strategy too often can be costly. If you modify your strategy too often, you could lose out.

Example of a Basic Forex Trading Strategy

Most successful forex traders develop a strategy and perfect it over time. Some focus on one particular study or calculation, while others use broad-spectrum analysis to determine their trades. One simple strategy is based on relative interest rate changes between two different countries.

Imagine a trader who expects interest rates to rise in the U.S. compared to Australia while the exchange rate between the two currencies (AUD/USD) is 0.71 (i.e., it takes $0.71 USD to buy $1.00 AUD). The trader believes higher interest rates in the U.S. will increase demand for USD, and the AUD/USD exchange rate will thus fall because it will require fewer, stronger USD to buy an AUD.

Assume that the trader is correct and interest rates rise, which decreases the AUD/USD exchange rate to 0.50. This means that it requires $0.50 USD to buy $1.00 AUD. If the investor had shorted the AUD and went long the USD, they would have profited from the change in value.

What is the difference between a Trading robot and a trading strategy?

In fact, nothing, this is the same trading strategy only written in code. The robot is devoid of emotions and prejudices, so it will definitely follow the strategy. The second advantage is that you can run the strategy on history and see exactly whether it works or not and what kind of income it brings and what risks. If you want to get your own trading strategy, get one of our strategies already written in the form of a robot. Our trading strategies embodied in the form of robots: