What is The Forex Trading Strategy? How to Create Forex Strategy?
Forex trading strategy is a process to anticipate the price movement of a currency pair based on previously set price sentiment. When investors try to anticipate the price movement, they should do a lot of pre-workouts with the price. One of the best trading strategies is based on technical analysis. Moreover, there is another analysis method, like fundamental analysis, market sentiment analysis, smart money analysis, or quant analysis.
In the following section, we will see a short description of the forex trading strategy including how we can create forex strategy:
What is The Forex Trading Strategy?
Forex trading strategy is a systematic approach to make money from buying and selling a currency pair. When investors try to anticipate the price movement, they should do a lot of pre-workouts with the price.
The precautions include the nature of the market, the previous price action, support and resistance, swing points, market volatility. Volume, trading session, etc.
There are more ways to define the upcoming price movement of a currency pair that depends on a trader’s trading style and strategy.
If you are a technical trader you would focus on previous price movements while if you are a fundamental trader, you would see what is happening in the economic and geographical sectors.
Overall, a trading strategy defines the guideline and rules to anticipate the price movement of a currency pair.
However, most of the trading strategy is distinguished in two ways- technical analysis and fundamental analysis.
Technical analysis is a process to anticipate the price movement of a currency pair based on the previous price action. If you see the price to show a nature there is a possibility that the price will do the same nature in the future.
In Forex trading, the price movement happens with traders’ thoughts over the market. Therefore, it is the emotion of traders around the world. If the same situation or the same price level appeared, there is a possibility that traders will react in the same way they have reacted earlier.
If we go deep inside the technical analysis we will see there are more tools and calculations used while the previous price actions calculations. For example, one of the biggest and most used technical analysis indicators is the moving average.
The moving average represents the overall price sentiment of a currency pair on a particular time frame. If you say moving average 50, it means the average price of the last 50 time frames where the time frame would be an hour or day.
Later on, when the price is trading above the average price of the last number of candles it provides an indication that the buyers are stronger than sellers. Therefore when we try to buy or sell in a currency pair we will emphasize buy trades mostly.
Fundamental analysis is a process to anticipate the price movement based on economic events and activity. As we know, the price of a currency pair depends on how the central bank reacts to the price and how the supply and demand of a currency are changing.
In general, when the supply increases the price will fall, and when the demand will increase the price will increase.
In fundamental analysis, the main aim is to identify the supply and demand of a currency against another currency. Moreover, Central banks of an intrinsic currency market directly are also a matter of consideration.
In fundamental analysis, the fundamental data is very important. Analysts’ usually read the data and evaluate it with the previous data to get a final output and direction of the currency pair.
When the fundamental data shows better than expected results we may expect that the price of a currency pair will increase. On the other hand, weaker than unexpected data will indicate that the price may move down in the coming days.
Among fundamental analysis, there are many data and economic releases that a trader should focus on but four fundamental indicators that a trader cannot avoid are- Interest rate, Unemployment, Gross Domestic Products, and Inflation.
How to Create Forex Strategy?
If you know enough about technical and fundamental analysis you can easily build trading strategies according to some specific rules.
Here in this section, we will learn how to create forex strategy with a step-by-step approach:
- Identify the analysis method. If you are focused on technical analysis, understand and learn technical indicators to anticipate the price movement based on specific calculations. In that case, you should understand how the indicator is working.
- Later on, you should understand the basic concept of the Financial Market including the market context, trend, volatility, and non-volatility.
- If you have enough knowledge about the trading system and market knowledge you can easily implement your knowledge in the chart. Make sure to open a trade once the trading conditions are made and do not try to trade with your emotion.
- After creating the forex strategy and implementing it on the chart, you should focus on how to manage it. Trade management is the hardest part of a strategy that a trader should focus on. The trade management includes how much risk you are taking per trade and when we will get out of the market if the situation goes against you.
- Moreover, there is a specific invalidation level of your trading strategy where you should get out of trading even if we made a good amount of loss. Remember that if you have enough money in your trading account you can come back and make a profit again.
- Lastly, the other important factor that traders should focus on is trading psychology. There is a saying that trading is the easiest way to earn the hardest money. Therefore if you cannot focus on how to keep yourself calm while making trading decisions, you will not be able to sustain in the market.
Let’s summarise how to build a forex trading strategy:
- Forex trading strategy is a systematic approach to make money from buying and selling a currency pair.
- Technical analysis is a process to anticipate the price movement of a currency pair based on the previous price action.
- Fundamental analysis is a process to anticipate the price movement based on economic events and activity.
- If you know enough about technical and fundamental analysis you can easily build trading strategies according to some specific rules.
- Trade management is the hardest part of a strategy that a trader should focus on.
- If you cannot focus on how to keep yourself calm while taking a trading decision, you will not be able to sustain in the market