How to choose a good trading strategy
Every trader sooner or later comes to the idea that the most important tool for making profit on the currency market is a trading strategy. Profile resources offer a lot of all kinds of systems, according to the authors, which are highly profitable and maximally effective.
How to choose a really good trading strategy out of all the variety?
What is a trading strategy and why it is needed
A trading strategy on the foreign exchange market is A set of rules in the form of an algorithm, which makes it possible to predict the movement of an asset, taking into account the situation on the market, and to obtain a certain profit by executing this algorithm.
For example, it may be a combination of several technical indicators: opening and closing will be carried out only if their values coincide.
To be fair, it should be noted that there is no trading strategy that guarantees 100% profit. The profitability of the strategy does not depend on the "freshness" of the indicators. You can use the latest and best indicators, as well as the traditional ones, which proved themselves a long time ago, it will not make the strategy universal and super-profitable.
But, more importantly, it is necessary to choose exactly the "right" strategy to begin with. The fact is that each trader sees the market differently. To this should be added characteristic features of personality, such as temperament and emotional stability. That is why one and the same strategy can bring one trader profit and another one loss.
Impulsive traders It is worth to pay attention to aggressive trading strategies, which, if used correctly, will allow you to get a substantial profit. These can be intraday strategies, scalping, as well as strategies built using the Martingale method.
Calm and patient traders medium- and long-term trending strategies with a minimum level of risk and ensuring steady growth of the deposit will be more suitable.
Evaluate the forecasting method used in the strategy
There are three main approaches to predicting the price of an asset in the financial markets:
- Fundamental analysis
First of all, trading strategies based on the fundamental analysis imply certain knowledge of a trader. In order to predict the price movement, a trader must clearly understand the functioning of market mechanisms, the impact of key macroeconomic statistics on national currency rates, closely follow the news background and economic calendar. This way of predicting is more suitable for traders who focus on the long-term outlook.
- Technical analysis
Trading strategies based on technical analysis are based on predicting prices by identifying market patterns. For this purpose, graphical constructions (support and resistance levels, round and technical levels), TA figures and candlestick patterns, as well as readings of technical indicators are used.
In most cases, such strategies have clear rules for opening trades, setting stop-loss and take-profit orders. Making a profit here comes down to a clear adherence to these rules.
There are a lot of trading strategies based on technical analysis tools - from scalping and trending to channel and breakout strategies.
- Combined approach
As you have already understood, the combined approach implies the complex use of the two methods of analysis described above. This is the "top flight" of trading, which is suitable only for experienced traders who have the necessary knowledge and practical experience.
Evaluate the time characteristics of the strategy
Not every trader has an opportunity to spend the whole day at the trading terminal. Some of them can spend 6-8 hours on trading making it their main occupation, and some others just 1-2 hours using trading on the currency market as a way to earn additional income.
On that basis, it is necessary to evaluate the time indicator of the strategy. If you can afford to dedicate only a few hours a day to trading, then medium- and long-term trading strategies are best for you, and scalping, pipsing and day-trading are out of the question.
But if you spend a lot more time in the market, it doesn't mean that your lot is pipsing and scalping. It means that, in principle, the whole range of strategies is available to you to choose from.
Assessing risk characteristics
First of all, it is worth remembering that the level of risk is a companion to the level of profit - the higher the profit, the higher the trading risks. For example, strategies built on the use of the Martingale method have exorbitant profitability, but the risk of losing the deposit is at about the same level.
For this reason, a trading strategy should be evaluated first by risk factors, and then look at its profitability.
The descriptions of most strategies contain recommendations for money management. Evaluate the potential losses of a series of losing trades depending on your money management rules and deposit size.
Also it should be mentioned that many beginning traders for some reason consider that quantity must convert to quality - the more trades they will open, the more profit they will get. That is why scalping and intraday trading strategies are very popular with newbies.
However, it should be remembered that the smaller the timeframe used, the greater the market noise, and accordingly, the higher the risk. There are no "I want it all at once" strategies with a minimum level of risk. A long-term trend strategy involves a small risk of loss, but the profit will have to wait a very long time. This profit can be "gained" by scalping and pipsing, but the risk of getting a loss will also be high.
Evaluate the trading strategy in practice will help the strategy tester, giving primary information on the risk/profitability ratio for reflection.
Conclusion
Choosing a good trading strategy with all the abundance of "profitable", "effective" and "best" is not at all a simple matter, requiring from the trader full dedication.
Of course, the above information is just the beginning. For example, for more in-depth evaluation of strategies' efficiency experienced traders use coefficients Sharpe и Squid - It's all about your desire to have a profitable trading strategy. After all, whatever you call the boat, that's how it sails. How you approach the choice of strategy, that's how you'll make a profit.
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