Part 1 Developing your first Forex trading strategy What to do

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Part 1: Developing your first Forex trading strategy: What to do?

If you want to do trading and are you serious about it you must have a trading strategy. It’s not enough to have the strategy in your head it must be on paper with a fixed set of rules. Today, we will explain what such a trading strategy must (should) contain and how to make it be one of the minorities of successful traders. You will also learn a few practical tips.

The idea behind the trading strategy

One of basic formations called pinbar

This may seem like a paradox to identify a trading strategy or an idea based on which you can do your trading is the easiest thing. As a trader you can use trend lines, indicators (e.g. MACD, RSI or moving average. Reliable are also pinbars or other candlestick formations.

Another successful Forex strategy is gap trading. The number of opportunities is incalculable. To start with, I recommend something simple, trivial. From my practice, I know that even the simplest Forex strategy may have a success rate of 60%.

This is not enough for the majority of traders. The trading strategy is usually complicated by further indicators. In the end, the strategy is so complicated that it becomes useless or even loss-making. Many people believe that Forex and trading, in general, is a rocket science but mostly the strength is in its simplicity.


Once you have identified your trading strategy, you must define a timeframe for your trading (this topic was discussed in one of our previous articles – see types of Forex traders). You also must choose the market, in which you want to do your trading. A quality sales strategy is robust and can be applied to currency pairs such as EUR/USD, EUR/JPY, gold or DAX. Yet, each market has its specifics: The speed, volatility and pip price are different. So it pays off to step into a market you are familiar with at least from a demo account.

Next, you have two options: (1) to program an order to run a Forex backtest right in the platform or (2) manually go through at least 100 trades back (on the platform’s data). Even though you are able to program the backtest, manual testing with the help of Excel will give you more. You will far better learn about the strategy and how to find it immediately. It’s simple: Using a chart, look into history to trace back the formation.

However, you must also anticipate that some strategies will redraw. Be careful and test the strategy also at meta trader strategy tester!

Trading strategy rules

The core of each trading strategy is the rules. You must set where to place the stop loss and where the take profit. Although this depends on the volatility of the market, rules are a must. For example, the backtest shows that after opening a trade the profit will be 20 pips and the stop loss 30 pips. Given the success rate of 50%, this deal would be a loss.

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The above example demonstrates that there is no universal setting.

The rate of 1:1 will be seen by some traders as success while others will want two successes out of three deals. Someone will not be satisfied unless reaching a 50% level. No matter which way you go, it always depends on the stop loss vs. take profit orders. Another factor that you must not underestimate is psychology. Only few people are mentally so strong to use a strategy generating loss in most of the trades (but overall profitable).

What you need is efficient money management. Nevertheless, talking about binary options and Forex, money management is applied in a bit different manner.

Trading plan

Based on the backtest result and your evaluation you should know exactly which market you would like to trade in and what timeframe would fit you (day, 4 hours, 1 hour, 30 minutes…). You should also specify the conditions for closing a deal, estimated profit and maximum acceptable loss. These parameters are essential for each of you and should be put on paper (not just stay in your mind).

After you have prepared the strategy, you can start trading with small volumes and amounts of money so that in case of loss the impact would not be so painful. And as usual, I recommend you should first test your skills on a demo account, for example with IQ Option, or plus500 offering the demo account free of charge.

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If you strictly stick to your trading strategy Forex will not surprise you. Then you are on the good track to becoming a successful (fulltime) trader. Good luck!


More about the author Step

I’ve wanted to build a business of some kind and earn money since I was in middle school. I wasn’t very successful though until my senior year in highschool, when I finally started to think about doing online business. Nowadays I profitably trade binary options full-time and thus gladly share my experiences with you. More posts by this author

Trader Personality Part 1: Discovering your Trading Personality

When you enter the business of forex trading, you should identify the aspects that characterize you as a trader. Many new traders try to mimic the Wall Street stereotypes they have seen in the movies, but that´s the biggest mistake that can be made. New forex traders overtrade and are overleveraged because they want to reach their first million as soon as possible, and this mindset eventually leads to failure.

Top traders identify the strong and weak points of their personality and plan trades according to their personality type. They also invest an appropriate amount of funds that they feel comfortable with, and which doesn´t break their account in the case of loss. On top of that, you should plan your trading according to the time you have available. In this article, we will talk about how to adjust trading to your personality.

Your trading personality can make all the difference between winning and losing

Personality types

We are not robots, every person is different and every trader is different, therefore, everyone has a different opinion about the market. If you ask traders and economists about where the price will be the next day, everyone will give a different answer. After all, that´s what makes a market; there wouldn´t be one if everyone had the same mindset. Besides for different opinions about the market direction, people also have different personalities. Some of us are more impulsive types, and more active in the market whereas more patient types tend to open new trades less often. Let´s see the upsides and downsides of both types of traders.

Impulsive: The forex market is very fickle and you must act fast; you should open a position if you see a good opportunity and get out quickly if the wind changes. The impulsive traders are good at that. But being impulsive has some downsides in regards to forex trading – they are restless and enter the market (buy or sell) too early which often results in misjudged trades. These types of traders usually try to chase the price instead of waiting for the price to come to them. When I analyze the market, I set levels where I feel comfortable opening a trade and then wait for the price to come to those levels. These levels might be prior support/resistance, trendlines, or levels where moving averages are found, etc. If you sell EUR/USD too early, then you will have to stretch the stop loss so that it is above the resistance or the downtrend line. Your take profit target will also be smaller; therefore, the risk/reward ratio increases.

The other downside of this type of personality is that these traders tend to close their trades too early, limiting the winning potential. If you have analyzed the market and made a plan about a forex pair, you should stick to it. I know that the market changes continuously and sometimes we have to alter the trades along the way or close them early, but in general we must stick to our plan. Cutting trades short for 20 pips, or letting them run the full course for 200 pips, makes a huge difference at the end of the month when you calculate your profit/loss.

Nonetheless, there are many impulsive traders who make a lot of profit from being impulsive. If you are this kind of trader, we will offer some trading strategies to match your personality in the second part of this article. You just have to discover and accept your personality. How impulsive are you in real life? Are you patient or are you a person who wants to get things done as soon as possible? Do you get an itch to close a trade once the trade is in profit or do you let them run their full course? So, figure out your personality and read Part 2 of this article to find out which strategy works with your personality.

Conservative: Being patient is necessary for this game; when trading you have to be calm and cautious. As we mentioned above, you don´t want to trade too early or exit too early. But, at the same time, forex is a very dynamic market and sometimes you´ll have to make decisions quickly. If the price comes near the level you planned on, you must pull the trigger. After all, you are in the market to make money.

The price doesn´t always come exactly to the pip that you planned on based on your chart analysis. So if the price is a few pips away, you should take the risk and open the position (at least that´s what I do). Traders who are too cautious tend to lose many good opportunities, which reduces the profit a lot and may end up with a loss at the end of the month.

Overly patient traders also fail to adapt the open trades to the shifts in the market sentiment. If the market sentiment turns around you must close the trade as soon as possible with whatever profit you have. When you trade forex, a winning trade can end up in a huge loss if you don´t adapt to the market quickly.

Same as the impulsive trader type, patient traders can make money trading forex as well, they just have to know and accept that they are conservator traders, before choosing a forex trading strategy. So, ask yourself the question: ‘am I a conservative person in real life who doesn´t like to take too much risk?’ Besides that, you should know how patient you are because the trading strategies for conservative traders require patience. They are based on keeping trades open for many hours or days. If you are not very patient, work on this trait, because it can be vital in order to make some good pips.

Trading forex is a human activity; and is often a very stressful job, especially if you are outside your comfort zone. You cannot move or change the market and you cannot change your personality but you can change your trading method. You must apply a trading strategy that matches your personality in order to be within your comfort zone and succeed in this business. But first, you have to discover your personality type and accept it. Once you have done so, it is easy to find the trading strategy that is right for you. In the second part of this article, we will highlight some trading strategies for each type of trader.

A Systematic Approach to Developing Trading Strategies

In Part 1 and Part 2 of our Beginner’s Guide to developing trading system, we talked about the necessary skills and how to approach a trading system. We said that an Automated Trading System consists of several elements. You need to decide which markets you want to trade, identify and code a trading logic, account for trading costs and optimize via backtesting (but not overfit).

Here, we specifically talk about the process of identifying the trading logic and developing a strategy. The strategy will be the meat of your trading system.

The end goal of a trading strategy is to give you a final trading action – buy or sell a certain quantity of a trade-able asset. However there is structured process that leads to this end goal. Ideally your trading strategy should decide the following:

  • DIRECTION: identify if an asset is cheap or expensive or fair value
  • ENTRY TRADE: given that an asset is cheap/expensive, decide if it wants to buy/sell that asset
  • EXIT TRADE: given that an asset is fair priced and if we hold a position in that asset(bought or sold it earlier), decide if it wants to exit that position
  • PRICE RANGE: decide the price (or price range) that it wants to make this trade at
  • QUANTITY: Amount of capital(how many shares of a stock for example) that it wants to trade

This give you the final trading action, for example: buy X number of shares of comapny Y at below Z price, that you an send to your broker.

While thinking about designing a trading strategy, I find the following flowchart helpful

Let’s analyze what’s happening here in detail:

  1. We have real time price data for multiple securities(this could come from a broker or a data vendor or a co-located server) feeding into our system
  2. DIRECTION — This data feed get analyzed by our prediction model, which uses current as well as historical data to predict a fair value for the securities using a pre-learned logic. The actual prediction can vary based on how you have built your model. For example, instead of predicting the fair value, you could predict the probability that price will go up(or down)
  3. ENTRY/EXIT TRADE — The previous prediction feeds into trading signal logic, which decides if we want to make a trade.This is very important. Even if an asset is cheap, you may not want to necessarily buy it. For example, the fair value of a stock may be Rs 100 and it is currently trading at Rs 99 (you expect price to go back to Rs 100), but the variation in stock prices (standard deviation) recently may be Rs 10 and you may want to wait for a better entry point. Or the cost to trade might be Re 1, leaving you with no profit if you buy at Rs 99. Or you may already be at your maximum position limit. This part of the logic identifies which trades to make and what price to trade at (PRICE RANGE)
  4. QUANTITY: Now you know what trade to make, you have to decide how much funds to allocate to that trade. The logic here will vary greatly from strategy to strategy. Normally, you don’t want to enter (or exit) into a trade all at once. You may want to enter a trade in small chunks to avoid losses from a bad decision or to trade at the best price or to avoid impacting the market too much. In the previous example, you may buy small quantity of stock at 99, then wait till price goes to 98 and buy some more and so on. The amount of position you already hold and available funds to trade also affect this logic. If you are trading multiple assets, you will have to decide how much to allocate to each asset as well.
  5. Finally we have the complete order that we are ready to execute in the market.

The aim of this post was to walk you through the systematic approach of developing a trading strategy. In the next few tutorials we will talk about some basic strategies such as mean reversion and momentum that will help you with step 2 and 3 — identifying the Direction, Trade and Price. For some hands-on experience, try developing your own strategies using our toolbox.

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