How to build your own trading strategy

Each forex trader has their own strategy. Some use well-established forex strategies, some build their own from scratch and others use a combination.

It's important to develop your own approach. You have to be comfortable with your strategy, and it needs to deliver results. Beginners often find this a daunting prospect, so here are some basic rules to get you started.

Filter your inputs

Not all forex advice is good advice. Figure out where the advice has come from, and how much you trust the source. This is particularly important when using the internet. There are a lot of amateurs out there who think they know what they're doing, but they don't.

Test and modify

When you develop your trading strategy, you'll start with a set of recommendations from analysts and other traders. Try these out on your demo account, and modify them to see what happens. It's important to create your own formula for success, as this will improve your trading skills.

Don't reinvent the wheel

You can learn from forex analysts and experienced traders. They are still in the market because they are successful. Study their strategies and learn from them. Don't follow them blindly, but test out what they are saying and see if it works.

Look at long-term trends

Some traders make money from short-term market fluctuations, but if you want to understand where the market is going, look at longer time frames. Short-term data contains a lot of noise and can't be relied on for overall market predictions.

Don't stick to one time frame

Analyse the market using different time frames. Opportunities may emerge when you are looking at daily data, and not show up when analysing hourly intervals. Conversely, you can profit from short-term anomalies even if the long-term trend is different.

Include fundamental analysis

Technical analysis shows the likely market direction based upon internal forex market factors, such as the number of buyers and sellers in the market. However, the overall direction of the forex market is heavily influenced by the real world. Study economic events, such as growth figures and interest rate changes, and decide how these will affect the forex market.

Our forex experts carry out extensive fundamental market analysis and produce daily reports and recommendations. You can use these when formulating your forex strategy, but keep in mind that these are recommendations, not rules.

Set stops

You can't watch the market 24 hours a day, so set stops on your open positions. These are orders to sell when the ask price of a currency reaches a specific value. You can use these to lock in your profits and limit your losses.

Even if you are online, you should still set stops. Decide on these before you open a position. It's often tempting to keep a position open once you hit your original limits, and setting a stop will make you think twice.

Look for volatility

Certain currency pairs are very volatile; the price can jump up or down suddenly. When you're trading a volatile currency pair you should do two things:

• Trade in small amounts to limit your exposure
• Set the stops far away from the support and resistance lines

Be careful entering just before the market closes

At the end of Friday trading, the American market can be very volatile. There's a lot of news at this time, and many traders are closing their positions.

The same applies at the end of the month.

This is not an exhaustive list. You may choose to ignore some of these rules and to add others as you become more experienced. However, we would recommend following this list when you're starting out, as doing this will help you avoid some of the most common pitfalls.

Open a Cent Account with Forex4you, and start developing your own strategy today!