There is no such thing as chance success. In any business, in anything, you can only reach your destination point if you act gradually and systematically. Such a strategic approach is equally important for any business, whether it is goods production, services or trading on financial markets.
When you develop a strategy, you estimate the current situation and go beyond it – estimate the business environment, the whole situation in the industry and your own prospects. Currency trading requires a strategy too because trading financial assets are one of the riskiest types of business. Without knowing the current state of the market, history data, market volume and leading trends, a trader turns work into gambling with his eyes closed shut.
A trading strategy is a firm plan that encompasses different scenarios. The major parts of a trading strategy are analysis, risk and money management, and self-discipline.
Market analysis is about studying the data, the past, the present and the expected future, which can serve as a base for a price forecast. Traders use a wide range of instruments to analyze the market – technical indicators, candlestick patterns, economic calendars, market depth, market volume indicators, etc. The main purpose of the analysis is to find the most probable price action.
The most popular technical analysis indicators are moving average, volumes, Relative Strength Index (or RSI), stochastic oscillator, MACD, etc. Candle patterns can show you if a trend reversal coming or not – Head and Shoulders, Double Top, Double Bottom, Triple Top, Triple Bottom, Triangles, Pennants, etc. Trading terminals are equipped with dozens of such indicators and different TA tools, so every trader can choose whatever suits him or her best.
Money management is crucial for any trading strategy since it allows you to control your current account statement and use your funds wisely. The correct money management helps you reduce the number of your losses and keep your account in the green zone. There are several basic rules:
This approach will help you keep your deposit safe and make the profitable deals outweigh the lost deals.
Risk management is also a very important part of a successful trading strategy. We have to accept that financial markets are mostly unpredictable, so you have to provide maximum safety to your account.
The key element to successful trading is, I guess, self-discipline. Even the most accurate indicators, and good risk and money management won’t help if your actions are governed by emotions.
The psychology of trading is the main problem of the majority of traders; trend reversing all the time, prices skyrocketing and diving – all of it inevitably sparks excitement and gambling craze, fear, greed and hope. Any newcomer is familiar with it: you make a detailed analysis, and yet you yield to an impulse and open an unpremeditated order. Most of such cases lead to losses because emotions make traders forget about the rules of technical analysis, indicators signals, and risk or money management.
Strict self-control is a solution. This is the most important and the hardest part of any trading strategy, because, without control, all the other norms and rules are often forgotten.
These notes can help traders concentrate on the technical part of their job and shut the emotions down.
There are thousands of trading strategies today. You can rely on other traders’ experience or upgrade their strategies yourself, or work out a whole new strategy. Anyway, a trading strategy can be successful if and only if it includes the most important components listed in this article.