Design guidelines for the forex strategy

By Eric Cole

Many traders suffer serious drops in their confidence after experiencing bouts of consecutive losses that prevent them from trading with the levels of discipline essential for success.

As such, they do not build sufficient confidence in their own abilities to withstand the furies that Forex can unleash.

To counter these problems, you need to consider designing or attaining your Forex trading strategy.

In particular, you need to understand that performing such a procedure will help you reduce the emotional and psychological problems that you can encounter whilst Forex trading.

You will first need a scientific method that will assist you in identifying all your entry and exit points.

Fundamentally, you require a set of rules that will form a baseline from which you can generate all your decisions as well as compare all your results. The traditional way of doing this is to create a Forex trading strategy.

You must first design a methodology that will be capable of identifying new trading opportunities for you.

This task is normally performed by using one of many technical indicators that have been designed specifically for this purpose. You can locate extensive lists of these tools by using an appropriate internet search.

You must always remember that none of these indicators will guarantee you success on their own unless they are fully integrated into a complete strategy.

When you first start out, you should consider one of the major currency pairs only, e.g. EUR/USD, USD/YEN, GBP/USD or USD/CHF.

In fact, you are well-advised to trade the EUR/USD because it is the most liquid currency pair in the world and accounts for about 70% of all trades actioned. In addition, the EUR/USD benefits from very low spreads.

The most important point you need to consider when you make your initial time-frame selection is that the quality of the associated statistics deteriorates rapidly as the period shrinks. As such, you should base your first trading strategies on the one hour time-frame and upwards.

You must make great efforts to understand Money management and integrate its concepts into your strategy. You should start by learning how to effectively utilize a simple strategy which advocates that you must never risk more than 2% of your entire budget per trade. Always bear in mind that without a bank balance you can no longer play the game.

You must have a methodology that you can use to evaluate the performance of your trading strategy. You can accomplish this task by determining the expectancy value and win:loss ratio. This means where you 'get out' if a trade starts to go wrong, not necessarily your stop loss limit.

One of the main pivot points of your strategy must be the calculation of these two important parameters at the end of every critical testing phase.

You will find that it is essential that you evaluate the performance of your strategy by phasing it through stages of incremental risk.

You can use the following phases to accomplish this task:

Back-testing, Demo-testing, Live micro-testing and full Live-testing.