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What is a Forex Trading Strategy?
A forex trading strategy is actually a technique or a method utilized by a forex trader which helps the trader to take a decision whether to buy or sell a pair of currency at a given moment of time. These strategies are constructed upon deep technical analysis, chart investigations or are based upon certain news events. There are tons of forex trading strategies available on the internet or if you are an experienced trader, you can develop your own forex trading strategy.
Digging Down Forex Trading Strategies
Forex trading strategies can be manual as well as automated. As you can guess manual involves a trader sitting in front of a system, analyzing the trading signals and determining when he/she can go ahead with his/her trade.
On the other hand, automated systems, also termed as a forex robot, are a much better alternative to manual trading. A forex robot contains an algorithm, which is developed by the trader itself, and it executes on its own, without requiring any kind of manual intervention or involvement of the trader. Forex robots have become pretty advanced nowadays and even beginner traders can use their services for forex trading and learn the tips and tricks of the field. However, it is always recommended to go through the robot review before selecting a particular automated forex trading system for you.
What Elements are involved in constructing a Forex Trading Strategy?
Designing a forex trading strategy that, actually, works requires the involvement of several components that are pretty essential to be considered in order to construct a winning forex trading strategy.
- Market
Before you start constructing a forex trading strategy it is essential that you select a particular currency pair and get all the knowledge that you can for it. One must be an expert in reading a particular currency pair before constructing a forex trading strategy for the same.
- Position Sizing
Position Sizing is, actually, the number of blocks that an investor or a trader invests in a specific security. Position Sizing is, usually, determined by the size of the account of the investor as well as how much risk an investor can take. An expert trader will be, immediately, able to access his/her position sizing and devise a forex trading strategy accordingly. Novice traders should take extra care before determining their position sizing as forex trading might seem attractive as well as highly lucrative but trade with haste and make attempts to make big bucks in short time always ends up in losses.
- Entry Point
This is, by far, one of the most essential components involved in constructing a successful forex trading strategy. The entry point is, actually, the price at which a trader or an investor buys or makes an investment.
Two elements which work in determining the entry point are the long and short positions. Entering by taking a long position means making an investment or buying a currency pair with an outlook and firm belief that the value of the currency pair will rise.
On the other hand, if a trader decides to enter by taking a short position, it means that he/she is going to sell first and buy later. This is done with an outlook that the price of the particular currency pair will drop later. Hence, the price at which the trader is going to sell the currency pair currently will be higher as compared to the price at which the trader is going to invest and buy the same currency pair later. Hence, an investor manages to make a profitable trade.
Determining when to enter a long position or short position in a provided currency pair is essential in devising a winning forex trading strategy.
- Exit Points
An exit point is, actually, the price at which the trader or an investor tends to sell a particular currency pair. As explained in Entry Point above, a trader must be able to determine as to when he/she should enter a long position or a short position in a provided currency pair. Similarly, Exit Point means a trader must be able to determine as to when he/she should exit a short position or a long position.
- Plan of Action
As clear from the name this includes penning down a set of rules as to how to buy and sell a particular currency pair.
Conclusion
A forex trading strategy, when defined carefully, works pretty well for a trader. In case of automated forex trading systems, with advancements made in artificial intelligence, forex robots have become smart and they are able to learn from the trades and take decisions accordingly. But, a particular forex trading strategy which works for a particular day may not work the next time. Hence, when profits are not flowing in, it indicates that time has come to change the forex trading strategy.
