How to Build Your First Trading Strategy?

The basics of forex trading are relatively easy to understand. But as you grow your skills in the game of forex trading, you will inevitably start to wonder how to build your own trading strategy.

The truth is, building your first strategy is a bit more complicated than many think. But don’t let the complexity intimidate you. If you have is a basic understanding of technical analysis, you can build a solid trading strategy that will be right more often than wrong.

To begin with, you will need to know what a trading strategy is and what you have to do to build a trading strategy that works.

What is a Trading Strategy?

A trading strategy is like a method that gives you a recipe to buy and sell the markets following a set of trading rules based on certain conditions. It is more like a systematic approach to trading the forex markets. It can be a single approach or a mix thereof. For example, it can be a breakout strategy or a reversal strategy. Or both.

Trading strategies are the key to unlocking the door to trading success. If you don’t have a trading strategy, you will find it challenging to make a sensible trade.

How to Build a Trading Strategy?

A simple trading strategy should include one or two indicators, conditions to enter and exit the markets, and the position’s sizing. Without these three components, there is no blueprint of how to trade.

To build your first trading strategy, you will have to select an instrument to bold your indicators on and a suitable timeframe you wish to trade. There is no rule to the timeframe or instrument as a scalping strategy requires the 5-minute timeframe, whereas a swing trading strategy does the 4 hours. However, the very first should be less risky. So, the 1-hour timeframe of a liquid pair like the Eurodollar is preferred for intraday traders.

Once you decide on the above, you are all set to create the basis of your first trading strategy.

What prerequisite conditions allow you as a trader to go long or short? Is it the RSI oversold level, or the top Bollinger Band breaking? Or both? Well, it will depend on whether your approach is to trade reversals or breakouts! Those define where you enter and exit trades.

Before you start executing trades at random, you will have to set several criteria for take profit, stop loss, and the position size, of course. Although the former two can be based on a fixed pip range from the entry, establishing them on the indicators will often improve the strategy’s performance. For example, if your long entry strategy is based on the top Bollinger Band breaking, set your target 2-standard deviations away from the entry, and your stop a tad below the lower band. Regarding position sizing, things are pretty straightforward: invest around 2-3% of your capital per trade, but never more than 5%.

At this stage, you have already built your first trading strategy. So, after writing down all the rules and conditions, it’s time to put the strategy to the test. What better way to test your technical analysis skills and if your trading strategy is set to succeed.

Is My Strategy Good?

Although “good” can be very subjective as it depends on the trader’s risk profile, a good strategy means you can achieve good returns with minimal risk over a reasonable period.

The best way to put your first trading strategy to the test without risking real money is to backtest.

The backtest is a manual process of testing and evaluating a trading strategy by comparing the backtest results to your goals.  It will show you whether the strategy performs well, it gives you a clear view of what market periods when the strategy does poor (so that you can filter these periods out), and it kind of backs up the strategy as being good enough to build a good trading record.

One of the essential things to do is test various markets, timeframes, and instruments. A good strategy should perform well in live conditions across the board. Strategies that do well in many types of markets and conditions are rigid. So go back in time and apply the rules to the charts, identify all trades, study them, and decide what worked well and what didn’t. The next thing you have to do is modify your strategy to improve its performance by changing some of the input values on your indicators. And last, test the strategy in real-time, but on a demo.

Closing words

Traders need to have clear goals for building their first trading strategy. If you are planning to get into trading strategies, you must make time to find profitable setups using several indicators, learn how to reduce the impact of false signals, and most importantly, and prepare to get rid of emotional trading!

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