Having finally decided to go into forex trading as an investment decision, now you need to decide on an effective forex strategy. Quite frankly, the strategy most effective for you depends on certain parameters which are specific to your case. With the guideline ‘trial and error and practice’, you will soon be able to find out which tools and strategies best serve your purpose.
Step 1: Decide On Your Commitment
The first step in deciding a forex strategy is to define your commitments, both in terms of money and in terms of time. If you plan forex trading as part of your investment portfolio, probably you have a job which will require most of your attention during the day. Chalk out how much time you are willing to spend every day/week for this activity. You also have to decide whether you will indulge in trading short for several hours everyday – or set your charts for a few times a day and forget about it till the next time.
We would also advise that you try out your forex strategy at different times during the day to find out the most effective times before you actually decide on it.
Apart from the timings, you should also lay out a budget which you are comfortable risking. Forex trading is a speculative activity, and there are chances that you may lose the entire amount, so start off with an amount which you would not be very affected with. You can leverage a smaller amount to operate on a larger scale, and gradually increase your exposure as you gain experience and confidence.
After you have thus laid the groundwork, your aim would be to
• Quickly find entry signals
• Tap exit signals effectively to maximize gains
• Avoid false signals
Step 2: Choosing Your Trading Tools
Do a bit of research on the Internet, go through books and speak to people who play the forex market to understand their forex strategy, the various tools and indicators. Tools such as EMA (exponential moving average), MACD, Parabolic SAR, Stochastic (Fast, slow or full) give fast signals, but the trick is to understand their basic principles to reap full benefits from these tools. Most online trading agencies offer these tools for analysis and you would need to just click to find out the results.
Simple strategies such as the 5 and 10 EMA cross over provide early signals of trend reversal and can be used to spot trading opportunities. Use a combination of the indicators to confirm the signals.
Step 3: Select Currency Pairs
To begin with, trade in the few popular currencies. You will notice that the currencies have their own behavior patterns. High demand currency pairs such as the USD/GBP are very active, while some others such as the EUR/GBP show steady trends. Here again, different sets of indicators (chosen from step 2 above) will yield the optimum results for different sets of currencies.
The time periods when each pair is most active also remains different. Find out from the charts the times when your chosen set(s) remain most active and use this insight to maximize profits.
Step 4: Confirm The Signals Received With Other Tools Before You Enter Or Exit
This step eliminates fake signals. Having decided on the time, money, tolls, and currency pairs, the signals received should be confirmed using the same tools with different settings, or preferably, more sophisticated tools.
Just as an example, if you are using the 5 EMA or 10 EMA cross over, you may use a 20 EMA line. After the 5 EMA line crosses the 10 EMA, be alert. When it crosses the 20 EMA, you may take it as a confirmation signal.
With practice and exposure, you will find the tools with which you are most comfortable. In designing a forex strategy, be prepared to try and possibly make some losses before you discover what works best for you. After all, it is a part of the speculation game!