Forex Strategic Principles & Trading Risk Equation

Designing and Implementing a Forex Trading Strategy

 

Designing and implementing a Forex strategy is the best way to trade Forex. A Forex strategy may be implemented in multiple time frames {intraday, week or month}. In these article you may find some general principles plus a model (equation) for measuring your Trading Risk.

 

Key Principles for a Successful Forex Strategy

 

1. The key principle in achieving a successful Forex strategy is to keep things simple and clear. Overcomplicated strategies tend to fail in the long-run as they are very difficult implemented.

2. Focus your Forex strategy on a couple of Forex Pairs (1 or two) and not in many.

3. You may always download free, buy or design a Forex Indicator.

4. Test your strategy using historic data, having always in mind that the currency market is evolving today so past data success is not a promise for future success.

5. Use always a 3-price strategy, and that means incorporating a clear stop-loss price level {Current Price, Targeted Price and Stop-Loss Price}

6. Adjust your stop-loss price according to your time frame {In the long run accept a lower stop loss price than in the short-run}

7. Determine the support and resistance levels of the currency pair. Adjust your stop loss and targeted price according to the support and resistance levels.

8. Draw Resistance Lines and use Charts with Candlesticks

9. Leverage your funds wisely {high leverage is more successful in short-term periods}. For more about that issue check our Trading Risk Equation that follows.

10. Evaluate the results of your trading strategy in the long-run and don’t get too enthusiastic based on short-term results.

 

News & Intraday Forex Strategies

 

Trading the News is very difficult for novice Forex traders. News as a trading factor is usually incorporated in the prices of currency pairs before it is released. When important news are about to be released concerning the majors (and especially as involves EUR, USD, CAD or GBP) it is better to avoid trading Forex 1 hour before and 1 hour after.

 

Leverage Vs Long Time Frame & the Equation of Trading Risk

 

Here is an analysis why you shouldn’t always use High Leverage when implementing a Forex Strategy.

The Analysis 

□ The opportunity of leveraging funds is one of the most important advantages when trading Forex. But high leverage means accepting more risk:

High Leverage → High Risk (1) 

□ Furthermore, the widening of your time frame increases your trading risk also, and that is because in long-term periods you are exposed in more unpredictable news and events:

Time Frame Widening → High Risk (2) 

□ So from (1) and (2) we are able to design is simple equation of your risk evaluation:

Trading Risk = {(Price Movement x Leverage Rate) x Time)} + Trading Cost

Explanation:

Now if we assume that:

i) The price of movement is an unpredictable factor, and

ii) Your trading cost (spread and commission) are known and fixed.

Then the only two variables that can be adjusted in the equation is Leverage and the Time Frame.

iii) When your leverage and time frame increase simultaneously then your total trading risk increases in a geometric scale (Leverage X Time Frame).

From all the above it is better to do as follows:

1. In short term periods (i.e. intraday), use a high leverage strategy (i.e. 1:200)

2. In long periods, avoid high leverage

 

What is Support and Resistance Level?

 

Determining the Support and Resistance level is a very important issue when trading Forex. These price areas are normally span 20 to 40 pips.

■ Support Level

The support area appears below the current price level and it indicates a price area where more currency buyers are likely to enter the market.

■ Resistance Level

An area of resistance always appears above the current price, and it indicates a price area where more currency sellers are likely to enter the market.

■ Support and Resistance Lines

Support and Resistance lines are used to observe where price has bounced from in the past. You may find that price bounces close the line, but very rarely exactly on the line.

 

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Interesting Links:

» Day Trade Strategies at TradingCenter.org | » Download at SoftPedia Forex Strategy Trader | » Download at SoftPedia Forex Strategy Builder | » Books for Forex Strategies at EarnForex

 

Forex Strategies

OnlineForex.Biz (2013)

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