Creating your Own Intraday Forex Trading Strategy
The Foreign Exchange market is characterized by high volatility and uncertainty. Therefore, only the existence of an effective trade strategy can lead to long-term success. There are hundreds of different intraday strategies which are based on the combination of technical analysis and money management techniques. It is important to find a trading strategy that is 100% compatible with your risk profile and your general personality in order to implement it with discipline.
Intraday Trading -Basic Requirements
Trading intraday is difficult and not suitable for all Forex traders. In order to evolve as a successful intraday trader, first of all, you need to have discipline. Only discipline and logic can drive you with safety when you are trading in tiny timeframes. Emotional trading, on the other hand, is the wrong way to go.
Moreover, trading intraday requires the right Forex Broker, as only ECN/STP brokers are suitable for intraday trading. Here are some important features when choosing a Forex Broker for intraday trading:
(i) Minimum spreads on the pairs that matter to you
(ii) If trading spreads are wide, a rebate plan that can limit trading cost
(iii) Fast execution without delays and price manipulation (ECN/STP order execution)
(iv) Offering the right trade platform according to your needs (i.e. MetaTrader4)
(v) Full scalping allowance (Dealing Desks may forbid scalping practices)
(vi) Full safety of trading funds (regulation, client funds segregation, etc.)
Only ECN/STP Forex brokers can offer all the above characteristics. On the contrary, Dealing-Desks (market makers) can’t, due to price manipulation and delays on order execution.
Creating Trade Strategies using the Expert Advisor Builder for MT4, MT5, and Tradestation
EA Builder is a web app that can transform any trading idea into an MT4/MT5 indicator. The app can also send trading alerts (via email and SMS) making the implementation of a manual trading strategy an easy task.
□ Operation: Creating custom indicators (No Skills)
□ Platforms: MT4/MT5 and TradeStation
□ Price: Free for developing manual trading systems / paid for developing EAs
It is important to mention that you don't need to have any special skills in order to develop manual strategies for trading Forex, Equities, ETFs, Bonds, and Commodities.
(1) No Programming Skills (The app can be easily used by beginners)
(2) Includes advanced Money Management functions (Spread & Slippage Control)
(3) Offers different alerting methods (eMail, Audio, and On-Screen)
(4) Unlimited number of accounts
Building your Own Intraday Trading Strategy
The first thing you need to build your trading strategy is to find a lot of trading ideas. These ideas may concern recent price behavior, pattern recognition, statistics, etc.
Reverse Engineering a Price Chart
Reverse engineering a price chart means adding two indicators in a price chart and examine their behavior over time. This is a simple way of building your own Forex Trading Strategy. You can use two Simple Moving Averages (one is slow and the other is fast). Examine the real price action at the points where these two moving averages interact (crossover). You can use for example:
■ 13-periods Moving Average (1-Hour chart)
■ 34-periods Moving Average (4-Hours chart)
Additionally, you may use another indicator to filter the results, for example, MACD or the Relative Strength Index (RSI).
Trading Ideas for Building a Strategy
■ Learn more about Forex Price Action
■ Examine the effect of the Forex sessions overlaps
■ Examine the effect of certain days of the week or the effect of certain days of the month
■ Examine the historical effect of news during certain periods
■ Use the Bollinger Bands or the Parabolic SAR to analyze Ranging Markets
■ Use the Relative Strength Index (RSI) to analyze overbought/oversold markets
■ Add daily pivots and examine how an exchange rate reacts when it reaches or when it crosses the pivot level
A Typical Framework to Design your Strategy
These are some typical points in order to build your own trading strategy:
◘ Combination of 2 Technical Analysis Tools (Indicators etc.)
◘ Use of 2 different timeframes, the longer timeframe will define the trend while the shorter timeframe will confirm the trend and indicate also the right entrance levels
◘ Strategy Testing (test your strategy on a demo account or a micro lot account before trading standard lot)
And after you start trading...
◘ Money Management (Decisions regarding the optimal rate of leverage, placing take-profit and stop-loss orders, etc.)
◘ Other Basic Rules (for example you always stop trading on days when you have lost 3 trades in a row)
Choosing When to Trade & Money Management
If you have found the right broker and deposited some funds, you are ready to trade. In order to trade successfully, you must choose when to trade very carefully. Selective trading is absolutely a must. Not every day and every hour will be suitable for day-trading. Learn about session overlaps and take advantage of them. Session overlaps enjoy high liquidity. Moreover, identifying a Strong Trend or a Strong Price Range is considered very important for all intraday traders. Once you have detected a strong trend, follow it by using a trailing stop order. If you have detected a strong price range it is easy to calculate your take-profit and stop-loss orders.
Making Things Simple
The Foreign Exchange Market is already too complicated don’t try to make things even harder. Be simple and design your strategy with clarity and precision. You may use technical analysis to forecast an upcoming trend or any other tool if that is suitable to your own trading style and personality.
Here is an example of a simple strategy that you may use without the need for technical analysis:
“Buy a pair found on its 2-days high and/or sell a pair found on its 2-days low”.
That is actually a variation of a stock –trading strategy that can be used also when trading Forex. In stock trading, you can use this strategy in a 4-week timeframe (Buy at 4-Weeks High and Sell at 4-Weeks Low). When trading Forex the timeframes shrink and the crucial point becomes the determination of the right leverage and the right stop-loss level.
Are there any Rules in Intraday Trading?
Yes, there are some basic rules when you trading intraday. These rules are mainly based on the way you manage your risk exposure and your funds (Money Management). Forex Trading is all about managing your risk. Risk Management is the key factor distinguishing winners from losers. Professional traders are always trying to hedge against risk, amateurs usually are trying to trade Naked without a stop-loss. Always manage your risk as pro traders do and always place a stop-loss.
The Leverage Formula
Calculating the optimal rate of leverage is very important when you trade the currency market. In another of my trading sites (TradingCenter.org), I have published a simple leverage formula. It can help you understand the relationship between capital leverage, Profit/Loss ratio, and the spread.
Here is the simple Leverage Formula:
◘ Optimal Leverage Formula= [ (P/L) * (1/Spread) * (R/2) ] %
-(P/L) = Profit to Loss Ratio, and
-(R) = Risk Tolerance
Follow this link and you will find more about the above formula: ► Leverage Formula at TradingCenter.org
Automate Your Trading Strategy
You may automate a custom strategy via the development of an Expert Advisor (Forex Robot). There are a lot of MQL4 programmers out there to do the job. They usually charge $100-500, depending on the programmer’s experience and the complexity of the coding project. Alternatively, you can use the EA Builder web app.
After your strategy is transformed into an Expert Advisor you can back-test it historically using MetaTrader4 backtesting tool or a demo account. Use Trial & Error to optimize your trading strategy.
■ Create your own Intraday Trading Strategy