How to Develop an Investment Strategy

People who want to invest in the markets often wonder where to begin. The more important question should be  – where do you want to end up and to get there what is the best strategy. If you’re thinking short-term investing, one option would be to go low risk to preserve the value of your investment.  However, with this strategy don’t expect huge returns. Long-term investing can be more rewarding but it also requires a bit more patience. Ultimately, what needs to prevail is that traders need a Forex trading strategy that fits their personality and investment goals.

What is an Investment Strategy?

An investment strategy is a detailed plan for trading. We can look at any trading strategy like a recipe which has many ingredients. Each of the “ingredients” that make up your investment strategy will help you determine:

  • What currency pair to buy or sell (You can read more on this in our previous article “Forex Pairs to Focus on and Avoid”);
  • At what time to buy/sell;
  • Entry and exit techniques;
  • How much to buy/sell;
  • What type of analysis to use: technical analysis or fundamental analysis;
  • Money Management;

You need to have some guidelines that define your trading philosophy, otherwise, it will be pretty much impossible to make a profit out of Forex trading. The more detail your investment strategy covers, the better.  However, at the same time, we don’t want to overcomplicate and rather keep things as simple as possible.

The 3 Key Components of a Winning Strategy

There are three key elements of a winning strategy that you can apply to any winning investment strategy or you can structure your own strategy based on these three key elements. At the end of the day, these are the three very important pieces of the puzzle shaping any successful strategy.

1. Trade With the Trend

You must trade in sync with the trend. We’ve all been taught this before, and everyone knows this is trading 101, the reason why the majority of traders fail is that everyone has a different idea of how to discern what the trend is.

The simplest and the most powerful way to determine the overall trend is by summing the 50-period moving average (50MA). Then ask yourself where the current price is in relation to the 50MA. If the price is above the 50MA, we’re in an uptrend and you should be only looking for buy setups.  If the price is below the 50MA, we’re in a downtrend, and a trader should only be looking for sell setups.

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2. Price Bar Pattern

Traders should be looking for price bar patterns in every setup you plan to trade, regardless of the strategy you currently trade with. Bar patterns are distinctive formations generated by the movement of price. Each trader should trade the bar patterns they observe through personal extensive research and time spent in the market. With time you’ll notice a tendency of currency pairs to exhibit certain patterns – patterns that are only known to you and that only you seek to profit from.

3. Entry Techniques

Don’t just simply enter a trade at the market price, wait for confirmation. A simple entry technique is to use a buffer between 5 to 15 pips above/below your initial entry price generated by your price bar pattern. This entry technique will help you to become more accurate and avoid being trapped by false breakouts. Many times people and traders lose money not because they have the wrong idea,  but rather because their entry technique is faulty and they enter at the wrong time.

A second entry technique is to enter the market only during the major Forex sessions to avoid entering at a wrong time and get trapped in a ranging market with the currency pair going nowhere with no profitability.

Conclusion

It’s important that you develop an investment strategy that is right for you, and then rigorously implement that plan with the right mindset. If you want to achieve some consistent success you need to understand that trading is pretty much a rule-based activity. We need to have rules that govern what we do and the decisions we make if we are to succeed. An investment strategy is nothing more than a compilation of your trading rules and I firmly believe that trading rules are designed to protect you from yourself and to stop you from making accidentally bad decisions on a regular basis.