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 one option is to go low risk to preserve the value of your investment just 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 the fact that you need a Forex trading strategy that fits your own personality.
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 on 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 defines your trading philosophy otherwise it will be pretty much impossible to make a profit out of Forex trading. The more details your investment strategy covers, the better but, at the same time, we don’t want to overcomplicate things but try to keep things as simple as possible.
The 3 Key Components of a Winning Strategy
I’m going to give you the three key elements of a winning strategy that you can apply to any winning investment strategy. You can also structure a strategy based off of these three key elements. These are the three very important pieces of the puzzle to any successful strategy.1
1. Trade With the Trend
You must trade in the sync with the trend. Obviously, we’ve all been taught this before everyone knows this is trading 101. The reason why the majority of traders fail is because 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 simply adding the 50 periods moving average. Then all you have to do is ask yourself where is the price 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 we’re in a downtrend, and you should only be looking for sell setups.
2. Price Bar Pattern
You should be looking for price bar pattern in every setup you have regardless of the strategy you currently trade. Bar patterns are distinctive formations generated by the movement of price. Each trader should trade his own personal bar patterns that can be discovered and observed only through extensive research and time spent in the market. With time you’ll notice the tendency of currency pairs to exhibit certain patterns that should be unique and only known by you.
3. Entry Techniques
Don’t just simply enter 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 it’s just that their entry technique is faulty and they enter at the wrong time. Our second entry technique is to enter the market only during the major Forex sessions to avoid entering at a wrong time and be trapped in a ranging market with the currency pair going nowhere.
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 ongoing success you need to understand that trading is pretty much a rule-based activity as we need to have rules that govern what we do and the decisions we make. An investment strategy is nothing more than a compilation of your trading rules and we firmly believe that trading rules are designed to protect you from yourself and from not making silly decisions on a regular basis.