Building the Best Forex Trading Strategy EverBuilding the Best Forex Trading Strategy Ever

Is there such a thing as the best Forex trading strategy ever? Actually, the best strategy ever is the strategy that works for you.


First, let's determine the basic components of a Forex Strategy that works in the first place.

Building the Best Forex Trading Strategy Ever: Defining the Components of a Forex Trading Strategy That Works

A Forex trading strategy that works must incorporate all the following components:

  1. Analyzing the General Market Conditions for Selecting a Trade

  2. Conditional Profit / Loss Ratio

  3. Detailed Market Conditions for Entry (entry signal)

  4. Position-Sizing (percentage of the available trading capital)

  5. Risk-Control (stop-loss)

  6. Exit-Strategy I (take-profit)

  7. Exit-Strategy II (time-exit)


Building the Best Forex Trading Strategy Ever: Determining the Trading Profile & Trading Style

In order to decide which is the best Forex trading strategy for you, you need to determine your trading style and your desired time frame.

These are some basic trading styles {from the longest to the shortest time frame}:

(a) Carry Trading (Horizon: 6 months to 18 months) -It is based on the different levels of interest rates between two currencies.

(b) Positional trading (Horizon: 3 months to 12 months) -It involves long-term trend following. The level of interest rates is very important (as expressed by overnight SWAPs).

(c) Swing trading (Horizon: a few days to several weeks) -It involves trading strong short-term price trends. Sometimes, it combines technical analysis and fundamental analysis.

(d) Day trading (Horizon: from a few minutes to several hours) -It may be based exclusively on technical analysis, or on news trading. The spread charges are very important, while the SWAP charges are irrelevant, as all positions are closed before the day ends. Day-trading is a very risky practice and it is suitable only for professional traders.

(e) Scalping (Horizon: a few seconds to a few minutes) -Scalping involves trading tiny price breakouts or small ranges. Scalpers seek a few points of profit (pips). The spread charges are very crucial, that is why scalpers trade exclusively high-liquid Forex pairs such as EURUSD, USDJPY, GBPUSD, USDCHF, and EURGBP. Nowadays, most scalpers apply automated trading strategies (Expert Advisors).

Distinguishing Between Trend-Following vs Reversal Strategies

In general, there are two major categories of trading strategies you can use:

(1) Trend-Following Strategies

(2) Reversal Strategies

Trying to predict the point of reversal is very difficult even for professional traders. Hence, choosing a trend-following strategy seems the best idea. Note that a trend-following strategy will perform better in a stable-trending market. If a market is characterized by extreme volatility, large swings can hit your stop-loss levels, and that is bad news.

Follow the trend, your only real friend”


Building the Best Forex Trading Strategy Ever: Money Management

The implementation of a trading strategy is based on rules and procedures that can help traders to prevent the emotional influence over their trading decisions. One of the key parameters for successful trading is the determination and the discipline to stick to a particular trading strategy. Follow your strategy no matter what happens. If the market is trading deep on the opposite direction and you suffer huge losses then you have applied the wrong money management. Losing money doesn't necessarily mean your whole trading strategy is wrong. No trading strategy can achieve 100% positive results. A very good strategy will prove 70% profitable. Don't underestimate the remaining 30%, because if you do, it can blow your account away. The proper money management will save your account's balance if everything goes wrong.

These are some key functions of a proper money management system:

  1. Forecasting / Limiting trading cost

  2. Defining / Entering the right stop-loss

  3. Controlling / Adjusting the level of capital leverage

The above three money management functions are absolutely essential whatever strategy you are implementing in whatever timeframe.

Building the Best Forex Trading Strategy Ever: Backtesting your Trading Strategy

The best way to make sure that a strategy works is to test it using historical data, that process is called back-testing. Every professional trader would back-test a new strategy to evaluate its performance. Of course, the past results of any strategy can not guarantee its future performance. But that assumption doesn't make backtesting useless.

” If a strategy is performing poorly over past data then it will probably perform poorly over future data.”

Building confidence will make it easier to stick with your trading strategy no matter what happens.

Key Tips for all Trading Styles

These are some key tips no matter what strategy you are applying:

(1) First of all, select a Trend-Following Strategy because it is much easier to make good money over the long-run.

(2) Use pending orders when entering a position. Pending orders can help you achieve the ideal entrance in the market and save you a lot of time. Every professional use pending orders instead of market orders (at least 80%).

(3) Be careful when the crowd is excessively bullish or bearish. Rarely the market follows the crowd expectations. Use online sentiment tools to determine what the great majority of retail traders really anticipate.

(4) Trade smaller sizes during times of uncertainty and especially during periods of important news releases.

(5) Prefer trades with Profit/Loss ratio above 3. That is the way professional traders do it.

(6) When you are trading the financial markets what matters most is your trading process, not any individual outcome. The process matters more than the outcome, simply because you can't control the outcome but you can control the process. If your trading strategy is correct then money will flow in the long-run. You don't have to over-trade your positions in order to make good money in the long-run.

(7) Forex currencies trend well in the long-run. Therefore run your profits and use trailing stops to secure them.

(8) Always back-test a new strategy. If it is an automated strategy you can back-test it easily. Even if it is a manual trading strategy, you can backtest it using historical data and make sure that works.

(9) Don’t just jump into a position. Let the market come to your own strategic setup and allow some time for this setup to be formed. That is the best way to do it.

(10) Last but not least, try always to limit your trading cost. Paying a tight spread or being paid a lucrative overnight rate can really make the difference. You can do that by selecting a competitive ECN/STP Forex broker and/or by joining a Trading Rebate plan. Furthermore, never forget that excessive trading leverage doesn't affect only your risk but it affects directly your trading cost. Keeping your leverage tight means less trading costs.

Building the Best Forex Trading Strategy Ever -Conclusions

When it comes to the best Forex trading strategy ever, there is more than one answer. It is the same as trying to determine the best weather for sports without saying if you are going skiing in the mountains or if you are going for a swim. It is the same as trying to determine the best medicine for a particular phthisis without knowing who is the patient. Is he 20 years old or is he 80 years old? A friend of mine who works in the pharmaceutical industry, says “The best drug is the drug that works for you”. This is also true when trading Forex. The best strategy is the strategy that works for you. What may work for a particular trader can prove a disaster for another trader.

In order to determine the best Forex trading ever, you need to consider: (a) your risk profile, (b) the available time you can devote, and (c) your personality. Whatever strategy you have chosen, back-testing it and experimenting with it on a demo account are two essential steps for ensuring that this strategy will prove the best Forex trading strategy ever, for you.


Building the Best Forex Trading Strategy Ever

George Protonotarios


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