Lesson #10: Creating and Believing in a Forex Strategy
Today’s lesson is going to be about something more theoretical than the previous ones. Specifically, we are going to discuss how to manage a forex strategy you customized around your needs.
In order to introduce this topic we need to describe the concept of volatility. Financial traders describevolatility as the possibility of an asset to be characterized by unpredictable movements, either in the positive or the negative direction. It is easy to understand how more volatility is synonymous for potential great earnings by good traders.
The currency market is a volatile market and this is due to two main components:
- News in the market
- Traders reacting to news and therefore influencing the value of a currency
Both of these elements weigh the same, but the reaction of traders is less foreseeable than the consequence caused by particular news. You need to be flexible enough to leave room in your strategy for last minute adaptations.
We interviewed many of our most successful forex traders and all of them agreed on the fact that there is one simple secret in Forex Trading:
Believe in your own strategy.
What does it mean?
Imagine you are investing in the EUR increasing its value against the USD. While trading you will notice quick changes in the relationship between the pair of currencies; for instance it could happen that the EURUSD goes from 1.2995 to 1.3017 and few seconds later to 1.2982 etc. When you see those variations you tend to be overexcited about your strategy if they are for your benefit and to try to fix the strategy you used when things go bad.
If you planned a forex strategy that is based on facts and is coming from a deep analysis of the market, you should keep believing in it since it will pay back in the long term. Always keep in mind that how good strategies give the best return on the investment not in the short term but in the long one.
It is very important to define a forex strategy with entry as well as exit levels prior to entering a trade. The reason for that is that before actual capital is deployed to a trade there are no emotions attached to it. Once a forex strategy has been created the most important aspect is to remain committed to the strategy regardless of how a currency pair will perform.
Many new forex trader’s fail even with a good forex strategy because they amend it once they face a floating trading loss. The most common mistake is that they hope the currency pair will recover and they adjust their stop loss levels without setting a hedge which can cause their losses to accelerate until they lose their capital.
A good forex trading strategy is only half the equation, the other half is to not adjust a trade mid-course and to stick with the defined strategy which may be the hardest part especially for new traders. It takes time to develop the required discipline in order to be able to create a good forex trading strategy and remain committed to it from start to finish.