What makes a good Trading Strategy?

Ask most NEW traders, and they will tell you about some moving average or combination of indicators or a chart pattern that they use. This is, as the more experienced trader knows, an entry point and not a strategy.

Any trader who is more experienced will say a strategy should also include money management, risk control, perhaps stop losses and of course, an exit point. They might also say that you must let your profits run and cut your losses short. A well-read trader will also tell you that your strategy should fit with your trading personality.

BUT there is one other vital ingredient that many traders forget - and that is to fully understand the "personality" of what you trade. Some traders specialise in say, gold or Brent crude or currencies or they might specialise in a particular index such as the FTSE 100 or the Dow but many traders choose to trade shares. Indeed some traders dabble in a bit of everything. I think this is the area that causes many traders to fail or at least not reach their full potential.

In my view: You absolutely MUST specialise.

I am sure that on the surface most people would say that sounds sensible but here is why it is a MUST!

Superficially, many charts look the same. I bet if you had not seen the charts for some time and someone where to show you a chart of Brent Crude over 6 months and then a chart of Barclays PLC over the same 6 months you would be hard pushed to say which was which purely on the look of the chart.

However, I bet that if you found a trader who trades ONLY Barclays day in and day out and also found someone who trades ONLY Brent Crude day in and day out, both of them would easily identify which was which. WHY?

Because every share, index or commodity has it’s own "personality".

Some will be volatile intra-day, some will follow their sector or the main index (market followers), some will do their own thing, some will spike up and down regularly, some will stop at key moving averages and some will just plough through. Some will move by 5% on average before they retrace and some by 2%. Some will gap up or down regularly, some will not. You get the idea!

Therefore, no matter how good you are at analysing indicators, moving averages, trends and patterns, the same strategy WILL NOT work for everything. I would go so far as to say that a strategy that works well for Bovis Homes, for example, is likely NOT to work for BT Group - they have very different "personalities".

So let’s return to our question: What makes a good trading strategy? Let me answer with a series of ten questions that you need to find answers to, in order to build a REALLY GOOD strategy.

1. What do you want to trade (share, index, commodity, currency, etc)? If your answer is shares (plural) I would urge you to pick one typical share at this stage to really specialise. You can add more later.
2. What "personality" does that share, index etc have?
3. What entry system is the most reliable for that share?
4. What stop loss system is the most effective for that share?
5. What average risk will a typical trade carry?
6. What exit system works well for that share?
7. What is your trading personality (attitude to risk, losses, discipline, how much do you worry etc) and can you trade that strategy without overriding it?
8. What timescale do you want to trade? (Using intra-day or end of day data)
9. How much data do you keep on past trades to help identify strategy weaknesses?
10. How does all this fit with your trading objectives?

Once you have an answer to each question you need to do one final thing. Make sure all those things fit together and complement each other. For example, if the ideal stop loss position represents a big average risk and conflicts with your own attitude to risk, you need to start again. If you will override your exit point because greed makes you hang in for more, you need to think again. Perhaps you shouldn’t trade that stock in the first place - look for one with a different "personality" which will lead to a strategy you can trade comfortably.

It is a long and sometimes painful iterative journey. You might need to go round and round in ever decreasing circles over a long time. Testing and refining, testing and refining before you can truly have a reliable and repeatable strategy that REALLY WORKS for you.

THEN, you can look for other things to trade that have the same "personality" as your specialist stock, index, commodity or currency.

Technical Evaluation

Technical Analysis

Technical analysis is a way to attempt to trade in the forex market by determining previous trends that have led to profitable trade. A technical trader gives more importance to studying the rise and fall of currencies on charts so as to determine the present and future developments of forex trade. This evaluation helps a trader settle on whether to stay entirely out of the market or to buy, sell or hedge a position. This study also helps in making intelligent assessments for future investments; whether to set a position open at a future price or to initiate a trade at the present level, technical analysis helps in recognizing persistent patterns in the forex market. However, a trader should always take into account the risk involved. Following recurring trends in the market do not always guarantee profitable trades as these patterns might not always be exact.

Trader’s kit

Better analysis and predictions about the forex market can be obtained by utilizing different technical indicators and charts. These indicators help interpreting fundamental factors behind rate fluctuations. Technical indicators can help determine the behaviour of the market crowd by taking into account the explosiveness, volume and other aspects of the market. Trends can also be differentiated by various patterns, trend lines, setbacks and support and resistance levels. Although not all patterns are evident, when any one pattern is accurately predicted, a trader can make a decision to wait and watch if the readings were accurate or to start trading immediately.

Although this brings our introduction to an end this still is not the end of your educational process. Online Forex Course is the next step if you want to know more about forex trading. There is a lesson on technical analysis that will help you understand more about frequent chart patterns and trend lines.

We also have technical analysis articles for detailed study of particular indicators and their usage. You may also sign in with our free practice account to experiment with your knowledge about indicators by using MetaTrader 4 ; the award winning trading software platform.

Futures Against Forex

Benefits of Forex Vs. Futures	Forex	Futures
Up to 200:1 Leverage*	Yes	No
Price Certainty †	Yes	No
24-Hour Trading	Yes	Restricted
Commission-Free ‡	Yes	No

More liquidity

The forex market, the largest and most active market in the world, conducts business of about 2 trillion dollars a day worldwide. A total 46 times greater than all of the futures markets combined. worldwide conducts business of about 2 trillion dollars a day which might sum up to be 46 times more than that of all the businesses of the overall futures market. The daily futures volume recorded on the Chicago Mercantile Exchange is about 2 to 3 % of the volume generated in the daily forex trade, making the volume of the forex market stand a significant portion of global capital markets activity. Having such great liquidity is a distinct advantage that forex has over futures.

Rates and execution

Certainty in rates and instant implementation of orders is what you get when you trade forex (under normal conditions), whereas this is not necessarily the case in the futures market. Technology has not advanced the futures market to the point where efficient execution is possible due to the uncertainty in price fills in market orders and the unstable speed. With Ideal World Forex a trader can interact with lives quotes on charts with trades filled without delay. No matter how unpredictable or dynamic the market tends to be there is no change in the quotes you see and the execution price.

Greater leverage

Traders must take into account that leverage can work for or against the trader, and that increasing leverage increases both prospective gains and losses on any given trade. The forex market lets a trader place trades with larger leverage than in most futures contracts. And, as a bonus, degree of leverage used while trading is specified by the client. Ideal World Forex offers you a leverage of up to 200:1. In futures the margin rates for day traders and overnight positions are different depending on the volume of the deal whereas there is no change in margin rates for forex trading.

Commission free

While trading with Ideal World Forex you don’t have to worry about any kind of commission as we are compensated by the spread between the bid and ask prices. The fee futures traders have to pay can weigh down their profits considerably. At Ideal World Forex we also have the facility of opening an account with a low initial deposit amount of $200. We also offer a test account (without any actual investment) for those who are new to this business and want to practice before starting the actual trade.

Access to forex

Unlike any other market including futures, the forex market continues trading 24 hrs a day starting from Monday at 5 pm EST to Friday 5 pm EST meaning you can trade at any time of the day or night. Also, unlike forex, the futures market has overnight contracts which can only be traded sparingly, are tricky to access, and the liquidity is also minimal whereas forex trading can take place at any time. Furthermore, the trading software platform, MetaTrader 4, also has designed custom alerts to keep you updated about any move the forex market makes at any time. We also have an automated trading system that will buy or sell at your specified rate (if the market moves towards that direction), hence executing your order instantly. If you are interested in downloading the software MetaTrader 4 for free, please sign in for our practice account. We can also open up mini accounts with as low as $200 investment.

Fundamental Analysis

Fundamental indicators are the announcements which traders follow to show the strength of a particular currency with respect to others. The value of a currency depends on economic news releases that depict the strength or weaknesses of the economy of a country. This is what fundamental analysis is all about; to scrutinize the value of a country’s currency with the help of daily news feeds.

The reports including statistical data on basic topics such as GDP, international trade, employment, manufacturing, retail sales, housing and interest rates are called fundamental indicators. There may be an effect on the value of a country’s economy in a direct or indirect manner with respect to the growth, stability or decline in any of the above mentioned areas.

Factors involved in forex trading

The responsibility of maintaining the base interest rates of a country lies with the central bank of that country and in this way the bank plays a vital role in the forex market. A central bank attempts to pursue growth in the economy along with curtailing inflation, hence it must manage to maintain a fine balance while setting interest rates. Speculation in the forex market is often fuelled depending on a central bank’s decision to raise, cut or hold the interest rates thus changing the value of a currency or group of currencies.

The rates of essential items such as oil and gasoline are also important indicators as consumer spending and confidence can be hurt by soaring prices which may result in a cut back in certain business activity and government services. Also information about a country’s economy is reflected in national and international political events and changes in government policies related to trade and elections.

Some events such as natural disasters and calamities, terrorism, and military actions in sensitive areas of the globe cannot be predicted and therefore may also cause uncertainty in the market. Events such as these also have an impact on the forex market as they develop.

If a trader follows the forex market and related news feeds one can obtain a very valuable tool through which to identify patterns in macroeconomic signals and also can understand central banks current and future actions.

Feel free to sign up for our free practice account or start trading with real money with a live account

Difference Between Stock And Forex Trading

Equal Potential

No matter whether there is a bull or bear market, in forex there are always opportunities. Unlike the stock market, whether the market is going up or down there is always equal opportunity for profit and loss. Also, there are no limitations on short selling. Forex involves the trading of currency pairs which can gain profit or loss whether the market is rising or falling. It does not matter whether the trader is short or long risk of loss and potential for profit will always exist.

Consummate liquidity

There is no time restriction for forex trading. No matter what time of day it is the trading continues to go on making forex the most liquid market in the world. Forex market trades in one day what Wall Street trades in approximately one month.

More leverage

The most attractive feature of the forex market is leverage. Although it should be noted that trading using leverage can increase the potential risk of loss as well as profit. The maximum leverage for stocks, for example, is 2:1 (i.e. if you invest 1,000 dollars you can buy up to 2,000 dollars of shares). Whereas while trading with us you can get up to leverage of 200:1 which means that if a trader invests 1,000 dollars he can buy up to 400,000 dollars in currency.

Direct trading

Forex trading enables clients to deal directly with the currency market without any worry or hassle. Also spot currency trading helps to remove the middleman which often can make costs higher due to expensive commission and management fees.

No commission

There are no brokerage, exchange, software or clearing fees at Ideal World Forex. We do not charge any commission as we are compensated through Bid and Ask prices (or spread) of a particular currency pair. Although be aware that the bank you are dealing with may have charges or fees for deposit or withdrawal. We are not responsible for this. There may be a fee for fund withdrawals. Please inquire with a Ideal World Forex customer representative for further information.

Technical trading

Forex trading tends to develop strong trends and patterns which a trader may identify for new potential movements, breakouts and chances to enter and exit positions.

Rate fluctuation

The major factors that affect the supply and demand of currencies are the strength of the country’s economy and interest rate policy. As currency rates show the supply and demand of currencies, indicators such as the PPI, foreign investment, CPI, the trade balance and GDP reflect the health of the economy and modify the supply and demand for a currency. Data on interest rates and expert observations on international trade and economic policy are also released on a regular basis.

24/7 trading

When you are using a forex trading platform you are seeing a miniature display of the world economy. A trader can access forex markets from 5 pm EST when trade begins in Sydney and Singapore on Sunday and continue trading till 5 pm EST on Friday.

Less trading options

In forex there are about 8 major currencies and 34 second level currencies to choose from, whereas trading in stocks involves about 8,000 different publicly traded companies. Such a huge range of choices tends to be confusing and complicated.

Best Software

Since the beginning, our team of expert forex professionals has invested long hours improving our software and services to guarantee a basic, wide-ranging system that enables users to decide sensibly. In addition, services include over 100 tools and technical indicators as well as the latest from Reuters News service to cover all important updates that impact the forex market. Our advanced chart-based trading system contains custom alerts, price quotes, as well as the ability to create an automated trading system so you can pre-program your method to buy or sell at specified market events. Users are able to connect directly with the help of MetaTrader 4 with the live currency market on a secure platform.

Forex Dealing

A trader attempts to profit from buying or selling currencies by implementing Fundamental and Technical analysis to help decide which way a currency is likely to move. Countries having secure governments and world renowned banks with robust economies and low inflation are the ones whose currencies are most favoured and are most commonly referred to as the ‘major currencies’. A trader can trade Japanese Yen, European Euro and British Pound in any combination as they are the most common currencies traded along with U.S. Dollar. These currency pairs are known to be the most liquid as well. One can also trade the Canadian, Australian and New Zealand Dollars as well as the Swiss Franc making for 19 total trading instruments when accounting for all the cross pairs. Other smaller world currencies are not offered as they are too illiquid and difficult to trade.

Trading Currencies

Profit and loss can be realized by selling currencies that are vulnerable to drop in value against another other major currency. Similarly, buying currencies which have a tendency to rise in the market against any other major currency can enable a trader to again gain profit (loss).

When a trader buys a currency at a particular rate and intends to sell it at a higher rate this is called a ‘long’ position and when he/she sells at a rate and intends to buy when the rate falls is called a ‘short’ position.

The value of one currency with respect to any other currency shows the economic stability of that country. Trading currencies in respect to the change in political situation is reactive whereas trading with respect to anticipated occurrences is speculative. Generally, forex trading is carried out by sheer anticipation about the shifting of currency rates.

A trader can both opt for a conservative approach and liquidate positions quickly using limit and stop orders to control risks which benefit from the slightest price changes or go for a more risky approach. A trader places a limit order to make certain a position is established once a price level is attained in the market. (Under unpredictable circumstances in the market a limit or stop order might not be executed by the broker at the specified rate given by the trader but we attempt to honour up to 10 lots in size of limit and stop orders.)

To limit loss on a particular trade a stop order is placed to automatically liquidate a position at a chosen price level. A trader might profit hugely by even the slightest change in daily currency rates if he/she places orders in respect to resistance levels and technical support.

Effect of time factor on currency trading throughout the world affects traders

Financial Centers - London, Tokyo and New York City.

Forex is the most liquid international financial market which trades continuously 24/7. The time of day has an impact on liquidity of a particular currency. The only break that occurs in trading is during the weekends.

Traders must contemplate which factors are likely to be in play in the market when they decide to trade as even a slight occurrence anywhere in the world might have a major impact on investments globally.

The major time zones and trading hubs are that of Sydney, New York, Tokyo and London.

As the market remains operational 24/7, forex has a great attraction for traders wanting to trade at any time of the day.

1. What is Forex? Forex; an overview

The foreign exchange market is the world’s biggest financial market regularly experiencing daily transaction volumes in the trillions of dollars. The world economy is made up of a complex balance between the eight major currencies. Depending on which currency we may favour or possess, each of us already automatically plays a role as investors in this mammoth global market.

The Forex market; as it is most commonly known, is a financial market which operates globally. Unlike the stock market, Forex is not located in a central location. Instead, trading occurs via electronic networks of banks, traders, speculators and financial institutions throughout the world. Forex is the most liquid financial market in the world and operates 24 hours a day. Trading occurs at all times of the day and night, beginning and ending with the open and close of each of the world’s major financial hubs’ daily trading sessions.

The Eight Major World Currencies are as follows:

1. Japanese Yen 2. New Zealand Dollar 3. Australian Dollar 4. Euro

5. Swiss Franc 6. English Pound 7. United States Dollar 8. Canadian Dollar

Originally, Forex was restricted to major banks and financial institutions. However, with the development of technology and growing ubiquity of the internet as well as the attraction of high levels of leverage (which increases chances of profit as well as loss), Forex is now available to regular individual investors.

If you have access to a PC with an internet connection, participation in this dynamic and exciting global trading market is easy. It is possible for you to start your new account at Ideal World Forex with a low initial deposit of US$200.

If you are not sure or are unfamiliar with the foreign exchange market, you can also open a practice account for a test run. This does not involve any money or risk. All you have to do is to fill out a form and you will be given a username through which you will be able to download the award winning software MetaTrader 4.

Feel free to continue reading for more information on how forex trading works or you can skip ahead by clicking on Next Page here.