By Akubuo IfeanyiChukwu Clinton
There is no single formula for success for trading in the financial markets. Think of the markets as being like the ocean and the trader as a surfer. Surfing requires talent, balance, patience, proper equipment, and mindfulness of your surroundings.
Would you go into water that had dangerous rip tides or was shark-infested? Hopefully not.
The attitude to trading in the Forex markets is no different. By blending good analysis with effective implementation, your success rate will improve dramatically, and, like many skill sets, good trading comes from a combination of talent and hard work.
Here are the strategies to serve you well in all markets, but in this article, we will focus on the Forex markets.
Approaching Forex Trading
Before you trade, recognize the value of proper preparation. It’s important to align your personal goals and temperament with relatable instruments and markets. For example, if you understand retail markets, then it makes sense to trade retail stocks rather than oil futures, about which you may know nothing. It also helps to begin by assessing the following three components:
The time frame indicates the type of trading that is appropriate for your temperament. Trading off a five-minute chart suggests that you are more comfortable taking a position without exposure to overnight risk. On the other hand, choosing weekly charts indicates comfort with overnight risk and a willingness to see some days go contrary to your position.
In addition, decide if you have the time and willingness to sit in front of a screen all day or if you prefer to do your research over the weekend and then make a trading decision for the week ahead based on your analysis. Remember that the opportunity to make substantial money in the Forex markets requires time. Short-term scalping, by definition, means small profits or losses. In this case, you will have to trade more frequently.
Once you choose a time frame, find a consistent methodology. For example, some traders like to buy support and sell resistance. Others prefer buying or selling breakouts. Some like to trade using indicators, such as MACD (moving average convergence divergence) and crossovers.
Once you choose a system or methodology, test it to see if it works on a consistent basis and provides an edge. If your system is reliable more than 50% of the time, you should consider that an edge, even if it’s a small one. Test a few strategies, and when you find one that delivers a consistently positive outcome, stay with it and test it with a variety of instruments and various time frames.
You will find that certain instruments trade much more orderly than others. Erratic trading instruments make it difficult to produce a winning system. Therefore, it is necessary to test your system on multiple instruments to determine that your system’s “personality” matches with the instrument being traded.
For example, if you were trading the USD/JPY currency pair in the Forex market, you may find that Fibonacci support and resistance levels are more reliable.
Akubuo IfeanyiChukwu Clinton, a Forex trader, writes from Imo state, South East Nigeria.