What is a Forex Trading Strategy?
This is something that really needs to be addressed as there is so much rubbish out there. And the information is Sooo misleading. Which certainly isn’t helped by all the charlatans out there claiming to have the PERFECT Strategy, everything you will need to be successful…
And then they sell you an entry system!!!
Getting into the market is the easy part, however it’s not getting into the market that makes you money… is it?
And it Certainly isn’t a Strategy.
Do you have a System or a Strategy?
Our Trading Director Andres brought this up the other day with our Elite Trader Program students, because they were getting confused. (He has also written an editorial article on the subject)
And let’s be fair here it’s not their fault, these are all traders who have spent money elsewhere with the charlatans selling systems while claiming they are strategies. And the Internet is full of them, systems and charlatans.
“What’s the difference?”
“What’s all the fuss about?”
Great questions I’ll let Wikipedia answer the first one. Strategy here. System here.
For the short version, a strategy is the art of a general, including several subsets including tactics, siegecraft and logistics etc.
And a system is something composed of multiple smaller systems. Or as Andres calls it… a system is a tactic.
So a system does have several moving parts like trend, indicator, setup pattern. It may even include a stop loss and a take profit. It still however fits into a strategy.
Forex Trading Strategy
Your Strategy is basically your Trading Plan. It is the complete or big picture, without it your trading system is useless. And that is why 95% of retail traders fail. They are trying to be profitable with only one part of the puzzle. And how many puzzles have you come across in your life with only one part. Even a baby can solve that one…
The market is far too complex to fall for that, if all you needed was a trading system then 95% of retail traders would be profitable and the commercial traders would be pulling their hair out. Maybe even the banks would be foreclosing.
No, in order to trade successfully you have to have a forex trading strategy. Because this will keep all of your decisions out of the market. You will have tested and explored every possible detail that you can.
Step 1
You need to know who you are and what makes you tick. If you were brought up by parents and friends who believe that you must work hard (physically as in blood sweat and tears) to be successful and earn good money. Then you will probably struggle to earn money sitting at a desk trading.
You will need to know how you make your trading decisions, do you decide easily to enter the market or do you need everything perfectly aligned? If you have no written rules at all then you borderline gambler. Or maybe you are just too active in the markets…
You will need to know your activity level, do you want to be in and out of the market several times a day, or would you prefer longer running trades? What time frames will you trade?
What time frame will you enter on? Will you manage on the same time frame? Which time frame will you take profits from?
Do you like trend following systems or trend-fading systems?
You will also need to know your beliefs about yourself, your beliefs about money and your beliefs about your trading business, because trading is a business. You will need to list all your strengths and trading skills. And you would do well to know where you struggle and what your weakness’s are. Most importantly you must know your Trading Edge.
Step 2
You must know what you want to achieve. You will need to have clarity and focus in order to succeed in the complex world of trading. So your Strategy must include your SMART Goals. Make sure these are specific. I want to be rich just won’t work… If it did you would already be rich!!!
Step 3
You have got to know your big picture and you will need to have an understanding of the market. This takes time and study, it may be what you call, a feel for the market. And you will need to know your beliefs about the market. Do you believe that the trend is your friend until the bend at the end? How do you define a trend?
Step 4
A Trading Strategy not only involves trading systems , it also involves business systems. You must have a business plan. Why?
Because most business’s fail within the first few years, however franchises tend not to fail. The reason that they tend not to fail is because they come with a well-developed set of systems and process’s that have already been tried and tested many times over…
Just LOOK at McDonald’s.
Step 5
Some of you may have already completed step 5 to a certain degree, and you may even consider yourself successful. I guarantee however you won’t be around for long, I have seen so many traders come and go over the years. And some come back time and time again, claiming that they have refined their system and this time it will work…
But they never completed all the other steps…
Some systems will work for several months, and some even work for a year or two. But if you do not complete all the steps, you will not be consistently profitable for long!
Some of you also need to decide whether or not you really want to be a Discretionary Trader (the trader decides which trades to make based on current market conditions). As you may be better suited to mechanical trading. This is something you will only truly know by finding out all your internal beliefs.
Step 6
You have got to understand both you and your system and how they will work together. This can only be completed by thoroughly testing and evaluating your system. Which is not something easily explained half-way through a blog.
It is covered very extensively in our course and will, eventually be covered in great detail in our newsletter.
Put basically, it is your expectation of how your system should behave in the market type it is intended for…
Step 7
The most important part of your Trading Strategy is to meet your objectives. Which as I have shown in a previous blog, has nothing to do with your trading system and everything to do with your equity management. Your position sizing. The trading system just allows you to properly position size to meet your objectives.
Step 8
Be sure to have a “what if plan.”
You need to think of all the things that may go wrong that could in some way affect your trading. This is not to be construed as being negative but merely creative. It all comes back to the most important aspect of your trading strategy…
NEVER having to make a decision while in the market. How would you cope if you lost power and internet in your region now including your phone. Do you have your brokers phone number in order to make changes to your trades?
Or would you be running around wildly F-ing and blinding?
Step 9
In order for your strategy to help you reach your goals and objectives, you will need to trade mistake free. As more often than not it is our mistakes that are the difference between a profitable system and a losing system. In order to do this you must understand your limitations and your current circumstances.
We strongly advise that you take our detailed stress test.
Stress reduces our capacity for good decision making, which then limits our choices and leads to us reverting to previous habits. Which will be those annoyingly bad habits that were causing us to lose in the first place. For more information on stress please feel free to check out Stress (1) and Stress (2) coming soon…
The stress test will however show you where you are currently suffering from or being affected by stress, and it will also advise on how to better protect yourself. You should make this a part of your self evaluation system.
Included in this system you should have a way of evaluating your psychology while trading your strategy. Which should be able to tell you when not to trade because you are clearly not in the right frame of mind. You may also want to include a system for ensuring that you are taking care of yourself and all of your environments. The more balanced your life the less chance that stress will affect your trading…
Step 10
Know when your system isn’t working any more. Which is exactly why we journal…
So that we can REVIEW
You must have a periodic review. The time between reviews will depend upon your system. If you are in and out of trades 4-5 times a week then you should probably review once a month. If you are in trades 1-3 times a week then a quarterly review should be sufficient.
Without the review you won’t know that your system isn’t working until it is too late.
Never believe that you will develop a system that will last forever. Doesn’t happen. Markets change and people change. And with the way technology is changing, you will find that you will need to adapt and change more often…
The Strategy
Hopefully now you not only understand the difference between a strategy and a system. But that you now fully understand how totally under prepared you really are. What happens next will define your future as a trader. And it will be one of three things:
- You will have had an aha moment and realized that there is a lot more to successful trading than just a mere entry system. And you will also have realized that there is an awful lot of work involved to complete a fully comprehensive Trading Strategy. You understand that we at Special FX Academy are one of the extremely few companies that offer this level of service and intensity, at by far the lowest cost. With a life-time membership. No back-end sales, or front end mark ups. One course. So you join. Congratulations you will be a successful trader.
- You will have had an aha moment and realized that there is a lot more to successful trading than just a mere entry system. And you will also have realized that there is an awful lot of work involved to complete a fully comprehensive Trading Strategy. And you will set of by yourself to complete this task. Good Luck, if you stick with it and follow those steps it can be done. You will have to make your own painful and costly mistakes and it will take you several years (took me six years to do it by myself).
- Or you will turn your back and call this psychology mumbo jumbo. And you will continue to be seduced by the get rich quick, instant gratification sales tactics out there. And you will continue to spend a few hundred here, a few thousand there. Until you either run out of money or quit trying.
To Your Consistently Profitable Trading
Callum
P.S. What did you think of this Lesson? Please share it with us in the comments below!
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Callum McLean
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