In today forex faq, we have a question from one of our fellow readers asking me what is the most important aspects I consider when I built my forex trading strategy.
Below is the question:
What is the most important aspects to consider when you are building your trading strategy
This is a great question and I believe that a lot of you guys out there must also be wondering about it. There are far too many courses/signals online that are created by marketers who are trying to make money out of us traders.
Throughout my years of maintaining this blog, I have received numerous emails from readers telling me how much money they have lost along the way after taking a course or using a signal service online. This is mainly because they are trading without a proven strategy that works.
However one thing that I want to emphasize here is it is a MUST for all of you to test out a strategy on a demo account first before you trade live with your hard earned money. No matter it is your own formulated strategy or strategy you have learned from anyone or even me, you will have to test them on a demo account to see if they really works before you trade live.
That is why I always ask my students to trade on a demo account first to see for yourself whether the strategy works or not. After you manage to have 2 consecutive months of profits in your demo, then you can move to live trading with high confidence.
Besides learning how to trade from a course, another alternative will be to build your own strategy which can be very tedious but very rewarding as well. I have written a blog sometimes back teaching you guys the exact steps that I took to formulate my own strategies back in 2009 and you can read more about them via the link below
Personally for me, there are 3 main aspects that I considered when I was building my own strategies in 2009 and I am going to share with you in this post.
1) Ease of Execution – Most new traders think that a good strategy is one that is very sophisticated. In fact, if you have a chance to take a look at the strategy used by professional traders, you will be stunned by the simplicity of it.
What I mean by simple is not that it has no indicator in it. It is just that it is very easy to execute with clear entry signal.
I have received emails from readers sharing with me their strategy asking me to give them some comment. When I take a look at it, I was stunned by the number of indicators they used and how complicated it is to enter a trade.
When you have a complicated strategy, you will find yourself getting into a wrong trade more often than not due to the tough execution criteria.
Therefore for me, the ease of execution is very important when I built my strategy in 2009. I will recommend that you use at most 2 to 3 indicators for one strategy.
2) Frequency of Trades – The next aspect that I had take into consideration when I am building my own strategies in 2009 is the frequency of trades. I have seen strategies that comes with 6 to 7 indicators and the entry only occur when all of the indicators are aligned.
Frankly speaking, to get the alignment of 6 to 7 indicators, you can only get 1 to 3 trades per month.
I will suggest that a good strategy is one with about 2 to 3 trades per week at least. Therefore the frequency of trades is one aspect that you must consider when formulating your own strategy.
3) Risk Reward Ratio – If you have been following my blog, you will have heard me saying the importance of risk reward in trading every now and then. Trust me, this is the one most important aspect all of you must have in your strategy in order to make money consistently every month without failed.
Just in case some of you who are new to my blog do not know what is risk reward, do let me explain to you here.
Risk reward ratio refers to the amount of risk vs amount of profit per trade that you take. For example, if you have a strategy that has a stop loss of 25 pips and target profit of 100 pips, your strategy has a 1:4 risk reward ratio.
With such a ratio, it means that 1 win can withstand 4 consecutive losses and therefore you are likely to make profit from this strategy.
The above are 3 aspects that I had considered when I was formulating my own strategies in 2009 and to me, these aspects still stand as the strategies that I have formulated since 2009 is still making me profits till today.
Although the process of building your own strategy is very tedious and time consuming, it is well worth every second of your time.
Do feel free to email me if you have any question on this topic.