Developing a Trading Strategy
Anyone who says it's easy to make money in the foreign exchange market is being deceptive. Foreign exchange by its very nature is a volatile market. In addition, the use of leverage can significantly increase risk.
As a result, trading forex effectively is by no means an effortless endeavor. It requires market knowledge as well as time and self-discipline. In order to trade successfully, you must take into account massive amounts of data and make an educated decision based on your perception of market sentiment and expectations.
ACM USA does not manage accounts, nor does it give market advice. However as market professionals, we can guide the novice in the correct direction and explain the difference between correct trading strategies and losing propositions. Let's look at what you need to do in order to increase your chances for profitable trading:
Trade with money you can afford to lose. Trading the forex market is invigorating and can be addictive. But, it is also speculative and can result in significant loss: Even experienced traders have down days, weeks and even months. The more you are “involved” with your money, the harder it is to make a level-headed decision. So, keep in mind that money you need to survive should never be traded.
Identify the state of the market. How is the market trading? Is it trending upwards, downwards or within a range? Is the trend strong or weak? Did it begin long ago or is it a recent occurrence? Getting a lucid picture of market conditions will lay the groundwork for a successful trade.
Determine your time frame for trading. Countless traders enter the forex market without defining their expectations. When trading, one must forecast movements—and within this forecast there is a price evolution during a certain time frame. For example, if your time frame is 60 minutes then the average price movement on your graph should reflect this. You must also pre-define an exit price: Although it is unrealistic to know precisely when you will exit the market, it is essential to define from the outset to know if you will be scalping (trying to get a few points off the market), trading intra-day or holding positions long-term. This will also define what charting period you can use:
If you trade many times a day; there's no point basing your technical analysis on a daily graph. You'll probably want to analyze a 15-minute or 60-minute graph. Furthermore, it is critical to be acquainted with the different times when various financial centers enter and exit the market: This affects volatility and liquidity and will influence market movements.
Time your trade. You can be right about a market movement but enter the trade too early or too late. Timing considerations are twofold: An expected economic indicator can consolidate a movement that's already underway. Or, an unexpected catalyst can immediately change the market dynamic. Timing your trade means knowing what the market expects from an event and taking into account the potential impact of any alternative prior to trading. Technical analysis, which we will examine in more detail later, can help you identify when and at what price a move may occur.
If in doubt, stay out. If you're unsure about a trade, stay on the sidelines. Hail Mary’s only work in the movies.
Trade logical transaction sizes. Margin trading provides the forex trader with a large amount of leverage. Trading at full margin capacity (at ACM USA, 1% or 0.5%) can result in large profits or large losses. We recommend that you avoid putting all your eggs in one basket. In other words, avoid trading amounts that could wipe you out in a single move. Sizing your trades so that you may re-enter the market or make transactions on other currencies is generally wiser. ACM USA offers the same rates regardless of transaction size.
Gauge market sentiment. Market sentiment is what the majority of the market is perceived to be feeling and therefore what it will do. For example, are the bulls or bears dominating the movement of a specific currency? Market sentiment often creates market trends—and as the old adage goes, “the trend is your friend.” In other words, if you are trading with the market, you will make a successful trade. This of course is overly simplified; a trend is capable of reversal at any time. Look to fundamental and technical analysis for guidance.
Market expectation. Market expectation is what most people are expecting in regard to an upcoming announcement or event. For instance, if people are expecting interest rates to rise and they do, there will likely be little market movement because the information will have been priced in to the market already. But often, if the adverse happens—in this case, if people are expecting interest rates to rise and they don’t—markets can react violently.
Use what other traders use. In a perfect world, every trader would make decisions based on a 14-day RSI, which is a common technical analysis tool. But the world is not perfect and not all market participants follow the same technical indicators—diversity of opinions and techniques translate directly into price fluctuation. But, traders have a tendency to use a limited number of technical analysis tools. The most common are the nine- and 14-day RSI, obvious trend lines and support levels, Fibonacci retracement, MACD and nine-, 20- and 40- day exponential moving averages. You should test these as well. The more a trader understands what other traders are looking at and betting on, the more precise your estimations can be.