How to build a good forex strategy

Each forex trader must have his own strategy, we can’t rely all the time on others strategies and forex signal, other FX traders are not better then us; we can develop more profitable techniques. In this article I will give you some tips to follow while developing your currency trading strategy.

First of all be simple as you can; Forex trading is not simple and it needs good concentration that’s true, but the good news is you can make profit by following simple techniques and stick to it. Don’t use complicated economic indicators; indicators describe the market and do not predict it.

Second, develop a strategy which do not rely on news release, you can do that by closing a trade before a news release or open it after a news release, and by this way you will not be stopped out because a report came worse than your expectation.

Combining the second and third rule we will have the following scenario: I see a currency in a downtrend (or uptrend) and I am sure of the trend, but the RSI is under 30, and after a while a report will be released, so what I do is wait for the report to be released.
At release time we will either see the currency going down very quickly and we will miss the chance to enter into a very profitable trade and it is not a problem as long as we don’t loose pips, OR the currency will go up, in that case the RSI is no more oversold, so we identify a good entry point to enter a short trade. Forex is not so bad and it always gives us new chances and always tells us to enter or exit but we must read well the signs and forex signal.


Fourth, the most important thing in foreign exchange trading is the entry point; good entry point leads us to profit, bad entry point leads us to loose. You probably hear a lot of traders telling you do not trade against the trend, and that’s right but it is not enough, you must know where to enter a trend , timing is the most important, so where to enter, I will tell you where I enter. For example, let’s assume that EUR/USD major trend is down and I want to enter a short trade. We know very well that currencies move in waves


http://www.rpchost.com/picture/wave.gif


So most traders see in wave [A_B} a good opportunity to sell but it is too risky for me and it has a good probability to stop me out, if I enter at point [b] I will be stopped out, but If I short at point [C] I will be riding the trend from the beginning and make very good pips.

At point [C] the currency is no more oversold and probably at point [b] a report has been released and caused a retracement to [C], so at [C] I will enter the corrective wave. With this technique, I will have a 95% chance to hit my target and the spread will be very tight. You see, forex gives you many chances, you must change your way of thinking a little bit and see trading from a different point of view and have our own forex signal.


Joe Chalhoub

Joe, thanks for sharing. I agree with you that entry is every bit as important as exit, in fact possibly more so. If you mis-time the entry, the best that exit can possibly offer is damage control.

I'm also very much in agreement that the consistent use of simple, robust techniques is as good an approach as any.

My one question is how do you know (in advance) that point C is going to be a tradeable reversal, rather than just a minor correction? That's the biggest problem I have trading pullbacks in trends: finding high probability points where the pullback is likely to end, and the prevailing trend resume itself. It's true that many pullbacks end between a 38.2 and 61.8 Fibo retrace, but in covering that entire area, and still allowing room for error in placing the SL, increases the #pips at risk. Hence I lean more towards trading breakouts than pullbacks. I also prefer looking at chart patterns and candle types, than using indicators, but then I guess that's just my style. I'm still very much learning.

IMHO, in order to be long-term profitable a system needs to be founded on robust principles (e.g. trends, S/R, breakouts, OB/OS, letting profits run etc) as opposed to being dependent on precisely optimized parameters. Robust principles can generally be applied to all pairs/timeframes, and tend to better stand the test of time, as they somehow embrace the "fuzzy" nature of underlying crowd psychology; while overly optimized systems are vulnerable to any randomness in market "rhythms". I am also growing to understand that it's preferable to have a small edge that works profitably, on balance, across all market conditions, than a method that offers spectacular profits, but only when conditions are favorable (e.g. trending, ranging, etc).

BTW, I would have said that price is oversold at B and overbought at C.

Anyway, all the best with your trading.
I will take a look at your web site.

David

Hello David

Thx for your reply.

About point C, there is many methods to identify that point, some traders uses Fibonnacci, others uses PP, others uses Resistances or supports etc ..
Me I use Supports and Resistances to identify C, in reality, C is a Resistance, why you think price falled from C, why it doesnt fal from another level, because C is a Resistance, the price couldn't pass it so it goes down. You would ask how to identify a resistance, its simple, every moving average is a resistance every bollinger band is a resistance, I advise you to open a chart and insert a bollinger band indicator, some moving averages MA(5), MA(20), MA(30), and watch the chart and see how point A - B - C are developed.

Good luck

I like your idea... frankly speaking I am using almost the same strategy with an entry at point C and using trendlines break and a target the same as AB... on a daily chart.
Would you be so kind to tell me and to give me some advise on trailing stops? stops area - I use above point C???
Exit strategy???

Thanks