Creating your Forex Trading Strategy (2)

In our previous article, we talked about one of the most important aspects of trading in any market and especially Forex, which is Money Management. Money Management in Forex can be defined as the way a trader manages his equity, number and size of trades, open positions, stop loss limits and take profit targets and optimizing its Risk/Reward ratio in order to yield positive results in the long run.

To appreciate this, first you have to recognize that no one can always get it right and we all get losing trades. This is a fact in a trader’s life and the sooner a trader accepts this, the better his chances of being profitable in the long run. We often hear traders speak as if they are certain what the markets will do next. The best approach is to try to view the markets in probabilities and always have an analysis to support our opinion.

Whether you are looking at fundamental news announcements, a combination of technical tools, or an indicator like simple moving average, what traders are looking for are patterns that put the probabilities in their favor so they will profit in the long run. In other words, we are looking for how the market has reacted in the past to certain conditions, and speculating how the market will react in the future to similar conditions. When it comes to trading, there is no absolute certainty. That is why good money management is essential in making trading profits grow over time.

There are different factors that determine how the market will react. For example, someone may have inside information about an interest rate change ahead of its release. This fact alone cannot predict how the market will react. There is a possibility of other insiders also knowing about this information and they can as well act in advance. But then, what happens if there are real orders from big corporations or banks that need to buy or sell after the announcements? It is also possible that a lot of participants in the markets felt the rate would move higher and acted by buying or selling prior to the release of the news, taking their profits after the announcement causing the currency to move lower (buying the rumour and selling the fact). Indeed, the possibilities are endless.

Remember, Forex trading is about thinking in probabilities – the higher chance of an event happening over another. So, how do you put the probabilities on your side? The truth is any trading plan/strategy that is profitable in the long run is good enough.  We try to use a more calculated approach in our trading tactics by applying money management considerations to our analysis of the market situation. First, we recognize that the market is always trading on a trend or a range and that we have much better probabilities of being profitable if our trades are following the trend hence the popular notion or saying that THE TREND IS YOUR FRIEND.

In conclusion, whatever plan or strategy one adopts, the underlying factor is having a good risk to reward ratio having your stop loss and take profit in place. This is to build discipline and instill in you a much better trading psychology to your benefit – not getting overly excited when a trade wins or getting very upset when a trade loses.

Based on this model, it is pretty easy to see why it makes little sense to get very excited when a trade wins or very upset when a trade loses which results in one more very important added advantage in forex trading- much better trading psychology.

For those of you in Ibadan, Nigeria, we hold a forex trader's forum regularly.  
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