Building a trading strategy: how to develop your own forex strategy | FxPro (2024)

In this article, we will focus on finding day trading strategies, in particular, using technical analysis indicators. You will learn how to develop a trading strategy, find strong justifications for its signals, and start applying your new rules for making trades on a live account.

Most novice traders do not follow any strategy at all. They rely solely on their own visual assessment of the current price chart and are happy when they even find the professional term "Price Action Trading" for their occupation (in fact, PA is not just looking at charts, but that's not the point right now).

Nevertheless, anyone who is already mature enough to trade forex correctly is recommended to use auxiliary tools to confirm their trading hypothesis. One of these tools is usually Forex indicators.

A trading strategy is a sequence of actions, as well as a set of signals from various indicators that together determine the conditions for opening and closing trades. In general, these are instructions for conducting effective trading based on your previous experience. This definition of trading is based on the idea that strategies need to be tested.

Such a strategy should consist of a detailed investment plan, as well as a trading algorithm that specifies the acceptable options for you.

• risks per transaction,
• time horizon (the period during which your position will remain in the market),
• investment objectives (potential profit and possible losses),
• as well as technical specifications (conditions for opening and closing a transaction).

Trading strategies can be created on the basis of information obtained on the Internet for trading both manually and with the participation of trading robots (mechanical trading systems with an embedded algorithm). One of the most difficult methods is the visual development of your strategy, i.e. an attempt to trade on the same Price Action, only with the need to determine the patterns of Japanese candlesticks on the charts. The risk of making a mistake and seeing the shape not where it is actually formed is very high.

As a result, you can get a trading strategy that can automate all or part of your trading process. If you are going to use automated algorithms, you can modify them to suit both an aggressive trading style and a conservative one.

For intraday trading, start by selecting a single stock, currency pair, or futures contract that you will trade, making trades exclusively within the day, without moving them through the night. Usually, a trader opens and closes 3-10 orders per day with an average profit of 20-50 points.

Once you decide on a strategy that works with one asset, you can probably adapt it to other markets as well. As a rule, traders start with the most popular currency pairs EURUSD or GBPUSD. If you want to start your career in the futures market, you can start with the S&P500 Emini (ES).

This is usually news trading and scalping with different transaction durations. If you are trading CFDs on stocks, make it a point to identify the assets with the greatest potential every week. There are more than 2000 of them on the FxPro platform. Stock market analytics, as well as communication in traders ' chats, will help you choose a tool for trading that will be in the spotlight in the near future.

For example, ahead of the week of quarterly reports of American companies. See which of them will publish their data this week and get ready to trade on these assets. Your task is to observe the chart and understand how you can use a similar event for your trading in the future. Usually, increased volatility on the stock and currency pair chart starts a few hours before the report is published and recoups in the first minutes after it is published. Be sure to keep in mind that price movements can be extremely sharp and unpredictable. If you want to trade on currency pairs, pay attention to the indicators that are published in the Economic Calendar on the FxPro website. Currency quotes can react strongly both before and immediately after the data is published.

Once you've decided on your asset and trading style, start watching the market. And it is best not to follow one, but several charts at once. It is highly discouraged to open trades at this time of development, because you don't have a strategy as such yet! Better watch for changes in the behavior of the price chart on different timeframes: from 5 minutes to months. After all, choosing a trading period is also an important part of the plan.

Next, we will talk about how to justify a trading strategy, i.e. choose specific criteria for the algorithm that you have outlined.

So, a close look at the charts of currency pairs or stocks begins with the search for areas and moments in which it would be possible to make a profit. They usually start by looking at larger price movements based on historical data. Then they make their own conclusion about what was happening on the chart, which could tell the trader a good time to open a trade.

Next, it makes sense to look at the charts of other timeframes and other assets (if we are developing day trading strategies) and try to find similar movements, i.e. market reactions to similar events (for example, the publication of NFP news), but at a different time (a month or two ago). This will help us find a rationale for the terms of our trading strategy.

This way, you will be able to see the patterns and as a result, you will have a hypothesis of the strategy. For example, you will notice that volatility on dollar pairs usually increases 3 hours before the publication of Nonfarm Payrolls, and in the last two months it reacts to the publication with a negative reaction, as if all the positive expectations of traders were already included in the price earlier.

However, remember that the conclusions should be your own. If you are based on the reasoning of an Internet analyst, be sure to test their hypotheses on a demo account before opening real trades. Also keep in mind that previous price movements do not guarantee that the asset will react in the same way in the future. However, the chances that this action will be repeated if it has occurred several times in the past do increase.

As soon as you have a working idea for a trading strategy, which you will also find logical justifications based on historical data, you can start working out in more detail. To do this, see if your new strategy works on recent price movements: select several currency charts (for example, with the dollar) and view them for different periods. Now your task is to find 10 or more "trading signals", i.e. reasonably successful moments for opening a trade. Remember that the rationale for each of them must be the same, otherwise it is not a signal at all.

Let's say you decide that for each positive Nonfarm Payrolls report, you will open a buy trade for USDJPY, and for each negative report, place a sell position for the pair.

Rewind your schedule a few months ago. In parallel, open the Economic Calendar for previous periods. See when the NFP turned out to be better than expected, and imagine that at that moment you opened a purchase transaction. Go back to the chart: would you be able to earn money this way? Or did the market behave illogically, and the price of the pair began to fall? Most likely, you will come to the conclusion that your hypothesis does not give a profit in 100% of cases, and this is normal.

The main thing is to check your trading strategy for success by adding up all trades with a minus and trades with a plus. What results did you get in six months? Did your account turn out to be in the black? Have you put forward a working hypothesis for the trading strategy? It may well turn out not to be. It may even be that you no longer have any ideas for a strategy based on fundamental analysis. Then a more stable option comes to the rescue-strategies based on signals from technical indicators.

If significant economic news or company reports are not published very often, then technical indicators analyze price behavior from morning to evening, allowing you not to stop trading even at night. However, for this purpose, you will have to put the selected algorithm in the basis of the robot and set it to trade non-stop on a dedicated personal VPS server. FxPro managers will tell you more about it.

So, how to successfully develop a trading strategy based on technical indicators? A technical strategy usually includes several stages, each of which must be recorded in the trader's Diary (journal), which we will discuss later.

If you want to develop a technical trading strategy, you should immediately write down what market you are trading in (currencies, stocks, metals, etc.), what asset, what timeframe and duration of the trade you prefer, and what the duration of each trade will be (at least approximately). For example, if we are talking about a trade that is two or three months long, there is no point in worrying about price changes within one hour – the market will change a million times before your position closes.

At the same time, if the trade is short-term (say, for a few hours or even days), you may be interested in studying the charts for longer periods to get an idea of the bigger picture and the overall trend. Here's what it's for: if suddenly the price goes against you in the short term, but you know that the trend of the month is upward, so chances are high that the quotes will still return to the medium-term path that they laid out on a scale of several weeks.

It is impossible to build a trading strategy without defining the technical indicators that will form its basis.

Based on the criteria discussed in the previous paragraph, you should select the appropriate filters for the chart under study. You should have a good understanding of at least the basic built-in indicators and understand when it is appropriate to use them. In this case, you will be able to interpret their signals more accurately, as well as open trades more often.

So, if the market is trending, it makes no sense to use the RSI, which will perform well during chart reversals. At the same time, if the market is characterized by wide uncertain fluctuations, moving averages (SMA) are unlikely to be of much use. If the underlying currency pair is highly cyclical (for example, if the currency is issued by a commodity exporting country), the Commodity Channel index (CCI) indicator may be quite appropriate. Also, if the chart is extremely volatile, smoothing out fluctuations with moving average intersections may be just in place.

To summarize:

• Since different instruments go through different stages of price fluctuations, you should have 3-5 trading strategies in your arsenal for market situations of trend, reversal, flat, news trading, etc. You can use them either one at a time, based on the specific market phase and situation, or determine for yourself only the only conditions under which you will enter the market.
• It is extremely risky to base a robot on a single algorithm, run it and forget it, believing that this instruction will become a universal magic wand for any market situation. Accordingly, even mechanical trading systems must be adjusted manually or start a new one, pausing the previous one.

Having chosen the technical tools for their trading strategies, the trader should logically choose the periods and ranges, the values of which should be transmitted to the software (to your Expert Advisor).

For example, you should answer the question for yourself: for an RSI-based trading strategy, do you choose a period of 14, 10 or 7? Or what will be the periods of the moving averages that make up the MACD indicator?

Don't worry if you don't know the right answers right away. They will only come with the experience that is accumulated on the training demo account.

Once the technical tools for trading strategies are set up, you need to learn how to correctly search for signals based on the readings of your indicators. They should show you current trading opportunities to open trades, acting as a financial advisor.

For example, you look at moving averages and wait for them to cross, or you expect a divergence between the movement of the MACD oscillator and the asset chart. The main goal of such an observation is to confirm your hypotheses based on the combination of indicators, and learn how to profit from the received signals.

What are trading signals in simple words? Let's look at the following examples:

• the price moves in the channel, starting from one or the other border. The moment of reversal will be the signal to open a trade.
• intersections of indicator lines (for example, SMAS with different periods).
• divergences (divergences) between the price movement and the oscillator;
• breakouts of channel boundaries or support and resistance lines.
• the appearance of additional figures of Japanese candlesticks, etc.

After making a decision to open a trade based on the signals of the trading strategy, we will conduct an analysis, determining the working entry points, as well as the rules and algorithm for exiting the market. The last point, by the way, is very important: traders lose a significant part of their profits precisely because of ill-considered moments of closing positions. In addition, it is necessary to calculate effective transaction volumes, taking into account the fundamental and technical analysis of the market and using the principles of money management.

When analyzing data, the trader should focus on trading signals related to the selected period and plan. Opening a transaction should be a clear and deliberate action.

After studying the various scenarios presented on the charts and determining which one is effective, the trader will compare them in terms of reliability and potential profit. For example, how much the indicator values are consistent with the signals, what profit or loss will be received if the Take Profit or Stop Loss protective orders are triggered Loss. Once this is done, the trader will choose the trade that offers the highest return with the lowest risk based on the most controversial technical scenario.

It follows from the above that if a trader uses a trend strategy, he will wait for a correction, entering trades against the current movement, based on the readings of the main trend. Or, when a speculator uses channel tactics, his main task will be to monitor the approach of the price to the limits of the range in order to open positions for breakdown or rebound.

The demo account is used by both beginners and professional traders at various stages of working on trading strategies, no matter how strange it may sound. You should always first check how certain algorithm changes work on the demo account, and only then on the real one.

If your demo strategy shows successful results, you can switch to a live account. However, each trader determines this moment for himself, and no specific recommendations should be given on this issue. The simplest answer is when you and your strategy are ready for it.

The Forex trading log is on the one hand a chronological record of your actions on the account, and on the other, answers to questions about the operation of the trading strategy. In the log, traders record various characteristics of completed trades-from the indicator readings to their own emotions. At first it seems that this process may take too much time, but then you start to understand exactly what you need for future analysis, and reduce the list to the minimum you need.

But you can start with general questions before starting trading:

• What is the best time for me to enter the market? (Morning, afternoon, evening, specific hours, lunch break, etc.)
• How much time and when do I have to analyze the market and events?
• What assets do I prefer to trade? (Forex, Stocks, CFDs, Futures, etc.)
• How long do I plan to keep the transaction active?
• At what points will I not open a trade, even if there is a signal? (Public holidays, before news releases, etc.)

• What specific event would tell me that now is the time to open a position?
• How do I prefer to enter a trade: market order, limit order, stop order, stop limit order? Which view is best for what I'm trying to accomplish?
• Which of the actions I did earlier will help me enter the trade more effectively now?
• Is there a suitable signal to enter the position now? What is my forecast for traffic potential?
• Are all the rules of my trade entry strategy fully implemented?

• Entering the market correctly is half the possible profit. But it is equally important to understand when the deal will be closed. Do I understand now when the trade will be closed with a profit or loss?
• What trading signals do I use to close a trade?
• How do I understand that the trend is over and there will be a trend reversal?
• How far can the price go against the trend before it pulls back? Do I want to close the trade before the first big pullback, or will I wait it out?
• If my criteria for entering a trade disappear, can I use this as an exit signal?
• How long can I stay in the trend trade to capture most of it, but still not lose too much profit when it reverses?
• Not all trades you enter will be successful. So think about where to place your stoplossso that the risk is limited.
• Would a trailing stop allow meto make a bigger profit? If so, what should it be?
• Will Teke Profit work with my trading strategy algorithm?

• The development of a trading strategy also includes money management. It helps us determine whether a trade is worth making, how much risk we are willing to take, and whether the potential reward justifies taking the risk in the first place?
• What is the risk in dollars based on the entry point and stoplossbased on the position size? The amount of loss, if the price reaches a stoploss, should not exceed 5% of the total account balance, and ideally – 2-3%.
• What is the potential profit from the transaction? What can be the maximum loss in points and monetary units?
• Based on the two answers above, is it worth making a trade? If the risk is too great or I start acting too late, I need to adapt. If I lose too much profit when prices turn around, I need to adjust.
• For day trading, the profit should exceed the risk by 1.5 times. For swing trading, the profit should be twice the risk. It is worth looking at the average value for the entire trade, rather than at each trade.

If you were to lose a lot of money implementing a strategy, this will tell you something worthwhile: perhaps if you perform actions that are the opposite of those that brought a loss, they will give a positive result. Think about it: if the strategy brings you losses, it means that someone else is making them. Try to understand what this group of traders is doing!

In short, it is worth analyzing financial charts in search of profit opportunities. Explore these opportunities and think about how you can turn them into real money without putting yourself at excessive risk.

Technical trading strategies are created using a combination of indicator signals and patterns. It's a good idea to combine them with price models to get more reliable indications of a potential trade. For example, crossing the MACD after a major countertrend move can be much more reliable as a trading signal than the value of the MACD at another point in time, no matter how extreme it may be.

In short, instead of absolute values, the technical analyst will prefer to focus on the rarer phenomena that we have just discussed. In the following chapters of this section, we will discuss technical strategies in more detail.