To be a successful forex trader, people must learn to distinguish good and bad trading strategies. Even though the most obvious way to measure success is to look at the profits and losses columns for all given strategy, there are other things to consider when choosing a trading strategy.
Strategies are Personal
Trading strategies must be personal because the markets are very volatile and emotional at times. Many traders implement risky trading strategies, but it might not be the best option for some. With that, if traders consider copying someone else’s trading strategy, they need to look past the nuts and bolts of the strategy and think about risk management as well. This is to know if it’s right for the trader.
Traders must be completely honest. Suppose they are not comfortable holding onto a trade in the strategy or placing the trades based on any rules that are part of that strategy. In that case, it does not matter if the strategy has a longer-term profitability expectancy or not, it will be hard for them to follow the rules, and they won’t achieve optimal results.
Traders will encounter the word ‘expectancy’ when determining if a trading strategy is good or bad. Traders will understand that the system they trade has a good opportunity of making money over the longer-term according to the figure.
By calculating the results to determine the typical profit for every trade placed, they can figure out the expectancy. When it’s negative, the strategy is a loser; when it’s positive, the strategy is a winner. The calculation combines the number of trades is usually one with the average loss on losers and the average gain on winners being the formula: (Win % x Average Win Size) – (Loss % x Average Loss Size)
Set of Variables
A number of strategies depend on particular variables or inputs. For instance, the ‘London daybreak strategy’ focuses on London when British ad European traders come on board. This is because the most massive amount of liquidity during the day is during the European session.
Now, if traders work or sleep at that time, that strategy won’t work.
Traders must remember that markets change – sometimes, it’s the sentiment wavering, sometimes it’s the overall trend that changes. Most long-term traders are very hesitant to change the strategy they use daily. However, there are times the situation demands them to do so. This is the main reason why they must always seek potential changes in any trading strategy’s performance. An excellent strategy will adjust to new market conditions. Then, a bad strategy may further run when it’s not appropriate.
By determining the scenarios, the system tends to focus on, traders can trade the right system at the perfect time. Also, do not get hung up on the results by themselves as some systems are not meant to be traded in specific events. In other words, the best strategies don’t always work. Thus, it is good to save a few solid ones to trade when the market changes.