A strategy is what ties everything together to make trading a systematic activity. The basic idea that makes strategic trading popular is that rules can be tested to give more-or-less consistent results. On the other hand, trading randomly or based on your mood at a certain time is very likely to lead to losses because any profits you do make can’t be repeated without more trial and error.
Ultimately, everything you’ve learned so far with Exness Education, from terminology all the way to indicators, is useless if you don’t know how it fits together. Even the world’s leading authority on technical analysis would be a catastrophically bad trader if they failed to manage risk. Strategic trading can reduce the stress and time of trading while also making you more likely to reach your realistic goals.
Trading’s not gambling!
Before looking at how traders design strategies, it’s worth remembering the key principle that trading and gambling are two different things. Betting and gambling are recreational activities: there are too many variables and not enough data to have a ‘strategy’ for gambling in the usual sense of the term.
Trading on the other hand is somewhat like investing with the budget and timeframe of betting, at least as far as the average person’s concerned. While trading can be enjoyable, it’s not a game, and when you’re trading, you’re not playing. It’s possible to make consistent profits over months and years with logical and strategic trading. If this wasn’t the case, you wouldn’t hear about many people all over the world making small (and, rarely, big) profits from forex.
Many people also lose money trading, though. One of the key determiners of whether you make or lose money with derivatives is your attitude. Specifically, treating trading as if it’s gambling will almost certainly lead to the loss of your account. Will you be a gambler or a trader?
|Strategy||Doesn’t have one (or has one but ignores it)||Has a clear, appropriate strategy which was tested thoroughly on a demo account|
|Risk||Doesn’t attempt to manage risk||Key focus on managing risk and the ratio of every trade|
|Profits||Obsessed with making large profits over short periods||Concerned primarily with protecting capital and secondarily with making consistent profits|
|Discipline||Often keeps a bad trade open in the unrealistic hope of a reversal||Hesitates only minimally if at all before cutting the losses from bad trades|
|Emotions||Feels intense peaks of joy and troughs of despair every day at each profit and loss||Never becomes emotional regardless of the result of a trade; always remains calm|
|Timing||Trades far more than they should and often trades for no reason but boredom||Trades only when good opportunities present themselves|
Very large losses
Consistent small profits
Designing a strategy
Any strategy has a greater or lesser number of rules. These rules could be about when to trade, what to trade, how much to trade and a very wide variety of other things. The point of the rules is to tell a trader how to behave in a certain situation and avoid emotional decisions.
Rules need to be as specific as reasonably possible. Having vague rules open to many interpretations is not a good idea because it opens the door in turn to thinking emotionally. What you want instead is a system of strategic trading that removes the role of guesswork as much as possible and discourages or prevents you from making random trades.
Simplicity is very important at the beginning. The number of rules should not be very large, and equally you should avoid using complicated concepts. This is because complexity usually means that there’s more to go wrong. If you test a simple strategy and find that it works, there’s no reason not to add some extra rules or modify the existing ones later down the line when your knowledge and experience have advanced.
Testing your strategic trading
Before you use a strategy for real, it must be tested. You need to know that your system works before you risk real money with it. This means that any new strategy you develop should be tested with a demo account for at least a few weeks under a variety of different conditions.
If your strategy results in consistent losses on a demo account, this means that it’s faulty. Don’t be afraid to reconfigure some parts of it and retest it. Every trader had some initial setbacks on the demo account when they were developing their strategy: persevere. On the other hand, if your strategy leads to consistent profits on your demo account, this might mean that it’s ready to be used for real. There are three important notes here.
1. No strategy is perfect
If your strategy doesn’t give you a profit from every single trade, this is fine and you should not worry. There’s no need to make a profit every time you trade; you just need to profit more than you lose in total to turn an overall profit.
Unfortunately, many traders who see two consecutive small losses jump to hasty conclusions that the promising strategy which produced them is worthless. Instead, the profitability of a strategy should generally be assessed over at least two weeks, preferably a month or more.
2. Don’t forget psychology
You should always remember that demo trading is psychologically very different from trading with real money. Losing money on a demo doesn’t really affect one’s emotions… because it’s not real.
Many traders who move to real accounts though forget that it can be extremely difficult to control negative emotions when it comes to losing actual money. This is why many traders put particular emphasis on rules for managing risk in their strategies. The bottom line is that you absolutely must be disciplined in following your strategy.
3. Testing must be realistic
Perhaps most importantly, your testing on a demo account needs to be a realistic reflection of what you might do on a live account. For example, if you have €200 available in real funds to deposit and intend to use 1:30 leverage, you should set up your demo balance for €200 with 1:30 leverage.
Far too many new traders make the mistake of filling their demo accounts with eye-watering amounts of money in the hundreds of thousands and using huge leverage. The subsequent testing is not just a waste of time but actively destructive to your likelihood of success in the future. Practice on a demo account needs to simulate real conditions as closely as possible; otherwise, it’s very easy to develop bad habits and become complacent in the face of losses.
The simplest strategies
At the beginning, your strategy’s rules need to be as simple as possible. You should be able to explain your rules to another trader without having to think too hard to remember anything. Let’s take as an example the Six Rules. This set of rules is very popular for strategic trading, with many thousands of current traders having used them to get started.
- Trade with the main trend on the four-hour and daily charts.
- Keep your ratio of risk:reward to at least 1:2; set stops and targets based on support and resistance (not fixed numbers of pips).
- Only open and close trades during the main session(s) of the instrument(s) traded.
- Only buy when there is no resistance nearby and only sell when there is no support nearby.
- Trade only when one currency is weak or the other strong (or both). For example, the euro should only be bought against the dollar if EURGBP and EURJPY are also moving upward.
- Practise on a demo account reflecting real conditions for at least a couple of months. After this, move on to trading micro lots (0.01 lot) only.
The Six Rules are easy to follow for any trader who knows the basics. Of course, this simple strategy does not guarantee profit – nothing can guarantee 100% that you’ll be successful. Having said that, strategic trading using a very simple system like this definitely makes success much more likely than opening and closing orders completely at random.
Implementing strategic trading
Putting your tested strategy into practice comes with its own set of challenges. Having the perfect strategy doesn’t matter if you don’t have the discipline to stick to it. It’s critical to follow the rules you’ve made for your trading, especially if you’re using a shorter term strategy. In this case, rules aren’t made to be broken.
Traders also need to be sure that their strategy is appropriate for the different psychological environment of trading for real. If you find that your system is good for the demo but too complicated in practice, it might be time for a rethink. Equally, it might take a while to develop a clear personality when it comes to trading. Some traders are inherently more conservative or more aggressive than others, so your strategy should play to your strengths while trying to minimise your weaknesses.
The variety of strategies out there is potentially infinite. This article has simply introduced the concept and value of trading strategically. If you want to know more about specific strategies, stay tuned to Exness Academy. We’re adding new articles on strategies every month.
Congratulations from Exness Academy!
Finally, well done for reading the cornerstone content at Exness Academy! Now you have all of the basic knowledge to get started with developing your own strategy. If anything’s unclear, you can always reread the articles and take the quizzes again to test your knowledge.
We wish you many pips!
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