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Designing a Forex strategy – the first step before trading

One of the worst things that can happen to a novice Forex trader is that they achieve big profits virtually instantly. Saying that this is something to be avoided may seem counter-intuitive, but there is logic to the position. It should be pointed out that it only applies if the trader in question hasn’t taken the time and put in the work needed to create a coherent trading strategy. All too often, however, traders decide to ‘have a go’ at dealing on the Forex markets having been seduced by the many articles and websites claiming that they offer a chance to get rich quickly and easily. Beginners luck can sometimes result in early gains and, before they know it, novice traders have put more of their money on the line, haven’t worried about safety nets like stop-loss mechanisms, have failed to take the multiplying impact of leverage into account – all of this on top of the many expenses incurred in simply running an account – and are staring down the barrel of substantial losses.

It can be very different of course, but only if you take the time to do some planning before putting your money where your trading instincts are (and the first lesson to learn would be that you should never rely purely on your instincts). The Forex markets offer global, round the clock opportunities for traders of every type and size, with excellent liquidity meaning that trades can be carried out quickly and simply. The relative volatility of the markets is what drives much of the activity, as traders from every corner of the globe seek to take advantage of often very small shifts in the relative values of currency pairs. All of these are plus points, but they also represent potential hazards; ease of access means it’s simple to keep chasing losses, high liquidity means you’ll never have any trouble finding currencies to spend your money on and the volatility that drives profits can also sometimes create losses that run out of control to devastating effect. All of which is another way of saying that you should never sit down to actually trade without first designing your own Forex trading strategy. These are six steps toward designing a Forex strategy:

1. Decide on your time frame

Forex trading involves work such as checking charts, reviewing data, following the markets and monitoring external factors which might impact on the value of the currency. Ask yourself how often you want to have to do all of that work and how long you’re planning on holding the positions you take. In simple terms, the question is whether you’re a day trader or a swing trader. A day trader often adopts a ‘scalping’ technique, making multiple small trades during the course of a single day, opening and closing positions quickly to take advantage of small shifts in currency and then moving on to the next. A swing trader, on the other hand, uses the data available to try to identify bigger shifts in the value of currencies and to set up positions that can profit from these shifts for as long as they last.

2. Look for indicators

Designing a successful Forex strategy is based on identifying an emerging trend at the earliest possible stage, and making that identification is only possible using the available indicators. The most commonly used indicators are moving averages, which track the average price of a currency over a specific period of time, and in this way help to identify trends. In most cases, traders will track two moving averages, one based on a longer period of time and one on a more recent period. The time to open a position is when the more recent moving average moves above or below the more long term moving average. Using moving averages in this way is one of the simplest means of spotting a trend in Forex markets. With experience and a deeper understanding of the data, traders will develop their own additional indicators, but moving averages are a good place to start.

3. Decide on risk

Different traders have a different approach to risk. In many senses, this is simply a question of temperament, with some people able to handle bigger risks than others – usually in pursuit of bigger profits – while others prefer to opt for a small risk/small returns strategy. Neither approach is definitively better than the other, but designing a successful Forex strategy means deciding what level of risk you’re willing to cope with. Many inexperienced traders only start to think about losing money once it actually begins to happen, and this is why they often make the mistake of risking more of their capital by chasing their losses in a manner driven by emotion rather than logic. Think about how much money you’re willing to lose on each trade and on a full day’s trading and stick to these limits when designing Forex strategy. Set a percentage of your capital and, as soon as your losses hit that figure, withdraw from the day’s trading.

4. Set your parameters

One of the most important parts of any strategy involves setting stop-loss orders. These are tools that automatically take you out of a trade when a certain point is hit, protecting you from the risk of further losses. Setting stop-losses is vital for two reasons – it can stop your losses running out of control and it frees you from the responsibility of having to monitor every position for as long as it is open. You should be monitoring your account closely, of course, but the speed with which markets can move still makes it possible for losses to mount before you notice them.  Stop losses can be set using various criteria, including the price of a particular currency, a percentage of your overall account, the volatility of the market measured by how much it moves within certain price bands and even a specific time limit.

5. Write your strategy down

It may sound like a rather old fashioned process in this era of digital connections and automated processes, but writing your strategy down is by far the best way of making sure that the details are set in your mind. In addition to this, it will give you a resource to turn to when the ups and downs and stresses of trading make it difficult to stick properly to the rules you’ve drawn up for yourself. Seeing them set down in black and white can be a useful reminder of why you thought those rules were a good idea in the first place.

6. Keep a detailed record 

Having tested your strategy out using the free demos offered by many trading platforms, and then made any adjustments needed, you should keep a detailed record of every day’s trading after you complete designing the Forex strategy.  Record every position, how it played out and the amount of profit or loss generated. Write down why you made any decisions you made (i.e. why you chose to close a position or increase the amount invested) and be honest – if you closed a position too soon and lost the chance to make more money, then record the fact. It could be that you’re working with a short term strategy anyway, and you’re willing to give up the extra profits in order to pursue multiple smaller deals. If so, writing it down will solidify the strategy and establish whether it may be worth modifying. Try to honestly record any emotions which prompted decisions, as you may see a pattern, such as investing more when you’re angry, or panicking over losses and cutting other positions short.

This is Petko Aleksandrov and I am recording from the Sky Tree in Japan. I’m on the 450th floor at 600 meters high. I had 2 Bitcoin trading seminars – one was in Osaka and yesterday was in Tokyo. One of the best experiences I ever had.

The Bitcoin trading seminars in Japaned showed me that the people are so polite here, everyone smiles, everyone bows. And they have this great, great discipline. When I was coming to Tokyo with this bullet train, it does really 320 km/h but what impressed me the most is there are these policemen that they have their routines.
And every 5 or 10 minutes they walk through the car and when they exit they bow! Even everyone sleeps and they walk even on the opposite way so everyone is looking forward but there is a guy who is coming backward. And I just put my phone with the camera because I wanted to see what he will do. And he bowed again when exiting the car. No one sees him, no cameras inside but he bowed. And one of the policemen stopped by me and I thought you will tell me something because I was talking on the phone and everybody was sleeping. The thing is he went down and he took a coin, one yen coin and he gave it to me, I’m not sure that it was mine but he gave it to me. I think this would never happen in Europe or anywhere else.

And it’s so clean here.

You cannot see a single cigarette on the floor or a single piece of paper. I was waiting in front of the restaurant because everybody waits in a column to get into the restaurant. And I saw at the next restaurant which was like five meters away, the chef from the kitchen went out and he took from the ground one very small piece of paper. I even did not notice it. There are women who are riding their bicycle with these fancy gloves and umbrella somehow attached to their bicycles. Everything is like in order.

There is nothing missing, there is nothing extra. Everything is where it is supposed to be. The Bitcoin trading seminar was organized perfectly.

And today is actually Monday morning, I am done with the Bitcoin trading seminars and I was wondering whether to go out or not because I thought there will be huge traffic. Guess what? No traffic at all! Monday morning in Tokyo no traffic. There are no cars on the street. There are a few taxis, buses, everyone uses the subway, the metro, and the trains. And the first time I got into the subway I was waiting for the train to come and I looked on my left side there was a column of people waiting two by two was standing alone I looked at the right side and guess what? There was another column of two people waiting. They are waiting on the exact spot, there is a line where you need to wait and I was standing in the middle and what surprised me the most was that nobody looked at me with a bad eye even I was standing in front of them in the middle.

Japan is really a fantastic place. People are so disciplined and everyone who comes here has a lot to learn from the people.

It was a great pleasure for me leading these Bitcoin trading seminars and I Japan really impressed me. I will be uploading some parts of the seminar in the following Youtube playlist:

Why Forex traders lose money?

Why Forex traders lose money? Well, probably this is one of the most common questions you will come across on the internet. Now with my experience, I have seen a lot. Especially when I was trading for different institutions and when I was working for a couple of brokers.

So why Forex traders lose money. Well, probably that’s one of the most common questions you will come across over the internet. Now with my experience, I have seen a lot. Especially when I was trading for different institutions and when I worked for a couple of brokers.

I dealt a lot with the clients, and I can tell you that, unfortunately, over 95 to 97% of the traders lose money, and over 70% of the traders zero their accounts during the first one month. And for me, this is unbelievable. Even I know that’s the truth. But it’s incredible because people jump into trading without having any idea what they’re doing.

Why Forex traders lose money? People aren’t educated on how to trade.

I can say this is one of the most important reasons, and I can say this is reason number one just because people lack education when it comes to trading. Now trading is like every other job.

Doctors study for 10 years, teachers study for…what, 7, 8 years in different countries. And people do expect they will stay in front of the computer for 1, 2 days and they will learn how to trade just because they saw some free YouTube clips or they saw some education from their broker that teaches them nothing. So traders lack education and education is very easy nowadays, to be honest.

Before, when I was studying there wasn’t much material over the internet, I was studying from books. It was time-consuming, it was nothing extraordinary that could be found really in books because the old methods don’t apply anymore. And this is probably reason number 2. I can say, everyone trades the same way using the same things and expects to have profits.

Study the trading statistics to get insights.

So head and shoulders, any pattern formations like a double top, triple bottom or whatever it is, normally these things are visible on the chart. And you can find so many patterns like that and it’s easy to learn those but obviously if everyone is using those they wouldn’t work. Right? And if the statistics are that 95% of the forex trader losing money, then you should think, alright, how this 5% are trading in order to have profitable results.

Or the question is: Why Forex traders lose money if they know that they should not use what everyone tells them?

This is the issue. When the beginner traders step on the market and they see this one and the same education about fancy patterns they accept it as the only proper way to do it. It is not about having the wrong education, it is about having this massive education that one finds everywhere.  So how the profitable traders do it?

Now they don’t use all the famous and conventional methods in trading. So this 5% are different institutional brokers that have access to paid data. They have information about the news quite faster than what we see on the websites.

And the others, I can say, 1 – 2% of the traders are the ones that are trading with the help of huge funds and institutions, where they have an unlimited number of funds, and they don’t think about having a tiny Stop Loss behind their position. Now the rest 1%, where I find myself, actually are those that trade for quite a long time having, let’s say, a regular trading account that allows them to trade regularly and those that are using algorithmic trading.

Do not involve emotions while trading.

That answers partially the question Why Forex traders lose money? So during the last five years, I have specialized in algorithmic trading, and with algorithmic trading, we succeed in avoiding the emotions. So when you’re staying in front of the screen you should be relaxed, no feelings involved. You should depend on the Expert Advisors, for example, on that screen, you can see I am trading with 100 strategies.

And you can see how many trades are opened and how many trades are being opened nearly every 15 minutes. So here I am testing 100 strategies for GBPUSD at the moment, and I’m trading with them. And I recorded, recently, a course about this 100 GBPUSD strategies because it’s a great system that teaches the traders how to avoid emotions, how to trade fully automatically.:

And all we need to do is to follow the performance of these Expert Advisors and decide which strategies to leave in the account, which strategies to remove because everyone knows that the market changes. So we cannot expect to trade with the same strategy continuously. We trade with many Expert Advisors, and we see which ones are profitable for the current market conditions, and which ones are losing.

Remove the losing strategies.

So those that are losing, we remove them. Also, when we trade with many strategies, we diversify the risk. This way, I achieve more stable results, and if some strategy loses, the others compensate for this loss.

Now every strategy has its losing phase. You won’t find any strategy that will make you a profit regularly, but the thing is that most of the people and most of the traders keep looking for this strategy that will bring them benefit like all the time, every day. And I will say that’s not the reality and that’s why when we have many strategies into the account and when one strategy is in the losing phase, the others compensate the loss, and we remove this strategy because we don’t want to trade it while it is in this losing phase.

And what usually happens with the beginner traders that lose money is they test the strategy, no matter manual strategy or an Expert Advisor. If the strategy loses for a couple of days, they remove it, and they get upset, and they start looking for the new strategy. But all they need to do is to combine many Expert Advisors. So Why Forex trading lose money? They do not know how to diversify the risk.

I use Strategy Builders to generate many Expert Advisors.

So how I achieved that, I use Strategy Builders to generate me many Expert Advisors. One of the Strategy Builders I use is EA Studio. The other one is FSB Pro. So these are professional software, they cost a bit of money.

Of course, for some people is not a bit of money but it’s professional software that I cannot trade without. And actually, when I am capable of generating many Expert Advisors and strategies, I have the freedom to trade with so many strategies and Expert Advisors in one account.

So probably, this is the next reason why Forex traders lose money. They don’t use professional software, and they don’t have the chance to trade with so many strategies in one account. They depend only on one strategy, which is a huge mistake. You cannot depend on one strategy. It has it’s losing phase, and you don’t want to sit in front of the screen trading for a couple of days and have only losses.

For beginner traders, have the tryout period first.

This is where people get mad frustrated, and they lose themselves in trading. Now one of the next, I can say, is the tryout period. This is what I call it for beginner traders.

So many traders want to see how it’s going in trading, you know beginner traders. So they open small accounts like $200, $500, they don’t put any effort to learn anything. They say, “Alright, I will test how the Forex market is at $200, it’s nothing to lose so much.”

And they lose the money, and then they say, “Alright I learned that thing and that thing, and because I did this, this was wrong. I will open another account, let’s say, with 500 this time because I learned something already.” And they lose this account, and they fund again, and they usually do a couple of times, three to four times statistically, and they lose it. Why Forex traders lose money? They keep funding the account and lose it, instead of changing something.

Why Forex traders lose money? Trade on a virtual account before trying out a live account.

But they have already lost like $1000 or $2000, which is good money to start with trading. But I could tell you that less than 1% of the beginner traders start with such accounts. So it’s an illusion that you try how it’s going with a small account, that you don’t care about.

Because then it will come to another account, and another account, and at one moment they get a little bit afraid. “Well, I lost like $2000, and I think this is not for me.” And they leave it.

So it is possible as well to trade on a virtual account where you don’t risk a lot. And you can open an account with $5,000, for example, or $2,000, see how it’s going there but on the virtual account and not on the live account. So it is much much better to trade on the live account when you are having already the system and to see how things are going or to test it on the virtual account where you don’t lose actual money.

Take caution about scam brokers.

Now another very important reason is scam brokers. Unfortunately, nowadays, there are many scam brokers. These are companies that have no regulation. People fund their trading accounts, and they lose their money without having any chance of profiting.

And in our forum actually at EA Forex academy, we have the topic that is called “How to Recognize the Scam Brokers”:

And if you have the time, you can spend just a couple of minutes reading it. So here we have described how exactly the scam brokers work. If this happens to you, you will recognize the steps, what they do.

So, for example, you leave your contact online they start calling you immediately over the phone. They will ask you to deposit a minimum of $250, sometimes even less. They will ask your credit card and debit card details over the phone, which is illegal. Then after that, they will take your money.

Why Forex traders lose money? Scammers make fraudulent calls.

You will receive a call from the compliance department, and when you send your documents, you cannot do anything to chargeback. And then start the horrible thing when a more professional trader or so-called professional trader calls you and asks for more money. These people have no idea about trading, and they scam the people all the time.

Unfortunately, it happens a lot daily. We have many students joining the Academy, where they share bad experiences with the scam brokers. Unfortunately, not too much could be done. But what we do is we try to protect our traders and students from the scam brokers as maximum as possible.

And the other reason, I can say, is trying to stop trading manually. This is one of the biggest reasons why people lose money. They trade manually. They try to predict the market. They fall in love with the trades.

People tend to become greedy after making a few profitable trades.

There are so many reasons around with manual trading, but most importantly, there are emotions. People feel greedy when they make a couple of profitable trades. They say, “Wow my system is so profitable. I did three consecutive trades on a profit. It’s time to increase my trading capital, it’s time to increase the trading size.”

And then, when the losing phase of the strategy comes, they lose their money very quickly. As well people are afraid when…I have seen so many times traders being on profit, and they hurry to close the trade because they are on a profit, and they are afraid not to lose this profit. Why Forex traders lose money? They do everything the opposite way because this is what their emotions say.

And I had seen clients when I was working for one of the brokers that were keeping positions with months on a loss, and they have this risk tolerance to keep their trades for a couple of months hoping that the price will get to their entry-level. But when they are on a profit, they don’t even wait for a single day they see the profit, the small profit and they close the trade and they say, “Wow OK now I am out with zero losses and a small profit.”

Why Forex traders lose money? Do not try making predictions.

So they waited like, a couple of months to be out without profit so basically, they did nothing. And the next trade comes and again they have this tolerance for waiting for the huge loss for many months. And sometimes the price doesn’t reach to the level it was before, just like what happened with the Bitcoin and so many traders, people lost their money.

Because they were buying when it was already expensive, and they were keeping their Bitcoins hoping that the price will reach the game to this level. That was at the beginning of 2018, but so far, it didn’t happen. It might happen, we don’t know. So we don’t do expectations.

I don’t try to predict what will happen. I don’t know what will happen. The price now, I know, of GBPUSD is 129.55. I don’t know where it will be after 5 or 10 minutes. I don’t care where it will be.

I depend totally on the Expert Advisors on the statistics I see from my trading, and I don’t put any emotions in trading to predict the market and not to fall into any feelings. This is crucially important in trading.

Thanks for reading the article. If you have any questions, do not hesitate to ask me in our forum, and I will answer you.

Cheers.