Traders who thrive in fast-paced price action and are able to think clearly in times of stress or information overload usually employ a scalp trading strategy. This can involve trading around more volatile market hours, such as session overlaps or during economic data releases. Profit targets are usually small and booked quickly while stops are generally tight.

If this kind of trading style appeals to you, then you could work with short-term charts, such as the 15-minute or 1-hour time frames. Some scalp traders even try their hand at 5-minute or 1-minute charts! This demands laser-like focus, as small price ticks or micro-pip moves could lead to considerable profits or losses.

Meanwhile, traders who are more patient and would rather hold on to trades based on long-term trends might want to stick with position trades. More often than not, this suits traders who are more comfortable with fundamental analysis and long-term economic biases, which often determine how currency pairs will fare in the next few weeks or months.

Having this kind of trading style involves looking at longer-term charts, such as the daily or weekly time frames to gauge bigger picture trends. Small retracements or medium-term trend pullbacks hardly bother position traders, as long as signals indicate that the longer-term trend is still intact. For some position traders, active trade management is often employed when it comes to scaling in or out of positions to improve profitability.

The middle ground between scalp trading and position trading is day trading, which can simply involve opening and closing positions within a day or a few days. This often involves multiple time frame analysis, as day traders often base their biases on longer-term trends then zoom in to medium-term charts in order to determine entry and exit levels.

This kind of trading style might work for you if you are able to monitor the markets and check on your charts regularly in a day and if you can be able to make adjustments when market catalysts come up or unprecedented events take place. Studying hourly charts, such as the 1-hour and 4-hour time frames, is usually part of this kind of trading style.

When you are starting out with trading, you can get a general sense of which trading strategies you might be more comfortable with. Do you panic when price suddenly starts spiking around? Or do you get easily bored when you’ve kept a trade open for nearly a week? Are you able to come up with a trade idea for news events? Can you think fast or do you freeze when something unexpected happens in the markets?

These are just some of the questions you might want to answer during the course of your learning experience, as you try to observe how various factors affect your decision-making process. At the end of the day, it is important that you stick with what you’re comfortable with and what works for you.

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As with trading styles and time frames, there are no hard and fast rules in constructing one’s risk management rules as these depend on one’s aggressiveness or tolerance. Confidence in one’s trade plan and the level of forex trading experience can also influence risk profiles.

When you’re a more aggressive trader, you could be willing to risk a larger percentage of your account per trade or in a day. There are traders that risk as much as 10% per trade or as a total of their open positions for the day while still feeling confident that they can bounce back even after a losing day. On the other hand, more conservative traders are uncomfortable with large risk and would rather risk 1-2% per trade or in a single trading day.

Aggressive traders are also more likely to keep several open positions all at once, with some potential correlation among their open trades. More conservative folks would rather trade one position at a time or be cautious about adjusting their stops from time to time.

Your risk profile can also dictate whether you are willing to press your advantage and add to your winning positions. If you are confident that price can move strongly in your predicted direction, you could opt to apply a stop-trail-add strategy, which could drastically improve your return ratio if price does move in your trade’s favor. Scaling in or out of positions can also be part of your risk management rules.

At the end of the day, it is important to get to know yourself when it comes to determining your risk profile, as this could serve as your guide in managing your trades and improving your profitability. There is nothing wrong with choosing to be aggressive or conservative as long as you trade in a style that you are comfortable with.

Of course this behavior might vary through the course of your trading endeavor as you acquire more knowledge or capital. When you feel that your risk strategies aren’t working out for you, you should have a thorough review of your forex trading journal to figure out what you need to adjust.

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This kind of trading style appeals to many, as it can eliminate the interference of human emotion in trading. As discussed in the trading psychology section, greed or the fear of losing can often affect decision-making and may hamper trading performance. By reducing the impact of emotions and discretion, a mechanical forex trading system can rely on pure price action and technical signals.

A basic mechanical forex trading system can contain a combination of a leading and lagging forex indicator, wherein the former acts as an early notification of a pending trade signal while the latter gives confirmation. Before creating a mechanical trading system of your own, it is imperative to determine what kind of trading style you are comfortable with so that you can also figure out which time frame you will use for your mechanical trading system.

Entry rules can involve having these technical indicators conform to certain patterns, such as a crossover coinciding with a move out of the overbought or oversold area. To be more specific, a mechanical trader can specify when the trade will be executed, such as the open of the next hourly candle or a break below previous highs.

Exit rules specify the stop losses, profit targets, or conditions for closing a trade early. Stops and targets can be a specified number of pips or it can also be based on a dynamic amount, such as the average true range of the pair or a certain percentage of price action. Early exit rules can be based on new valid trade signals or an additional technical indicator that may signal if price is about to turn.

Of course, risk management rules are an essential component of a mechanical trading system. Not only does this involve proper position size calculation or the use of a limited risk per trade, but it can also involve rules such as not opening trades during top-tier economic events or closing trades early prior to major economic releases.

Before applying a mechanical forex trading system on a live account, it is important to run back tests on the system to gauge its profitability. While past profits don’t guarantee future results, these tests could allow the user to identify whether adjustments need to be made or if rules need to be revised.

Some traders even opt to run a few forward tests on a demo trading account in order to get a better feel of how the system works in live trading conditions. This can also allow the trader to determine if the trading platform is able to execute the trades properly. This is particularly important if you are using a forex expert advisor that automatically executes trades on your account.

It is also an option to simply purchase an expert advisor instead of having to develop one on your own. Bear in mind though that you should do your research on the system and not base your decision solely on the profits that the owner claims that the system was able to generate.

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This kind of trading approach, which is also a form of mechanical forex trading, makes use of computer code and mostly focuses on short-term price action. This is also termed as “black box trading” since the programs are typically hidden from the public and makes profits on small price ticks or sudden spikes in volatility.

In particular, there are several kinds of algorithmic forex trading system suited for different kinds of traders or institutions. The most basic ones include trend-following or mean reversion systems while others take a news-based approach or one that focuses on market sentiment.

More complicated forex algorithms look into arbitrage, which looks for price imbalances across different markets or brokers and makes quick profits off buying and selling large positions. Another complex forex algo is known as high-frequency trading, which operates at very fast speeds and is able to go in and out of trades in a matter of seconds.

Some large financial institutions employ “iceberging” in algorithmic forex trading in order to hide their trades from the markets in order to ensure that large positions are still executed under normal market conditions. Some break down their positions and execute trades under different times while others could even enter these trades under different brokers.

As you’ve probably concluded, it takes a lot of resources and research before one can come up with this type of trading system. Programming skills are necessary to automate a system and to ensure that trades are executed properly on the platform. Apart from that, a thorough knowledge of technical indicators and its parameters might also come in handy.

Retail traders have the option of coming up with their own algorithmic systems or having expert programmers code the system for them. Others opt to purchase existing systems from established institutions which have shown a good track record and hold a strong reputation in the financial industry. Of course, this does not come cheap.

Bear in mind that algorithmic trading has been blamed for causing market crashes in a few instances, as system glitches can result to a shutdown among some exchanges or erratic behavior in asset price action. With that, several forex firms have already been placed under strict scrutiny by regulators who are hoping to avoid another market crash scenario from taking place.

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Proponents of purely discretionary forex trading believe that price changes are determined mostly by fundamental factors, which influence interest rates and supply and demand for a particular currency. After all, as discussed in the fundamental analysis section, expectations of higher returns tend to boost demand and value of a currency.

This kind of trading style appeals to those who are well-versed in economics, as they understand the dynamics of the ebb and flow of price action. They are able to look into GDP figures or inflation data and determine whether or not this could lead to currency appreciation or not. Discretionary traders tend to monitor trends in economic figures, as well as political or environmental news that could affect currency movement.

Some discretionary traders also watch forex positioning reports in order to gauge market sentiment for a particular currency. These kinds of information can be found in the CFTC Commitments of Traders Report, which tracks changes in net long and short positions on a weekly basis. From these, discretionary traders are able to pinpoint market tops and bottoms then predict potential reversals. They can also be able to determine if trends will continue for the longer-run based on these positioning data.

The common drawback to a purely discretionary approach to trading is that it can be very subjective. Most of the price predictions can be based on whether a trader thinks that price will go up or down, with very little regard for actual levels during which trends might turn or reversals might start. Because of that, traders who favor discretionary trading still tend to add a few technical components to their trade plans.

Another factor that can make discretionary trading challenging is the impact of human emotions in decision-making. Since this trading approach relies mostly on biases, it could easily be clouded by negative thought patterns or confirmation bias. After all, when a trader feels very strongly biased about a particular currency behavior, he might be zoomed in on the data that simply confirms these biases and wind up being blinded to those that don’t.

This kind of trading approach can be applied to the long-term and short-term time frames, as those who trade around news releases might watch the minute charts while those who base their positions on longer-term fundamental biases could rely on daily or weekly charts. Either way, it takes an experienced trader who has a thorough understanding of economics to profit mostly based on a purely discretionary approach.

If you think this trading style suits you, try executing trades on a demo account first to ensure that you are in sync with the markets and that you are able to understand how fundamental biases drive forex price action. If you feel that you need a little more confirmation before taking trades, it wouldn’t hurt to add some technical indicators or to watch chart patterns before entering any setups. As always, you have to be able to figure out a system that works well for you and that you are comfortable using.

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Of course these rules are not set in stone and may still be open for revision. However, you must be able to exercise enough discipline and patience to test out your trading system for a few weeks or months in order to have enough data to help you figure out if any adjustments need to be made. It is not enough to have just one or two losing trades before completely overhauling your entire approach!

To begin with, you must set the conditions for a valid trade setup based on your trading style. What requirements must be satisfied for you to take a long or short trade setup? Is your trade approach based on longer-term trends or short-term price moves? Are there any technical indicators that could confirm these signals? It is important to be specific with these conditions, as they will act as the framework for your system.

After identifying what would make a trade setup valid, you need to figure out the details for trade entries. Do you open the trade on a break above the previous highs or lows? Will you be using Fibonacci retracement levels in line with moving average or other kinds of inflection points? Will you be setting long or short orders exactly on major or minor psychological levels only?

Now that you’ve determined the entry points, it’s time to identify when you should lock in profits or at which points your trade idea will be invalidated. After all, trends or price moves do not last forever and there’s always the chance that a trade idea will turn out to be wrong. In these cases, it is important to have a clear set of rules for closing trades.

Some traders base their exit signals similar to their entry points. For instance, when Fibonacci retracement is used to identify trade entries, Fibonacci extension levels can be used as exit points. Other focus on major or minor psychological levels, which act as inflection points for most yen pairs. Meanwhile, technical traders can also employ a set of indicators to confirm if it’s time to exit a trade. Setting hard numbers for stop losses and profit targets can also be an option, but bear in mind that these must be appropriate to the time frame you are using.

Above all, the risk management component must be part and parcel of every complete trade plan. Based on your risk profile, you should be able to stick to a certain amount of risk per trade or per day. You can adjust these based on your confidence in a trade setup, but beginner traders are often recommended to stick to a pre-determined risk percentage of the account per trade.

At the end of the day, don’t forget to keep track of your trade system results using a trade journal so that you can identify potential problem areas or points to improve on.

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First is your level of experience in forex trading. When you are just starting out and learning the basics, it is recommended that you stick with the simple indicators first and the default settings. There is no need to delve into the mathematical or statistical details regarding how a particular technical indicator was derived. What is important is that you know what the levels stand for or what kind of signals it generates.

More experienced traders can look into adjusting the indicator’s parameters or playing around with more advanced settings. Having a few years’ worth of experience in the forex market can also make you more comfortable with complex risk management strategies, such as using trailing stops or adding positions. However, beginner traders might want to start off with standard sizes for stops and profit targets first.

The next factor to consider is the amount of time you can spend trading. Not everyone can monitor the markets all day or regularly, which means that this must be accounted for in constructing a trade plan. Some part-time traders prefer a scalp trade strategy, which allows them to open and close trades in a span of a few hours, without keeping positions open overnight. Others prefer a longer-term approach that just requires them to check up on their trades every now and then.

Another factor to consider is which currency pairs to apply your trade plan to. There are plenty of choices in the forex market, but you have to consider which ones are more active during your trading schedule. For instance, if you can be able to trade during the Asian session, then you might want to focus on yen pairs or AUD and NZD pairs. If you are trading during the London session, then EUR and GBP pairs could give you more price movement during those hours.

In addition, trade plans that are more appropriate for trending market environment could be applied to dollar pairs or actively traded crosses. On the other hand, a trade plan that can withstand volatile market moves or one that is geared to catch large price swings can be applied to exotic crosses. Trade plans that revolve mostly around inflection points or psychological levels might be more appropriate for yen pairs.

At the end of the day, there is no hard and fast rule to determine which currency pair you should focus on or which technical indicators you should use or which time of the day you should trade. What’s important is that you work with what suits your preferences, schedule, personality, and level of experience and that you are able to make adjustments along the way.

The post Factors to consider when constructing a trade plan first appeared on IC Markets | Official Blog.

First and foremost, you should identify if you would like a trend-following or mean reverting system. The former takes advantage of large price moves in a single direction while the latter aims to catch market tops or bottoms, under the assumption that price will eventually bounce back to the mean.

After that, you can narrow down the list of technical indicators you plan on using. This depends on which one you are more comfortable with using, but it is generally recommended to have one leading indicator and one lagging indicator. The former should be able to give an early signal if a new trade setup is about to form while the latter could confirm if the trade signal is valid.

Next, you can decide on which time frame and currency pair you will be using for your trades. As discussed in the previous article, this can depend mostly on your trading schedule and what kind of market moves you are hoping to catch. This also depends on your level of comfort with additional volatility and potential slippage.

After this, you should lay down the specific rules for entering and exiting trades. This should include stop loss placement and profit targets, which should also have expectancy and reward-to-risk incorporated. By putting an effort into planning these in advance, you will have an easier time following your risk management rules.

Of course, it goes without saying that you should have a solid risk management plan in place, which specifies how much you will risk in each trade. Having a plan for scaling in or out can also come in handy, especially if the market presents opportunities for you to press your advantage or minimize your losses.

Now that you have the basic components down, you can start conducting back tests on your mechanical trading system. Traders typically test their system at least a year back in order to have a better idea of how much the system can generate over a span of twelve months. This could depend on the time frame of your system though and how much historical data you have on hand.

From there, you can also run forward tests on your system, preferably on a demo account. This should give you a better feel of how the system performs in live market conditions and allows you to take notes and figure out if any adjustments need to be made in order to adapt the system to current market conditions.

Through all this, it is crucial to maintain a trade journal, on top of the profit and loss statement generated from forward testing. This will help you pinpoint if any components of the system are also affecting your trade psychology.

The post Steps in making a mechanical forex system first appeared on IC Markets | Official Blog.

Sticking to your plan is much easier when you trust it, and this naturally comes when you’ve built the system up yourself, based on your own preferences and risk profile. Positive results in back testing and forward testing could also help you maintain trust in your system, even though past performance doesn’t always guarantee future results.

When you find yourself doubting if your trade plan will work, put it up to the test in real market conditions to see if you need to make any improvements. If you haven’t settled on a currency pair to apply the trade plan to yet, you can run tests on various currency pairs and see which one the plan works best with. When you’ve identified this, you can feel more assured that the plan can be able to generate decent profits.

If you’re not very confident with your trade plan yet, you can also scale down your risk while you are starting out. If you normally risk 1% on a single trade, you can cut it in half first before risking the full amount when you’ve built enough confidence.

Encountering a few losses through your trade plan might lead you to doubt its effectiveness. Instead of letting this doubt stay in your head, delve into the details of why the trade turned out to be a loss. If it was a result of unforeseen market conditions, then you should remind yourself that you should let the law of averages work in your favor and that your system aims to garner consistent profits in the long run.

If you follow your trade plan sometimes and don’t follow it during other instances, you could have a tough time monitoring your trade performance and gauging if the system is profitable or not. Your decision-making will be haphazard and will lack a framework that can guide you in understanding and taking advantage of forex market moves.

Of course there may be times when you panic and suddenly abandon your trade plan when the market has a surprise up its sleeve. When this happens in a few instances only, you shouldn’t take it too hard on yourself. We are human and we’re liable to make a few mistakes here and there. When you find this happening very often though, you should remind yourself that discipline is key to consistency and that you might need to make a few steps to work on your mindset.

Just as professional athletes go through training drills in order to get better, you should also maintain this kind of discipline in working to improve as a forex trader. Even if repeating certain processes may seem boring at times, remind yourself that this is an investment in building your trade discipline and expertise.

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