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How to create own trading strategy and learn to predict the Forex market?

Tuesday, 16 January 2018 12:45
How to create own trading strategy and learn to predict the Forex market?

If a trader caught a Golden Fish, he would undoubtedly wish to learn a trading strategy that would allow him to predict the Forex market without errors. It's much better than a million dollars, a villa in the Bahamas and a Top Model wife. Possessing an ultra-precise trading strategy, you can ensure all this yourself. Besides, you do not have to be worry about someday the money will end, the villa will be taken away for debts, and the Top Model will leave you for another.

But, unfortunately, there are no Golden Fish, as well as absolutely no-lose trading strategies. However, this does not mean that you cannot learn how to predict the Forex market and get a stable income with trading.

How to create an effective forex strategy?

Examples of many successful traders prove that everyone can get their own share of $ 5 trillion that make up the daily turnover of the world foreign exchange market. For this purpose, it is necessary to devote a long time to the analysis of market processes, observation of price behavior, the study of correlations between different financial instruments for this purpose.

Those who come to Forex in search of quick and easy money lost their deposit very quickly, and after they write angry posts on the topic "Forex is a scam" on the forums. If you intend really to make trading the main source of income, prepare for a long journey, at the end of which you will get an effective trading strategy. This path includes work in three main areas:

  1. Working with technical indicators.
  2. Mastering the fundamental analysis.
  3. Studying the market psychology.

Working with technical indicators

The first stage is the easiest and fastest. Most technical indicators are as easy to use as possible. They are presented in the form of dynamic charts, which reflect the market state at a certain point in time. Indicators are divided into three main groups:

  • Trend indicators show the direction and strength of the trend.
  • Oscillators help determine when the situation on the market will change (trend reversal, consolidation period, the origin of the trend after the flat).
  • Auxiliary indicators (volume indicators, cyclic, channel, etc.) allow for better understanding of market processes.

Despite the fact that the indicators greatly simplify the work of a trader, it is not worth to rely solely on their testimony when creating your own trading strategy. Nevertheless, they are indispensable tools for revealing the laws of the market and confirming your own forecasts. For this, standard technical analysis tools such as Fibonacci levels, RSI, stochastics, ADX, etc. are ideally suited.

Mastering the fundamental analysis

The economic and political events that take place daily in the world have a direct impact on the exchange rates of national currencies. Because of a lack of information, it may seem that the price movements in Forex is chaotic, but in fact, they have deep cause-effect relationships.

Adherents of technical analysis repeatedly stated that it is enough to master the technical analysis for successful trading in the foreign exchange market, because all events are already included in the price. But, nevertheless, each of them regularly peeks into the economic calendar and follows the daily news.

Statements by political leaders, macroeconomic reports, the results of parliamentary elections, central banks' meetings have a direct impact on the movements of national currencies. To create an effective trading strategy, it is necessary to observe for some time how the price of a particular currency pair reacts to these events. It may take more than one month, but the result is worth it.

Forex obeys the law of conservation of energy as everything in our world. In the currency market format, energy is the money of investors. They do not disappear, but flow from one asset to another. For example, during periods of global instability in the world, investors prefer to transfer their capital from risky assets to defensive assets. Such assets in Forex are the Japanese yen and the Swiss franc. Therefore, when you hear the news that Donald Trump is threatening the DPRK with a retaliatory missile strike, you can be sure that the USD/JPY and USD/CHF pairs will follow in the south.

Starting to observe the behavior of the Forex market, you should concentrate on one currency pair at first. Later, when you can predict its reaction to various events, try to figure out which pairs correlate with it, and also observe them for some time. The more trading tools you master, the faster you will understand how the Forex works and how to predict its behavior.

Studying the market psychology

It is possible that in a few years, the Forex trade will become fully automated. But now, most of the transactions in the foreign exchange market are made by people. And as you know, a person is subject to emotions: fear, greed, excitement, and, of course, herd instinct.

A professional trader should not only master the methods of technical and fundamental analysis in perfection, but he also must be a good psychologist. He must feel the market at a psychological level, and also understand that the movements of exchange rates cannot always be explained logically.

Let's say, a currency has growth potential according to all grounds, but it suddenly turns in the direction of a downtrend for no apparent reason. This situation can arise due to the massive automatic orders closing when a price has reached a certain level or market maker have entered the market intending to play for a decline. Watching this, small traders are exposed to the herd instinct and begin to support the emerging downward trend. In this situation, only those traders who know how to recognize illogical price movements in time and know the psychology of the market will benefit.

Only having mastered all three types of analysis: technical, fundamental and psychological, you can create a truly effective trading strategy that will allow to do Forex forecasting with high accuracy. This can take many years. But, as a result, you won't be needing the Golden Fish or a magic genie to fulfill your desires - you will receive a tool that will allow you to earn stably in the world's largest financial market.

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David Melton
David Melton

Financial expert. I work with investors and different companies. I write analytical reviews for newspapers and TV channels and I also manage researching projects

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