How to build a forex trading strategy

3. Understanding fundamental analysis

In the previous sections, you learned that technical analysis is focused mainly on trends and price actions. Fundamental analysis has a different approach to assessing the markets, offering a holistic picture of market weaknesses and strengths.

A fundamental analyst takes a look at key events that could affect a specific currency’s strength or weakness. These include political and economic data as well as natural disasters.

In short, a fundamental analyst utilizes all available information in gauging a currency’s strength. Attention is focused on key economic reports and data, including GDP and unemployment data, production data and announcements of interest rates.

5. Choosing your entry and exit points

Forex traders are exposed to trading risks, regardless of their approach. That’s why understanding price action is key to determining when you place your trades and when you exit a position. Here, you will learn the four key price actions concepts used in forex trading to determine entry and exit points

• Support & resistance: Support and resistance refer to important trading levels where the price has touched and bounced back multiple times. You can think of them as key points where demand and supply meets.

• Breakouts: A breakout, is a break through an established support or resistance level. Breakouts are strong signals, especially when confirmed by other indicators like gaps.

• Gaping action: Gaps are important since they signify that buyers (upside) or sellers (downside) are making their moves. But, you have to make sure to confirm a new trend using multiple indicators before you jump in.

• Sideways market: A forex market that trades sideways refers to price action within a narrow range of strong support and resistance levels. When a market trades sideways, traders are preparing for a breakout.
   

6. Managing the trading risk

By now, you should be aware that forex trading involves risks. The market is quite volatile and the bigger your potential gain, the higher the risk. Here are some tips to keep the risk in control.

• Avoid over-trading
  Although volatile markets can be tempting, a good rule of thumb is to avoid risking more than 2% of your trading account balance on any single trade. Trading more than that would expose you to losses that are hard to recuperate.

• Set up stop loss orders to minimize losses
  Success in trading does not consist of winning trades only. On the contrary, it is the aggregate of winning and losing trades. That’s what makes stop-losses a key factor when it comes to profitability. Placing stop-loss orders will also eliminate the need to constantly monitor your position.

7. Test your trading strategy

While you cannot replicate the risks involved in trading with real money, a demo environment can help you test the soundness of your investing strategy. Every new strategy needs to go through a period of trial and error before you can confidently invest your hard earned money on it.

For faster strategy testing, you can use Trader’s Gym, a live trading simulator that allows you to replay, pause and re-wind real market action even during the weekend. To get access, open an account for free by choosing ThinkTrader® as your platform and test your strategy in a real trading environment either on desktop or on your mobile phone.