This is a continuation of The Forex Trading Strategy Guide, where we will talk about:
- How Forex Trading Systems fit into your Trading Strategy, and
- Building a Learning Curve Buffer into your Forex Trading Strategy.
How Forex Trading Systems Fit Into Your Trading Strategy
Once you have a better grasp of the reality of trading, your available resources and your trading objectives, then it makes sense to start searching for potential trading systems to fit into your strategy. If you can’t find any, then you have to either develop one yourself, or there’s something not so right with your strategy.
When you are trading longer term, you might want to start studying trend trading systems rather than counter trend trading systems. When you trade with the trend, usually there is less activity for you to do except for trailing your stops once you are in the trade.
When you are trading shorter term, you might still want to study trend trading systems, but also counter trend trading systems. You can even go all the way down into trading news, scalping, and other really short term trading set-ups.
Choose a trading system that fits your strategy, and work on mastering that particular trading system first. Why?
- It’ll help you achieve your trading objective a lot faster because your activities and energies are focused.
- Once you’ve mastered that particular trading system, you can move on to learning other systems because now you have something that forms the foundation of your trading strategy.
Most traders fail because they jump from system to system. And they jump from system to system because they don’t know what they want to accomplish in their trading other than just to “make money”. It becomes really easy to be lured by trading systems that aren’t suitable to their personality, their life situation, and their trading objectives.
Because all trading systems go through drawdowns at one point or other, it makes jumping ship a lot easier when there’s no reason to wait through current market conditions.
Building A Learning Curve Buffer Into Your Forex Trading Strategy
The fact is, you are learning how to trade. And in the course of learning, everyone makes mistakes. Which makes this next question important for you to answer as well!
Does your Forex Trading Strategy Have A Learning Curve Buffer?
What do I mean?
Because all traders who go through the learning curve usually make mistakes, it’s about creating contingency plans to prevent possible mistakes from wiping out your budding forex trading career.
Forex Strategy Contingency Planning
Here are some factors you may want to consider in developing your Forex Trading Strategy.
- Back-up Capital:
Instead of committing all your trading capital to the first trading system that you learn, why not separate them? Have a certain percentage of your capital as “back-up” in case your first portion becomes a casualty of the trading wars. 
You can set aside 40% to 60% of your initial trading capital as reserve. However, it’s really up to you, except that if you are a beginning trader, I suggest that setting aside a higher amount initially is better than setting aside a lower amount.
- Cease Trading Limits:
How much drawdown are you willing to take on your trading system before you call for time out? This is an important part of your forex trading strategy in terms of capital preservation. Your particular trading strategy may stop working simply because:
- Market conditions change.
- There’s something you have yet to understand in the implementation of the trading system.
- It doesn’t work for you.
- It just doesn’t work.
Professional traders in financial institutions usually have risk managers. Once these traders lose a certain amount of capital for that month, their trading privileges are suspended until the next month.
This prevents continual trading despite the system being out of sync with the market, the trader going through personal situations, and so on. It gives the trader time to cool their heels, gather their wits about them before they start trading again the following month.
Rule No. 1:
Don’t Lose Your Money.
Rule No. 2:
Look at Rule No. 1
The most important part of money management is the return OF your capital. The next consideration is then the return ON your capital. So long as you have your trading capital, you can continue trading. But once it’s gone, it’s gone.
Executing Your Trading Strategy
Once you’ve developed a trading strategy that you are satisfied with, it then comes down to the implementation phase. As you learn your forex trading systems, gain a better understanding of the realities of trading, and move through the learning curve, you’ll come back to revise your trading strategy time and again.
Have a system to track your trades, monitor your thoughts and rationale, and then review them as and when necessary. This will help you uncover areas for improvement as well as inform you of potential trading blind spots.
In the process of doing so, you find yourself moving out of the “novice trader” to becoming a consistently successful, profitable Smart Trader.
And isn’t that grand? 