A trading style is an essential part of any participant in the forex market. It refers to the overall strategy and process that a trader uses when opening and closing trades. In this article, we will look at the best way to create a trading style in forex.
Learn about forex first
The first step you need to make when developing a trading style is to learn about it. You should do this by using books, websites, and watching YouTube videos.
Alternatively, you can pay for an online course on platforms like Coursera, where you will find experienced trainers who specialize in forex. While most of these courses will be free, some do charge a certain amount ranging from $10 to more than $1,000.
In these trading courses, you will learn:
- An introduction to forex trading
- Fundamental, price action, and technical analysis
- Technical indicators and chart patterns
- Risk management
- Trading psychology
A common mistake that many people make is to approach forex without getting some training. They go about it in a relatively easy way. They spot an ad from a forex broker, download a demo account, practice for a few days, and then open a live account within no time – this is wrong.
Identify the type of trader you are
After learning about how the forex market works, the next stage in developing your trading style is to identify the type of trader that you are.
There are several types of traders you can choose from:
- Algorithmic or quantitative trader – This is a trader who focuses on creating and implementing robots or expert advisors in the forex market. You need a lot of background information in software development to become a good quant.
- Scalper – A scalper is a trader who loves volatility and one who specializes in opening and closing several trades every day. They make a lot of money by making little profits in every trade.
- Swing trader – These are traders who specialize in identifying trends, initiating positions, and holding them for a few days.
- Long-term traders – Also known as position traders, long-term traders focus on buying and holding a few trades for several weeks.
- Copy-trader – This is a forex trader who focuses on copying trades from experienced traders. This is done using a copy-trading feature that is provided by most brokers.
- Pairs trader – These are traders who focus on opening two trades of correlated or uncorrelated currency pairs hoping to benefit from the spread.
You should use the materials studied in the first step to determine the type of trader you are and then move on to the next stage.
Study and perfect the strategy
The next stage in developing a good trading style is to study and perfect the strategy you want to use. To do this, you should use the materials you used in the first step to refine your strategy. The best approach to use is to have a demo account, which is similar to a live account, with the only difference being that you will be using fake money.
As you use the demo account, ensure that you start with the same amount you believe you will use when you start trading. For example, it does not make sense to have a demo with $1 million when you know that you will start trading with $10,000. Similarly, ensure that you use the same leverage in your demo account that you will be using in the live account.
In summary, as you develop your trading style, you should ensure that you spend a few months trading a demo account. Practicing with virtual money will help you to identify flows and perfect the strategy.
Risk management strategy
After studying and testing the strategy, the next stage is known as risk management. Here, you will identify the key strategies to manage your risk so that you will be fine no matter what happens in the market.
See several approaches to risk management below.
- Leverage – This refers to the amount of money that a broker loans you to help you maximize your profits. While leverage is a good thing for a trader, it is also risky. As such, you should use small leverage and increase it as you gain more experience.
- Risk reward ratio – Calculate the risk-reward that you will be using. The most basic approach, especially among new traders, is to ensure that you are not risking more than 5% of your balance per trade. For example, if you are using a $10,000 account, ensure that you are not risking more than $500 per trade.
- Lot sizes – A lot size refers to the volume of trades that you will be opening. You should have a specific lot size written down as you start.
- Money management – This refers to several things, such as the money you will be trading with. For example, if you have $1 million in cash, you can decide to use 5% of that to trade.
Trading room and sessions
By this stage, you have already created, tested, and retested your trading strategy. The next steps are relatively easy.
For example, while you can trade from anywhere, we recommend that you have a designated room for trading. Further, you should create your trading routine and the times you will be trading.
Summary
A trading style is an important concept that you should have when you want to become a successful trader. In this article, we looked at some of the steps you should follow when creating a trading style. We have also looked at the several types of traders you can become and some things of creating a good risk management strategy. When you do all this, there are higher chances that you will become a successful trader.
Read also: The Fundamentals of Forex Automated Trading
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