Taking steps to discipline your trades
Every Forex trader needs to develop a sound trading strategy that they can follow regularly. We won’t recommend a specific strategy. That’s something you need to develop for yourself based on your own emotional tendencies, as well as your knowledge and understanding of the marketplace.
But no matter what strategies you develop, you should use the classic approach to trading Forex – the inverted pyramid approach. This approach uses both fundamental and technical analysis to help you develop your trading plan.
Here are the 5 steps to developing your trading plan:
Step 1: Take a macroeconomic view. Start your research by looking at the economic conditions around the world. What are the key pressures driving economic forces – including wars, oil prices, trade agreements among nations, storms, earthquakes, or holiday shopping? One of the easiest ways to judge this quickly is to watch one of the business cable news networks.
Step 2: Find news about specific money market conditions. Start focusing on what is happening in the money markets. If something could dramatically affect the money markets, all the business analysts will be talking about it. Once you’ve completed Steps 1 and 2, you should have a good idea of what the market sentiment is around the world, as well as in the countries on what you plan to focus your attention.
Step 3: Pick your currency pairs. Once you have a good understanding of the currency market, you will be able to pick the currency pairs you wish to trade. Decide which economic indicators will be the most important for market moves during the window of your trading plan. Also look at the recent trends in prices for the currency pairs you’re considering trading. Use this step to narrow down the potential currency pairs for which you expect to set up a trading plan.
Step 4: Determine your basic technical points. Start using your favorite chart type to look for signs of support and resistance. Use this information to pick currency pairs you want to trade based on the direction in which you expect the market to move. The fundamental information you gathered in Step 2 will help confirm the trends you are seeing in your charts.
Step 5: Pick your entry and exit points. Fine-tune your trading plan by actually picking your entry and exit points. If you look at the charts and still don’t know how to do that, you need to spend more time learning how to apply technical analysis. As you become more comfortable with it, you’ll pick the tools that best match your trading style and your knowledge or abilities. Determine your plan and stick to it!
As you are learning how to use the inverted pyramid method, test your successes or failures with the method by opening a demonstration account with a Forex broker. We discuss how to choose a broker in trading with your plan and see if it works before using your hard-earned cash for a live account.