Trading Strategies –The 3-Elements Concept
Applying a strategy is ‘everything’ when you trade the global financial markets. The implementation of the right trading strategy is what really distinguishes winners from losers in the long-run.
“Trading Luck suddenly ends and there starts a Trading Strategy”
Applying a strategy when you are trading means building a system of knowing always what you must do next. If you want to evolve into a profitable trader these are the three elements you must incorporate into every trading decision, these 3 elements together form a complete trading strategy.
The 3 Elements of a Trading Strategy
A Trading Strategy has 3 main elements:
1st Element: Asset Allocation / Trend Identification
The first element involves the process of selecting the right asset to trade by knowing also if you should go Long (buy) or Short (sell) the market. The trend evaluation procedure must be always in accordance with the timeframe you trade. If you are a day trader there is no point of trying to evaluate a long-term trend.
Alternatively, you can use this definition for determining the trend in any timeframe:
□ Rising Trend: A Trend is rising when a local High is higher than the previous High and at the same time the recent Low is Higher than the previous Low.
□ Falling Trend: A Trend is falling when a Local Low is lower than the previous Low and at the same time the recent High was lower than the previous High.
2nd Element: Trading Signals and Timing
After the asset allocation/trend evaluation process, the 2nd element involves the selection of time that you should trade. That means the time to buy or to sell the previously allocated financial asset. At this point, you must use an additional indicator capable of confirming the trend and capable of providing trading signals. A trading signal indicates the entry and exit levels of a potential trade.
3rd Element: Money Management
This is where most traders fail. Money management means a lot of things and most importantly:
(i) Knowing where to place your Take-Profit and Stop-Loss Orders
(ii) Knowing always what rate of leverage you should use each time you trade different assets in different market conditions
(iii) Knowing when to stop trading
The Essence of Using the Right Rate of Leverage
Each time you increase your trading leverage three things are happening simultaneously:
(i) Your Profit Potential is increased (in Dollar Value)
(ii) Your Loss Potential is increased (in Dollar Value)
(iii) Your Trading Cost is increased (in Dollar Value)
Never forget that your trading cost increases as the rate of leverage increases. Therefore it is easy to understand why you shouldn’t use more trading leverage that you can really afford. In general the higher the spread you pay the lower trading leverage you should use.
□ Assets offered in High Spreads → Leverage 1:10 to 1:20
□ Assets offered in Tight Spreads → Leverage 1:50 to 1:100
The Leverage Formula
In another of my sites (tradingCenter.org), I have published a simple leverage formula to highlight the importance of low trading cost and the involvement of the Profit / Loss Ratio when using leveraged trades.
◘ Optimal Leverage Formula= [ (P/L) * (1/Spread) * (R/2) ] %
Where: (P/L) = Profit to Loss Ratio, Spread is the difference between Bid and Ask and (R) = Risk Tolerance (High-Risk Profile = 100)
Here is the full article: ► Formulating the Optimal Rate of Leverage
Rebate your Trades for Free: ► Free Forex Rebate Plans
Scalping Trading Strategies
Scalping means opening and closing many trading positions on a daily basis by targeting profits of a few pips (5-10 pips). These positions remain open usually for 1-2 minutes. Scalping is a widely used method for some Forex traders who are called Forex Scalpers.
The day trading strategies are very popular among Forex traders as they provide the chance of making huge profits using high capital leverage. Day-Traders are trading any pair among the Forex majors (USD, EUR, JPY, CHF, CAD, AUD, NZD) but they prefer three particular pairs EURUSD, GBPUSD, and USDJPY. As in the case of scalping, day-trading should be limited only in low-cost trading. That means when trading Forex you should choose only among the Forex Majors, when you trade metals you should choose Gold and etc.
■ You can also limit your trading cost by joining a Trading Rebate Plan ► Information about Forex Rebate Plans
Swing Traders are among the most profitable of all Forex traders. This trading style involves opening and closing positions that last from 2 to 5 days and usually by targeting high profits of 200-500 pips per single trade. Swing Traders use also high Profit/Loss ratio and limited capital leverage (50:1).
◙ Introduction to Forex Trading Strategies
Giorgos Protonotarios, Financial Analyst