Introduction to Trading Strategy

Trading Strategies –The 3-Elements Concept

Applying a strategy is everything when trading the global financial markets. The implementation of the right trading strategy is what truly separates winners from losers in the long run.

“Trading luck eventually ends, and that’s when a trading strategy begins.”

Applying a strategy means building a system that always tells you what to do next. If you want to become a profitable trader, you must incorporate these three elements into every trading decision. Together, these elements form a complete trading strategy.

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♜ The 3 Elements of a Trading Strategy

A trading strategy has three main elements:

 

📈 1st Element: Asset Allocation / Trend Identification

The first element involves selecting the right asset to trade and deciding whether to go long (buy) or short (sell). The trend evaluation must always align with the timeframe you are trading. For example, if you are a day trader, evaluating long-term trends is not relevant.

Alternatively, you can determine the trend in any timeframe using this definition:

⬆️ 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 is lower than the previous high.

🕒 2nd Element: Trading Signals and Timing

After the asset allocation and trend evaluation process, the second element involves selecting the timing to trade—that is, deciding when to buy or sell the chosen financial asset. At this stage, you should use an additional indicator that confirms the trend and provides trading signals. A trading signal indicates the entry and exit points for a potential trade.

🔗 There are commercial trading signals available for a monthly subscription fee: ► Compare EA Trading Systems | ► EA Builder Systems

💸 3rd Element: Money Management

This is where most traders fail. Money management involves many aspects, but most importantly:

(i) Knowing where to place your Take-Profit and Stop-Loss orders

(ii) Always knowing what leverage to use when trading different assets under varying 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 happen simultaneously:

(i) Your profit potential increases (in dollar value)

(ii) Your loss potential increases (in dollar value)

(iii) Your trading cost increases (in dollar value)

Never forget that your trading cost rises as leverage increases. Therefore, it’s clear why you shouldn’t use more leverage than you can afford. Generally, the higher the spread you pay, the lower the leverage you should use.

□ Assets with high spreads → Leverage 1:1 to 1:10

□ Assets with tight spreads → Leverage 1:5 to 1:30

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➗ The Leverage Formula

On another of my sites (tradingCenter.org), I have published a simple leverage formula that highlights the importance of low trading costs and the role 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 = difference between Bid and Ask

(R) = Risk Tolerance (High-Risk Profile = 100)

🔗 Here is the full article: ► Formulating the Optimal Rate of Leverage

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♗ Scalping Trading Strategies

Forex scalping involves opening and closing multiple trading positions daily, aiming for small profits of a few pips (typically 5–10 pips). These positions usually remain open for 1–2 minutes. Scalpers trade primarily on the 1-minute and 5-minute charts and often focus exclusively on two Forex pairs: EURUSD and GBPUSD. Choosing one of these pairs is essential, as they offer the narrowest spreads in the market (along with USDJPY). Scalping should be limited to low-cost trading opportunities.

🔗 Strategies: ► Hit & Run Strategy | ► Bollinger-RSI Strategy | ► Stochastic Trading Strategy

► Read more on Scalping Strategies

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♘ Day-Trading Strategies

Day-trading strategies are very popular among Forex traders as they offer the opportunity to generate quick and consistent profits on a daily basis. Day-traders use high capital leverage, which exposes them to elevated levels of market risk. They may trade any pair among the Forex majors (USD, EUR, JPY, CHF, CAD, AUD, NZD), but they tend to prefer three specific pairs—EURUSD, GBPUSD, and USDJPY—due to their tightest spreads in the market.

🔗 Strategies: ► The Stochastic Strategy | ► Bollinger-RSI Strategy | ► Breakout Strategy | ► Trading the Falsebreak

► Read more on Day-Trading Strategies

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♚ Swing-Trading Strategies

Swing traders are among the most profitable non-professional Forex traders. Swing trading involves opening and closing positions that last from 2 to 5 days, typically targeting profits of 200–500 pips per trade. Swing traders usually aim for a profit/loss ratio greater than 2, often exceeding 3.

🔗 Strategies: ► Trading the Moving Envelope | ► MACD Swinger Strategy | ► Riding the Trend Strategy

► More on Swing-Trading Strategies

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◙ Introduction to Forex Trading Strategies

Giorgos Protonotarios, Financial Analyst

ForexExperts.net