Distinguishing Between Good and Bad
Trading Strategies Like A Pro
In forex trading, the difference between profitability and loses almost entirely depends on whether a trading strategy is good or bad. The most obvious way to establish if a trading strategy is good or bad is to look at its success rate. The most profitable trading strategies are good, while those that have a higher loss rate are bad. However, several other factors go into determining whether a forex trading strategy is good or bad.
A Good Trading Strategy Should Be Personalized
Undoubtedly, every forex trader aims to earn as much profit as possible. Several trading strategies are good; however, keep in mind that different traders have different trading psychology. A bad strategy won’t necessarily mean it is unprofitable. It means that you may have difficulties adapting it to suit your risk profile.
That is because trading goals vary between traders. This is on account of different risk profiles and risk management techniques employed by different traders. More so, different traders may have a preference for different types of assets which have varying levels of volatility and risk-reward profiles.
For example, one trader may have a profitable trading strategy that involves trading Tech100 only when the market is volatile. For a conservative trader who isn’t comfortable with high volatility, this strategy, although profitable, is bad for them. Therefore, if you are going to adopt someone else’s profitable strategy, it would be suitable for you if you can adapt it to suit your risk profile and remain profitable.
Trading Strategy Should Be Flexible
There are different types of forex traders, depending on the timeframes they trade. From scalpers, day traders, swing traders, and position traders. Some trading strategies can be adjusted for long-term trading with almost the same profitability as in the short-term. However, some trading strategies are only suitable for a select type of traders. For example, say a forex scalper intends to trade USA500 with a strategy that allows them to open and close a position within a few minutes. Note that it may be hard for a swing trader, trading the same asset, and be as profitable as the scalper using the same strategy.
What we are saying here is that a good trading strategy should accommodate the type of trader you are.
It Should Accommodate Your Preferred Trading Time
A trading strategy should be able to work seamlessly and allow for flexibility in terms of forex trading sessions. Remember that forex trading happens 24 hours a day for five days a week for retail traders. Therefore, a good trading plan should deliver consistent profitability with your preferred trading time since it might be hard for you to trade round the clock.
Therefore, if you choose a trading strategy, be sure to ascertain that it is profitable during your trading hours. For example, depending on your schedule, you might only be able to trade in the forex market during the Sydney and the Asian forex sessions. In this case, it would be unwise to adopt a trading strategy that works best during the European trading session, like say, the London Daybreak trading strategy.
This trading strategy works best when the London forex trading session begins. The main premise behind this strategy is to take advantage of the increased trading volume, which causes the market to trend in a specific direction. Using the strategy, traders attempt to profit from the directional volatility. Now, if you decide to trade using the London Daybreak trading strategy, you will be required to be awake when the London market opens. Otherwise, this trading strategy could be bad for you.
It Should Be Profitable in The Long Run
If you were to check the short-term record of almost all trading strategies, you wouldn’t be surprised to see that they are profitable. This is because, in the short-term, we cannot fully ascertain the efficacy of a trading strategy. Yes, a trader can be lucky and make a few profitable trades using a trading strategy. That is not because the trading strategy is efficient, but simply out of luck. It would thus be unwise to consider a trading strategy to be a good one by only looking at its short-term record. The long-term expectancy is what determines if a trading strategy is good or bad.
By expectancy, we mean the long-term profitability of a trading strategy. Here is the formula for the expectancy of a trading strategy.
= (Percentage of win * Average size of win) – (Percentage of losses * Average size of loss)
If the expectancy is negative, then the trading strategy is bad. Conversely, if it is positive, it means that the trading strategy is good. The expectancy of a trading strategy takes into account the fact that no trading strategy is always 100% profitable. You are bound to lose money on some trades and make money in some. What the expectancy shows is that for a good trading strategy, the size of profitable trades outweighs the size of the losing trades. So, in the end, your overall trading record is profitable.
Your Trading Strategy Should Adapt to Market Changes
In forex trading, the market fluctuates continually. The forex market goes from periods of extreme volatility to low volatility, from consolidation to trending markets. A good trading strategy should promptly detect these transitions in the market and offer you clear entry and exit points for when the market is transitioning. In such instances, a bad trading strategy would fail to capture the changes in the market conditions, which may result in losses on your part.
More so, it may be wise to have multiple trading strategies that you can use under different market conditions.
There are several trading strategies in existence, with many more developed daily. While most are profitable, not all of them are good for you. Take your time to study your preferred trading strategies and test them on demo accounts before implementing them on your real account.