Trading Strategy 101 - What Every Trading Strategy Should Include

A dream of every trader is to find the "holy grail" — a strategy that will be an absolute winner, a strategy that you can run on a trading software and it just makes you money. If it was that easy, everyone would be a trader and rich! One of the first things to learn in Forex is what to include in every trading strategy you design.

Making money trading Forex is possible, however, it requires skills and discipline. You must never, never, approach trading as a game — it isn't gambling! Gambling in trading means that sooner or later (probably sooner than later) you will fail and lose.

To make money in trading, you need one or more strategies that you can apply to the market to identify setups, open and close trades, and know when to stay out of the market. Strategies should always include rules for trade management — this is especially true if you want to automate your strategy. Trading automation involves programming your software to execute operations by following rigid rules. A computer cannot read a chart by itself and understand what is happening like humans do. Is the price going up? Going down? Ranging? You need to set the rules and the computer will trade depending on these rules.

We have already examined what modules should be included in an expert advisor. Here, you will learn more about designing a strategy and what it should include.

Ideally, a trading strategy should include the following parts:

  • Risk management rules
  • Entry signals
  • Scaling up and partial close rules
  • Exit signals

Despite being only four, these modules can contain many pretty complex rules.

Risk Management Rules

Risk management rules are necessary for the trader's survival. These rules can include:

Risk management will save your capital in case the strategy doesn't behave as expected or in case of losing streaks.

Entry Signals

An entry signal is a specific condition in the market that tells you: "Open a trade!". Entry signals could be anything: a news published, some economic data release, an instrument reaching a price level, indicators showing a specific setup, a price action pattern. In trading, automating entry signals is almost always a specific setup of one or more indicators or some particular candlestick patterns detected on the chart. When you set these rules in an MQL4 program, you must remember that you need to translate everything into mathematical language of code. The computer will calculate and compare values and execute some code only when the given criteria are met.

Scaling Up and Partial Close

Some strategies may include additional rules to increase open positions when the price moves in the direction of the trade or to partially close a position to secure some profit or to limit its risk.

Exit Signals

There must always be an exit signal as a part of a trading strategy. This signal can be one rule or a set of rules to decide when to close a trade. A very simple example of an exit signal could be the hit of a stop-loss for a losing trade and of a take-profit for a winning trade. Some strategies can have more complex rules to exit a trade — these can depend on changes in the market conditions assessed through either fundamental or technical analysis. When automating your trading, these rules must be translated into mathematical operations — the same as with the entry signals.

As was mentioned before, to be a successful trader, you must gain skills and discipline. Good traders create, follow, test, and trust their strategies. Many of these strategies follow a strict set of rules, which are the most suitable to be automated.

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Forex trading bears intrinsic risks of loss. You must understand that Forex trading, while potentially profitable, can make you lose your money. Never trade with the money that you cannot afford to lose! Trading with leverage can wipe your account even faster.

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