Increasing Your Chances of Success When Trading Forex

In this piece, I will outline the four main pillars of building a trade advantage. In this article, I will share some insights I've gained from trading for over twenty years, including how to find an edge, test it, and capitalize on it in the market.

 

As well as foreign exchange, futures, options, and cryptocurrencies, I am also experienced in trading stocks and options. I've invested in residential rental properties as well as day-traded futures and other futures markets.

 

The point is moot whether you consider yourself a long-term investor or a short-term scalper, or even if you trade in a specific market. You need to find a way to differentiate yourself.

 

Before you risk any money in trading, you should be able to articulate what gives you an advantage

An advantage, in our context as foreign exchange traders, is something that we have observed in the market. Because of how often this has occurred, we believe it can serve as the basis for a profitable trading approach.

 

Therefore, we will use our trading advantage to choose which currency pairs to trade and how to trade them. Your strategy for trading them will contain entry and exit rules, volatility-based rules, and potentially even event-based rules that are triggered by factors unrelated to the instrument you're trading.

 

Our goal should be to design a plan that can be carried out without hesitation from trade to a transaction. Did we take a loss on our prior five trades? Whatever happens, we will continue to act on it when the next signal is triggered.

 

Based on these guidelines, we are confident that long-term edge trading will result in a beneficial financial outcome

What this indicates, in layman's terms, is that we are confident that our plan will be successful the vast majority of the time if we simply make an order every time we observe this occurrence. Guest author Tim Thomas of Tim Thomas Co. shares his expertise in trading and investing to help readers achieve their financial goals.

So, let's examine the initial stage of developing our forex trading advantage. Finding Your Competitive Trading Niche.

 

The First Question: How Do We Come Up with This?

Here's the deal: we want to prove a theory based on a hunch, some observations, or a guess.

 

Here are a few examples of hunches from the actual world:

There is typically a trend in the exchange rate between the Euro and the Pound. If the price moves in either direction by at least 1% on any given day, it will continue to move in that direction for another 2% during the next two trading days.

Usually, the USDJPY will move in the opposite direction of the S&P500 when the S&P500's value changes.

 

New York City traders often log on between 11 AM and 11.30 AM GMT. US traders will confirm or disprove a morning trend in the EURUSD and GBPUSD if those currencies are trending significantly. Thus, we should be able to join the trend if it is still fundamentally robust, i.e., if there are no reversal indicators on the price chart.

Ideas can occur through staring at a screen for long periods of time, observing the ebb and flow of prices, and looking for patterns. Or maybe you were wondering how Japanese pension funds' decisions to keep more USD and less Yen may be affected by the strong US economic data you read about in The Economist on a Sunday morning and it struck you. Anything is possible.

 

You are a trader, so don't stifle your creativity, but do keep an open mind and a critical, objective perspective at all times. It may take me 20 guesses, all of which I will reject, to arrive at one that seems promising enough to justify the research.

 

Next, we'll establish our ground rules

What we hope will be our competitive advantage is based on our initial idea. The rules for joining and leaving the market are currently lacking.

 

As a starting point, let's examine the EUR/GBP currency pair. Now is the time to lay out the groundwork for our norms. The daily closing price of the EUR/GBP currency pair will serve as the signal. Has the price increased by more than 1% from the previous day's close?

 

Positive or negative (up or down) closing prices are possible. If that's the case, we'll need to decide when we'll actually enter the market; let's say for the sake of argument that we'll enter on the open of the next trading day.

 

Due to the 24-hour, 5-day-a-week nature of the forex market, it is important to define when trading begins and ends.

 

Our normal opening and closing times are Sunday at midnight UK time and Friday at midnight UK time. Thus, we consider Sunday through Friday night to end at 9:59 and night to begin at 10 p.m. Within this framework, the 24 hours can be broken down into sessions, starting with Sydney, then Tokyo, then London, then New York, and finally back to Sydney.

 

High and low points of volatility occur in each trading session. In my own observations, I've found that the busiest time is when New York City joins the network and its online time coincides with that of London. At about 11 a.m. UK time, there is a coincidental overlap.

 

Now that we have our signal, we can establish our entry rule, and we can set our exit rule to close the trade when our stop loss is hit or when the price reaches our objective of 2%. Keep it simple for now with just the entrance rule and the two exits we have (volatility changes and a stop-loss order). Our next step will be to apply these principles to actual historical data to see how well they hold up.

 

Third, put your theory to the test (Backtesting)

The first step in backtesting is to collect as much data as possible. One single trade result cannot be used to judge the overall value of an edge. For reliable results in a study, it's important to look at lots of data at once. When conducting research, a bigger sample size is preferable.

 

More information means more tests can be run, and the more tests run, the more certain we can be that our hypothesis is either correct or incorrect. In science, a greater sample size means more reliable findings. To that end, we will need ready access to a large quantity of intraday data if we are to engage in the practice of forex day trading. There are available options for services. Such a platform exists in the shape of Quandl; nevertheless, it is important to keep in mind that real-time data usually comes at a cost.

 

Trading on closing price data has a number of benefits, including lower data costs

If a trader is solely interested in the Open, High, Low, Close, and Volume of the market for a given number of days (daily bars), he can affordably do research spanning decades. Our research is complete, and now we need a trading simulator on which to try out our hypotheses. TradingBlox is one that I'm familiar with and can recommend, but there are others out there with varying prices and features.

 

As an alternative, you may have a computer program examine the data in accordance with the criteria you provide by translating your rules into logic statements. Python, R, or Matlab are great options for programmers. Python is the most user-friendly and straightforward language for programmers just starting out.

 

Python is open-source and free to use, and there are a ton of free modules that can make the analytic process easier and faster, so there is some good news despite the learning curve.

 

Both Backtrader and Zipline are widely used as backtesting modules

We can hire a programmer from Upwork and provide them with our specifications if we don't feel like or don't have the time to write the code ourselves. When we hire them, we may expect the task to be completed in a fraction of the time it would take us to accomplish it ourselves.

 

Whether we write the code ourselves or hire someone else to do it, we must carefully consider and articulate the signal and rules. The plan we may have in our thoughts needs to be converted into computer code. This method frees us from making decisions based on our feelings; instead, the computer makes the call.

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