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09-10-2021 | Forex Education

How to Distinguish Good and Bad Trading Strategies?

When you make money or lose money in forex trading is nearly completely determined by the quality of your trading technique. Examining a trading strategy's success rate provides the most direct indication of its quality. Approaches with a greater win-loss ratio are preferable to those with a higher loss-win ratio. A number of additional variables, however, influence whether a forex trading strategy is successful or not.

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Personalized Good Trading Strategies

There's no question that every forex trader wants to make a profit. However, bear in mind that various traders have various trading philosophies while choosing from among the many trading methods available to you. Unprofitability isn't always the result of a poor plan. Meaning it will be tough to adjust to your risk profile, if at all.

This is due to the fact that every trader has a different set of trading objectives. This is due to the fact that various traders have different risk profiles and risk management methods. To make matters more complicated, traders may choose certain asset classes with differing fluctuation and risk-reward characteristics.

Once the market is turbulent, one trader may have a successful trading method that includes just trading Tech100. This is a terrible strategy for cautious traders who aren't pleased with extreme volatility, despite the fact that it's lucrative. It is thus OK for you to embrace someone else's successful approach provided you can alter and stay profitable while doing so.

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Flexible Trading Strategy

Various periods attract diverse kinds of forex traders. Traders range from scalpers today speculators to swing and position speculators. While certain trading techniques are better suited to short-term trading, others are better suited to long-term trading. Some trading methods, on the other hand, are only appropriate for a limited group of investors. 

For instance, let's suppose a forex scalper plans to trade the USA500 using a technique that enables them to start and exit a position quickly. Remember that swing trader may have a harder time becoming as successful as scalpers while trading the same asset.

What we're suggesting is that your trading style should be taken into account while developing a trading plan.

Accommodate Your Preferred Time of Trade 

To be successful, a trading strategy must be easy to implement and flexible when it comes to forex trading periods. Keep in mind that retail forex traders engage five days a week, 24 hours a day. As a result, because trading around the clock may be difficult for you, a smart trading strategy should deliver steady profits during your chosen trading period.

You should thus make sure that your trading technique is successful during your trading hours before using it. In other words, if your timetable only allows you to manage the forex market in Sydney and Asian time zones, you'll have to miss out. A trading technique that performs well within the European trading session, such as the London Daybreak trading method, would be inappropriate in this situation.

During the start of the London forex trading session, this trading technique performs well. This approach is based on the idea that when trade volume increases, the market will naturally trend in a certain way. In order to benefit from directional instability, traders use this technique. If you want to trade using the London Daybreak method, you must be alive when the London session starts. If you don't, this trading technique may backfire on you.

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Profitable in The Long Run

There is no mystery if you look at the short-term track record of virtually all trading methods. This is due to the fact that it is impossible to determine the effectiveness of a trading technique in the short run. It is possible for a trader to get fortunate and produce a few good deals utilizing a trading method. 

This isn't due to an inefficient trading technique, but rather bad luck. Short-term performance alone is no indication of a trading strategy's long-term effectiveness. A trading strategy's long-term prospects decide whether it's successful or not.

With the word "expectancy," we refer to how profitable a trading strategy will be over the long run. The technique for calculating the expected return on a trading strategy is as follows.

= (Percentage of win * Average size of win) – (Percentage of losses * Average size of loss).

As soon as the expectation is negative, it's time to reconsider your trading approach. If, on the other hand, it's favorable, the trading technique is working. A trading strategy's expectation takes into consideration the reality that no trading method is ever successful at full strength. 

Some transactions will see you lose money, while others will see you gain. To put it another way, an effective trading strategy produces more winning transactions than it does losing ones. Your total trading record has been lucrative, so you may call it a success.

Change Your Strategy According to Market

The currency exchange rate market is constantly changing. Currency markets move through phases of high volatility and low volatility and then revert to trending states. 

Trading strategies that identify market shifts quickly and provide you with precise entry and exit locations while the market is shifting are called excellent trading strategies. Using a poor trading strategy in this situation may lead to a fall since it fails to account for changes in market circumstances.

This is why having several trading methods that you may use in various market situations is a good idea.

Existing trading techniques include a wide range of approaches, and new ones are created on a regular basis. Many are lucrative, but that doesn't mean they're always beneficial to your health. While applying your chosen trading techniques on the main account, take your chance to learn and practice them on demo accounts.

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