Technical analysis is a vast world where you can find countless trading strategies for approaching the market from an operational perspective. To create a winning strategy in Forex, it's not enough to simply choose one or more trading techniques and apply them to the market. It's essential to create a set of decisions (method) that range from technique to Money Management to managing your own emotions.
Building the Technical Foundation
The starting point is the technical part. There are myriad trading systems based on indicators, oscillators, moving average crossovers, and other types of entries. The best way to find a good setup for entering the market is to start by searching for objectively identifiable patterns. Price patterns, i.e., those formed by a single candlestick, are the most suitable technical analysis figures for building a trading system, whether discretionary or automatic. Building a system this way tends to produce precise and conceptually valid signals.
Matching the Strategy to a Trading Style
The choice of price patterns must be made after understanding what operating style a trader intends to adopt in their trading activity. It's important to decide whether to be a scalper, a day-trader, or a position trader. This will greatly influence the construction of the method, working hours, analysis methods, and risk management. In 80% of cases, it's better to use trend-following strategies rather than trend reversal, as the probability of success increases greatly even when entry timing is not very accurate. Patterns are not infallible, they are not the "Holy Grail": there is always a degree of randomness in the financial markets, so it is absolutely necessary to pay attention to the next step in building the strategy.
Managing Risk and Protecting Capital
The second step in creating a good strategy is to equip yourself with a valid risk management system, taking into account a trader's ability to withstand losses, especially when a trade is still in the portfolio and shows no signs of taking the hoped-for direction. Entering with excessively high leverage compared to one's risk perception could easily create problems in managing the trade, since a trader risks not being lucid at crucial market moments. For the rest, once an ex ante credible exit strategy has been decided based on the capital available in the trading account, it is simply necessary to respect the plan and avoid any emotional involvement.
Overcoming Fear and Trading Psychology
In fact, a trader's great enemy lives right inside them and is capable of sabotaging trading activity at any time: fear. There are different types of fears: choosing the wrong strategy, losing money, missing a spectacular market move, not collecting a large part of the accumulated profits (paper profit). How to fight these fears and defeat them definitively over time? The answer is to work on one's psychology and get to know oneself better. To work well on managing extreme moods - such as fear, greed, depression, euphoria - trying as much as possible to contain their negative effects, it is necessary to gradually expose yourself to the market, thus avoiding creating a condition potentially capable of generating fear. The journey toward a winning strategy must, therefore, necessarily address these psychological aspects to produce positive results. To outline an optimal path, in the context of managing moods related to trading activity, the following guidelines must be respected:
- Write down the trading system;
- Follow the action plan without any hesitation;
- Accept losses as physiological management costs;
- Let profits run and cut losses;
- Increase exposure during positive periods.
