Why Finding A Forex Trading Strategy is Like Buying A Second-Hand Car
Buying a second-hand car is an exciting occasion but, unfortunately, it doesn’t always work out. Sometimes it is the dealer’s fault,, and other times it is the buyer’s fault, but there are a few things to bear in mind which can really boost your chances of driving away with the right vehicle. A lot of the variables that should be considered while trading, also work just as well when deciding on a new car, so read on as we list the similarities between the two processes.
Do your research and establish what sort of you need
The first thing that people should consider when buying a car, is what sort of car they really need. I’m sure there are plenty of wives out there who have left it to their husband to go and get a new car for the family, only for them to return with a fast, small sports car.
The same is true when settling on a forex trading strategy; you need to consider a whole range of variables to make sure that you find a strategy that is right for you such as: how much time each day do I have for trading?
It’s no good picking a strategy that requires you watching the charts for hours on end if you can only check them before and after work.
Similarly, you need to consider what sort of personality you have and how you would like to trade, for example, if you like action and like to be involved in a fast-paced environment then it is no good picking a high time frame swing trading strategy where trade setups are infrequent and trades take days to play out.
Picking an incorrect strategy, just like picking a wrong car will only ensure a terrible journey so make sure you spend some time really thinking about what strategy would suit your abilities and preferences best.
Find a reputable dealer – a trusted source
We all know the cliché of the dodgy used car-salesman who tells you the car is amazing and dazzles you with his sales skills only for you to later find out that the car is worthless and you were ripped off. Unfortunately, the online world of people selling forex strategies can be very similar, and while there are loads of fantastic strategies online, offered by proven market professionals, there are also a lot of untrustworthy people just trying to take your money. So, it is really important that you find a trusted source for your analysis and strategies with a good history behind them, plenty of clients and a solid reputation, that way you won’t see the wheels falling off your strategy as soon as you take it round the block.
Kick the tires and look under the hood
Speaking of wheels, one of the most famous pieces of advice when it comes to buying a second-hand car is “kick the tyres”. Kicking the tyres of the car lets you know whether they’re made from quality rubber or not. Similarly, looking under the hood will let you know whether the engine is in good shape or not. Basically, when you buy a car, you want to do a little digging and make sure that the quality is good.
The exact same is true when settling on a forex trading strategy. Many people often focus on only the big shiny returns when choosing a forex trading strategy, which is the same as being fooled by the new paint job on a used car. To really understand the quality of a strategy and its worth you need to check out the stats to make sure it’s what you want.
Just as important as the returns are the drawdowns, you need to get an idea of what sort of losses the strategy takes because it is no good having a strategy that does 100% a year if it has drawdowns of 60% because that means there is no room to scale the strategy and before long it will wipe your account out. Traders need to learn about the important stats that really show a strategy’s worth such as drawdown, drawdown recovery time, profit factor and sharp ratio.
Take it for a spin
When all the questions have been asked and the tyres have been kicked, there is no better way to understand the quality of a car than to take it off the forecourt and hit the open road. This is exactly the same with finding a new forex trading strategy. The best way to get a feel for the strategy is to test it out. Fortunately, with Orbex you open a demo account to test your strategy to make sure that the strategy performs correctly without risking any of your hard-earned cash. Then, when you are satisfied that the strategy is solid, you can fund a live account.
If there are any faults make sure you change it
One of the most important pieces of advice for buyers of used cars, is that if you start experiencing problems with it, you need to have it looked at immediately by an independent mechanic and if the problems persist, just change it.
Once again, this piece of advice works just as well when choosing a forex trading strategy. Once you have understood the stats and data backing up your strategy and you have started running it live, you need to monitor its performance to make sure that it’s working correctly. Now, this doesn’t mean that you should just swap strategies as soon as you take a loss but it does mean that you should assess its performance against the stats.
If the strategy has only ever had 5% drawdowns in the past, but you immediately experience a 15% drawdown, then either you are doing something wrong (not following the strategy correctly) or the strategy is a dud and you should change it.
Choosing the right forex strategy, just like choosing the right car is an important decision to make, and it is worth the time and the money to make sure you drive away with the best vehicle possible.
by James Harte, Orbex
With over 6 years’ experience analysing currency markets, James is now a well-known industry analyst focusing on price action trading and fundamental drivers. Beginning as a private retail trader, James developed a strong interest in understanding the fundamental aspect of the market before pursuing technical trading capabilities which he now uses to identify opportunities over a short-term horizon. Alongside his market experience, James is also IMC certified having achieved the qualification to help further his understanding not only of the markets but the industry as a whole. James has a strong interest in both fundamentals and technicals and uses both forms of analysis in generating and executing trade ideas, with trades generally lasting from a few hours to a few days.