The trading system is the key to successful Forex trading – novice traders and aces in the currency trading are also aware of this. However, just creating a trading system is only half the battle. One of the axioms adopted in trading is: the market is constantly changing. And since the market is changing, its laws are changing, and then the trading system must change.
Improving Forex Trading Strategy
History knows many examples when a successful, profitable trading system in the past, after some time, ceased to generate income and even became unprofitable. Therefore, no matter how perfect or effective your trading strategy may be at this stage of trading, you need to periodically test and improve it, adjusting it to the current market situation.
That is one of the simplest examples, which, however, very clearly illustrates this situation. Everyone knows that the exchange rates of the currency pairs are either trending or flat; that is, the market either has directional movement or not.
When creating your trading system, you are guided by pronounced trend movements. Accordingly, while the exchange rates of the currency pairs are moving along the trend, your trading system will generate income. As soon as the trend movement becomes less pronounced, the trading strategy will certainly also become less profitable. Well, and accordingly, with a flat market situation, the trading system will be unprofitable. Therefore, during a flat, the market should adjust the system. Nevertheless, it is reasonable to create a new system designed for trendless trade and to return the trend system to circulation when a pronounced trend appears on the market again.
We can give another example – compare, for example, the pre-crisis foreign exchange market and the market at the moment. If earlier movements of currency pairs were often limited to movement to hundreds of points, today’s movements of two or three figures are considered in the order of things. Accordingly, trading systems for a more volatile market should differ from systems for less volatile movements. So, a system designed for strong movements of pairs in a quiet period will bring minimal profit, while a trading system designed for calm movements, during high volatility; can bring big losses – if the price suddenly and unexpectedly goes against you.
There are many more such examples, but the essence is clear – each trading system reflects the optimal style of the trader and is designed for a certain pair, for a certain nature of the market. Accordingly, if the conditions change, you should reconsider your attitude to the market and … adjust your trading system.
Forex Trading Strategy Testing
As for testing the system, if it is adjusted after the market, then testing on historical data is excluded – because, in this case, we are talking about testing on past data when the system made a profit. Therefore, in this case, the best option would be a demo account or a micro account. It is clear that such testing will take time; however, you must always remember that Forex will exist tomorrow, and in a month, and in a year.
Therefore, in the UAE, it is better to spend some time analyzing the features of UAE Forex brokers and improving the system in order to earn a well-deserved profit in the future, than rushing about in the market, randomly opening deals, and hoping for the eternal chance. The latter option almost always leads to large losses, and even to zeros on the deposit.
And the last question: how to understand exactly when to test your trading system? In order to “catch” the right moment, it is optimal to keep a graph of the profitability curve of transactions. When the profitability curve approaches the minimum critical value, you will know that your trading system needs adjustments and improvements. So, you need to take a break in trading and devote time to testing the trading strategy so that your further work brings you the maximum stable profit.
Why are exchange rates changing?
Even before the first half of the 20th century, exchange rates were stable, but today we take as usual the constant fluctuation of currencies. Despite the fact that some of them hold their positions without sharp crashes and lows, yet in the world, more than one currency cannot be protected.
Why do we have to monitor this intricate system every day (if not an hour)? How can a political event, whether it is an election or a speech by the president, change exchange rates?
So, the main reason for exchange rate fluctuations is the demand for currency. Like any product on the market, the currency is associated with demand. In demand currency, the price will rise. And if demand falls, then, accordingly, its value decreases. And then the question arises: what influences this demand? First of all, it is an investment in the state economy of this currency. In countries with an active pace of economic development that attracts investors, the demand for currency is increasing. Accordingly, the cost of it is also growing. Also, demand depends on the success of banks in which the state currency is bought or stored. Say, if you keep your money in American dollars, then this is in favor of strengthening this currency.
Also, the exchange rate depends on real goods and services owned by the state and, therefore, can export.
Small fluctuations in the exchange rate are often exacerbated by any rumors about upcoming problems, as well as when changing the direction of the policy. If the rate of a particular currency collapses sharply, then people try to get rid of this currency, expecting it to fall further, thereby causing an even greater depreciation.
Situations when the market expects an event to occur or the release of any information that affects the market are associated with sayings: “buy on rumor, sell on fact” (buy by rumor, sell-by fact), “sell good news” (sell when good data).
Statements by politicians can affect the movement of exchange rates. The market is preparing for important speeches and summits – there are forecasts or rumors and a possible interpretation of the upcoming event, which change the exchange rate. To help you better understand, you can give a vivid example of such a connection: when D. Trump was elected to the post of US President, the euro and Mexican pesos fell significantly, due to the expectation of worsening trade relations with states using this currency. Also, public speeches by the head of state, which inspire credibility and stability of the situation, can significantly influence the exchange rate.
By Joyesh Chakma
Photo credit: D’Vaughn Bell (pexels.com)