Theory Of Economic Cycle

Forex Trading Strategy is key to successful trading. Every trader has his/her own unique strategy and the strategy is developed with various combination of analysis, techniques and tools such as Fundamental Analysis, Technical Analysis, Statistical Techniques, Trading Systems, Trading Indicators, Forex Signals, Trends, Bands, Ranges, etc.

The key to develop a successful strategy is in ' FINANCIAL PLANNING'. Forex Trading Strategy should include financial planning as a part of strategy.

Let us understand why Financial Planning is necessary for successful Forex Trading.

Forex trading has the highest level of risk amongst all other trading activities. This is because of two main factors:

* Margin Requirements

* Volatility

Margin Requirements

Usually brokers offer high margin money to all traders and margin availability varies from broker to broker. Generally, margin availability could range from 1:50 to 1:400. This factor encourages traders to enter into high stakes as capital requirement is negligible, thereby increasing the risk factor. Following is an example to understand leverage and margin requirements:

If the ratio of margin money is 1:400, then in that case, to buy one lot of $100,000, trader needs only $250/- A change in one cent in either direction, which is 100 pips, will fetch the trader $1000 profit or $1000 loss on the investment of $250. The traders can lose or gain 4 times of his capital invested just with a change by one cent (100 pips). This factor forces the trader to keep tight stop loss depending upon risk bearing capacity and may prevent trader to hold the position for longer period of time to win the trade.

Hence, it is utmost necessary to plan the size of trading lot depending upon the trading strategy including investment available, risk bearing capacity, time frame and risk to reward ratio.

Volatility

The relative rate at which the price of a currency pair moves up and down is volatility. Volatility is found by calculating the annualized standard deviation of daily change in price. If the price of a currency pair moves up and down rapidly over short time periods, it has high volatility. If the price almost never changes, it has low volatility. Volume of Currency trading is close to 2 trillion dollars per day as currency market is 24 X 5 days a week, which means huge volume caused by huge demand and supply. This causes high volatility and rapid price change.

Currently, the most popular strategies to trade are based on technical analysis, where stop loss is the key element to preserve capital. Trader, depending on this strategy, has 60% to 70% probability to win trade. Since each trade is independent of other in most of the trades, trader faces financial constrains due to lack of financial planning included in trading strategy, resulting into loss. It is not possible to enter into all trades, as per signal to trade received by his/her strategy due to financial constrains, which ultimately leads to loss, as selective trading from signals generated, changes probability to win and affects risk to reward ratio, paving the way for failure.

It is estimated that 95% of traders lose there capital in forex trading. Therefore, before one ventures in to the forex trading, Trading Strategy should built in financial planning and should be tested on demo platform before entering into real trading environment.

Conclusion
Forex trading Strategy should include Financial planning, to provide trader with capacity to withstand market noises and capacity to average or hedge his/her position in the same or different currency pair, in order to win the trade.