Deriving a forex signal is first of all dependent on the creation of a powerful yet simple strategy combining different aspects of analysis. But analysis is not all of the picture. A successful forex strategy is above all about the balancing of risks, evaluation of the risk/reward ratio inherent in the planned trade, independent of the analytical tools used. In other words, money management must always be made a major part of the formation process which results in the employed trading strategy. If one understands and recognizes that no forex strategy can be applied to the market for consistent gains, and that the markets operate on different dynamics at different time periods, it is only too easy to recognize as well that a forex strategy is only useful as a temporary compass of our path with which we determine our destination, but never points directly to the destination itself.

How should we formulate a forex strategy?

1. Keep it as simple as possible

Keep your strategies simple. Avoid over-interpreting, over analyzing market phenomena. It is almost certain that the tools that you use are not sufficient to establish a truly reliable analytical picture of the market. So do not waste your time trying to reach at the holy grail of technical analysis.

1. Only use the methods that you understand well

In order to have clarity of mind as you make decisions, use only the tools that you understand well, and are capable of interpreting with fluency and confidence. Recall that there’s no special indicator that will do particularly well in a market, (or, more precisely, that it is impossible to know which indicator will work in advance in a particular market configuration). So do not obscure your analysis by wasting time trying to understand obscure and esoteric methods.

1. Focus on money management, not analysis

Any strategy may fail, but you should make sure that you never fail so severely that you suffer severe results from which you can not recover. Make sure that your plans depend on risk management, the careful balancing of positions, modest leverage, and sensible commitment of capital. Always keep in eye on volatility. Do not hesitate to liquidate a position if your basic assumptions are proven to be false.

1. Make a plan, and follow it

Discipline is the essence of trading. Make sure that your trades follow your original plans carefully, and that you never make arbitrary decisions. It is impossible to be arbitrary in your decisions, and successful in your trading. Your trade sizes, stop-loss/take profit orders, leverage, must all follow well-established principles that emphasize conservatism over risk taking.

If you follow these rules, you may do well even with a less-than-perfect forex broker. If you don’t follow them, the chances of success are very limited indeed. To ensure that you get the greatest benefit from your trades, make sure that you adopt a disciplined, rigorous approach to trading from the very first day. Then you can succeed with just about any strategy.