Modern Forex traders have the luxury of using advanced tools that would have been unimaginable a few years ago. However, they still need strict planning, execution, and self-leadership skills to use these tools wisely. Generating consistent profits requires traders to be good managers of their time and emotions. Modern technical indicators can seriously enhance a trader’s ability to spot trading opportunities and capitalize on them before setups become invalid. Let’s define how expert traders use technical indicators to increase their win rate and reduce losses.
Step 1. Planning your strategy using indicators
Indicators are popular in Forex trading, where traders try to gauge market sentiment and other important insights from these tools. FX technical indicators are mathematical formulas that allow traders to track various important factors in the market. Popular indicators like moving averages and MACD allow traders to quickly spot trends and define price momentum while other tools help them to define when a price is oversold and overbought.
However, using indicators in a trading strategy requires a scientific approach where traders should create objective rules where they get signals from indicators, add filters, and only then execute trades.
First things first, select your preferred indicators, such as moving averages. Then add some kind of filter to ensure only good-quality signals are taken for decisions. And lastly, add risk management and position management rules.
Simple trading strategy example
Let’s take an example of a moving average crossover strategy: when the 5-period simple moving average (SMA) crosses the 20-period SMA above, we take it as a buy signal. The opposite is true for sell signals. However, using only this method won’t make money, so let’s add a directional filter using the stochastic oscillator with default settings. When the price is above the 100 EMA and a bullish crossover happens and the stochastic also shows a signal line above the main line, we take it as a buy entry signal. Conversely, when opposite conditions are true, it is a sell signal.
This strategy is just one example of using indicators to your advantage, and in no case should you deploy it without extensive backtesting and then demo trading.
Step 2. Execute your plan with discipline.
Here is how you should execute your trading plan with discipline:
- Select trading pair – Choose an FX pair like EUR/USD or others to trade and select the timeframe.
- Trading hours – Define a specific time window when you stare at your charts and trade (for example, from 9 AM to 3 PM)
- Trade your strategy on demo – Start with demo trading and stick to your trading rules without deviating from your rules.
- Control risk – Use well-defined stop-loss and take-profit orders to ensure losing trades are cut quickly.
This is just for example, and every trader will find their favorite trading pair, timeframe, and position size for risk management. The main idea is to never deviate from your trading strategy’s rules and stick to them even when you have a losing streak of several consecutive losers.
Step 3. Performance management and self-leadership
Profitable traders keep trading journals and log the outcome of all their trading positions. They write down details of each trade to ensure it is easy to analyze the performance later. After you have 25-30 trades in your journal, you can use this sample size to analyze how well your trading plan performed and ideally find mistakes during execution.
Risk management
Risk management is critical, and it goes beyond just setting stop-loss and take-profit orders. Seasoned traders use strict position size techniques such as the Kelly criterion to define optimal position size depending on your account balance and trading stats. These trading stats include win rate and risk-reward ratio as well.
Another important factor is to limit trading operations after achieving certain targets or losses. Some traders have max drawdown rules for a single trading day to ensure emotions do not impact their performance.
Self-leadership principles
Self-leadership is critical in trading, as it allows the successful trader to understand their inner workings, define which trading style is suitable for their psychological type, and improve their emotional control. Emotions are among the most influential factors in trading, as it is difficult to follow the trading strategy when several losses occur. By focusing on a scientific approach, correctly matching your personality with your strategy, and improving yourself, you can become a member of the profitable forex traders’ club much sooner.
One good behavior is to share your performance reports with a mentor or community to increase accountability. Receiving feedback from traders can also help to find weaknesses in your trading strategy and enable you to quickly adapt to new market dynamics. Adaptability is one of the most important factors in FX trading, affecting results.
Also read: Common Mistakes to Avoid as a Forex Trader
