Forex Trading: Four Steps to Developing Your Trading Edge

As forex traders, we define our edge as something we have seen in the market. This event has repeated frequently enough for us to think we can develop a trading strategy around it.

Four Steps to Developing Your Trading Edge

Step 1 What’s Our Idea?

We have an idea or hunch, something we’ve seen, a hypothesis that we want to prove.

Step 2 Define Our Rules

So far, our initial idea is the basis for what might become our edge. What is missing are the rules for entering and exiting the market.

Step 3 Test Your Idea (Backtesting)

Backtesting starts with gathering as much data as possible. We cannot assess the relative merits of an edge by looking at the results of just one past trade.

Step 4 Forward Testing

The results from our backtesting are encouraging so we move into the testing on live data. This stage is called the forward testing stage and is where we apply our strategy and its rules to new live data.

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