Four Trading Strategies You Need To Avoid As A Funded Forex Trader
As a forex trader, the strategies you use within the markets will be a huge contributing factor to the success you have, or don’t have, within the markets. Although psychology, risk management and other factors are important, without a trading strategy that is profitable over the long term, you’re just going to be spinning your wheels.
There are 4 main trading strategies that many traders attempt. These strategies need to be avoided:
- No Strategy
In this article, we are going to look at these 4 strategies and discuss exactly why you should not be considering these if you’re serious about becoming a funded trader. So, let’s get into it…
The 4 Trading Strategies You Need To Avoid As A Funded Trader
When newbie traders are learning the ropes, it’s easy to get hooked into trading with strategies that seem appealing. Typically, these strategies will be great at generating short-term returns, but much less appealing over the long term. This rings true for all 4 of the trading strategies we are going to look at below…
There needs to be a pinch of salt taken with what I am saying here. Is it possible to make money with a grid trading strategy or a news-trading strategy? Well, of course, but it’s very unlikely.
To give yourself the best chance of becoming a funded trader and keeping your funded trading account, it’s important to utilize proven and profitable strategies within the markets.
So, let’s take a look at the strategies you need to be avoiding.
1. Martingale Trading Strategies
Martingale is a very popular”strategy”, commonly used among gamblers in casinos. The logic is simple. Every time you take a loss, you double the position size. This means that if you have a losing streak, your position size is now so large, you will win just one position to get back to break even. Although this sounds like an outstanding plan, you would need millions in liquidity to be able to pull this off. For most traders, it would only take between 6–10 losses to completely destroy your account balance. You also need to consider the fact that this will not be an acceptable risk management strategy for any funded trading account – meaning you will have to use your own trading capital.
Martingale strategies can create a very nice equity curve, until you hit a losing streak. By back testing any trading system, you’ll soon realize that all systems will hit a losing streak at some point.
Many profitable trading systems even have periods of losing 15–20 trades in a row, during turbulent market conditions.
When looking at EA’s and algorithms within the market, most of the time, the developers will just run the back test until they know a losing streak will occur. At that point, they upload the perfect equity curve to MQL5 and lure newbie traders into purchasing the system! Regardless of your entry points and exit strategies, using Martingale is a sure fire way to lose all of your account balance in a matter of days. We have written a full article about EA trading which may be of interest.
2. Grid Trading Strategies
Grid trading strategies are also very common among algorithmic and EA traders. This involves setting a large amount of pending market orders, both buys and sells, in a grid pattern across the chart. For instance, a grid of 10 pips could be used. This would mean that trades are set in 10 pip intervals up and down in the market of choice. On its own, this doesn’t provide any kind of edge in the markets. Many traders aim to combine this entry method with other price action or analysis efforts to give themselves an edge in the markets.
However, it’s a lot easier said than done.
Opening so many trades leads to huge draw-downs. When the market pushes against you, it can push against your buy and your sell orders, depending on how you’ve structured your orders and how the market is behaving. This leads to massive draw-downs, something that is a huge problem for funded traders. Not only that, opening that many trades causes you to suffer from ‘death by a thousand cuts’. Each position opened has a fee attached to it, whether paid from commission or spread. This makes it very expensive to open so many positions, especially if you’re only taking a few pips per position. There is certainly utility in grid trading methodology, but this shouldn’t be approached by novice traders. Much like with Martingale strategies, this can provide a great-looking equity curve, until the losing streak hits, and your whole account will be wiped out in days.
3. News Trading Strategies
News trading is not for the faint-hearted. In minutes, you can turn an account from £100 to £1000, or £10,000 to £0. For newbie traders, it sounds incredibly appealing because you can make the ‘fast money’ that all traders dream of. However, this is much less of a reality in principle. Why?
Well, news releases are typically priced into the markets days before they are released. If a piece of news comes out that is supposedly good news, you’ll notice that the market doesn’t fly in that direction. Likewise, bad news doesn’t always get the price of currencies moving in the direction you would assume. Cynics would call this manipulation, but in reality, the price movement has already been priced into the market by institutions. With that being said, it’s certainly possible to make profits with news trading. However, you cannot be a novice trader to pull this off. It takes a huge amount of experience to consistently make this work, without giving all of your money back to the markets. You need to be hyper aware of spreads and the liquidity during these news releases. In your terms of service with a broker, it’ll mention the fact that they will strive to fill you at the closest price to your stop losses, entries and take profits. This doesn’t guarantee that they will actually meet that demand. When news is released, spreads can go from 0.1 pips to 20 pips and traders get stopped out of positions, taking on a huge amount of additional loss than ever planned. I’d highly recommend that you avoid trading news if you’re serious about getting funded.
4. Not Having A Trading Strategy
One of the worst trading strategies you can run with is not having a strategy at all. This is very common among newbie traders. Saying that, I’ve even met traders with years of market exposure under their belt that don’t have a set trading strategy in place. This is appealing to some traders. Not being shackled by the objective rules of a strategy. Being able to take trades whenever you fancy. Not answering to a trading plan.
However, this simply isn’t realistic.
Humans are not wired to be successful traders because we are too emotional. Even if you’re a professional standard trader, you will succumb to emotions in the markets – fear and greed. These two emotions will cause you to hold trades too long, close trades early, take trades you shouldn’t take and sit out of trades you should be taking. I’ve seen this happen time and time again… A trader back tests a strategy, and it’s a profitable/viable strategy. They then apply this manually to the live markets and get slapped by losses.Why?
Because they aren’t following the plan, or they don’t even have a plan! Without an objective plan in place, it’s impossible to analyze whether your trading strategy is actually profitable. Without knowing this, you’re wasting your time and money and ultimately may never be successful as a forex trader. For these reasons, it’s so important to build a robust trading plan for becoming a funded trader.
In Summary – What Trading Strategies Should You Avoid As A Funded Trader?
In conclusion, I’d highly recommend avoiding these 4 risky trading strategies if you’re looking to obtain forex prop firm funding. Of course, take this with a pinch of salt. Traders are making profits using all 4 of these strategies, but they’re most likely well-experienced, and certainly the minority.
To give yourself the best chance of success, use robust, tested objective systems in your trading and throw away the gambling mentality. Are you looking to get funded? Work with Lux Trading Firm now!