If you graduate from Harvard Business School with an MBA, you will have been fully trained in strategy development and implementation. SWOT Analysis is Harvard’s Strategy Creation Model. In this article, I break down SWOT Analysis and show you how to use it to further your trading career.
SWOT ANALYSIS APPLIED TO TRADING
When analyzing your Forex Trading Career, SWOT analysis reveals your Strengths, Weaknesses, Opportunities and Threats; the four needed building blocks of strategy.
SWOT is an analytical framework that helps you identify your internal strengths and weaknesses while considering the opportunities and threats outside of you. In using SWOT Analysis it is very important to break the categories of analysis into Internal (Strengths and Weaknesses) and External (Opportunities and Threats).
These mentioned areas of analysis are segmented into four quadrants so you can examine each individually and then strategically align the components of SWOT to create the best strategy for your endeavor.
INTERNAL ANALYSIS (STRENGTHS AND WEAKNESSES)
As a trader, you begin your SWOT Analysis by doing your INTERNAL ANALYSIS
STRENGTHS What am I good at?
- What trading patterns have I been able to consistently make money on this year?
- What currency pairs do I have a read on and understand.
- What economic events do I feel strong trading?
- What major market sessions do I excel in?
- What trade plan has worked the best for me?
WEAKNESSES What am I doing wrong?
- What are my weaknesses in trading? Honestly.
- Do I let my winning positions run to full profit potential?
- Am I impulsive in my trading?
- Are the risk / reward ratios in my trade plan working?
- Do I add to loosing positions thinking that the market will soon turn my way?
- Do I carefully consider the risk associated with each trade I take.
- Do I ever trade based on emotion?
- When I loose a trade do I ever force my next trade?
- Do I create professional trade plans?
EXTERNAL ANALYSIS (OPPORTUNITIES AND THREATS)
After you have identified your strengths and weaknesses as a trader you then identify the opportunities and threats outside of you.
OPPORTUNITIES What are the opportunities in Forex?
- Do I trade economic news releases?
- Do I take advantage of economic news releases out of Great Britain?
- Do I take advantage of economic news releases out of Australia?
- Do I check the economic news calendar at the start of each week to plot my news opportunities?
- Do I trade Asian Pairs in the Asian Session?
- Do I trade the New York Session?
- Do I trade the London Session?
- Which session is ideal for where I am geographically located?
- What trade setups are forming in the market?
- Am I seeing and taking advantage of these setups?
- Which good setups did I miss out on this week and why?
- Am I analyzing multiple pairs to find the very best setups?
THREATS What threats are before me in trading?
- What do I do if my hard drive crashes while I have trades open?
- What happens if there is an electrical surge in the grid and my computer shuts down?
- What do I do if the internet goes down while I am trading?
- What if I get sick and am not able to work?
- What if there is another major new event like the Swiss National Bank (SNB) suddenly announcing that it would no longer hold the Swiss franc at a fixed exchange rate with the euro? Do I have stops in place to prevent catastrophic loss in an event like this?
- What if Japan announces additional quantitative easing and greatly weakens the yen? Can my trade plan handle that?
Once you have identified your Strength, Weaknesses, Opportunities and Threats then you start your strategy creation process by asking questions about how your Internal Strengths and Weaknesses will interact with the External Threats and Opportunities in your environment.
MATCHING INTERNAL STRENGTHS WITH EXTERNAL OPPORTUNITIES
- In analyzing your strengths you may find, for example, you are good at trading triangle patterns. How do you align that strength with an external opportunity? Answer, take time out to analyze the major currency pairs looking only for triangle setups. There may be triangles forming in the market in pairs that you don’t frequently consider. In doing this you are expanding your realm of opportunity. There are actually quite a few flag and triangle patterns that form in Gold. Maybe you should consider trading commodities in addition to Forex. The effort here is to fully take advantage of the strengths that you have by aligning those strengths with the right opportunities in the greater environment in which you operate. So, if you are just trading the EURUSD and you have a talent for a particular trading setup, then expand your horizons and search out all the opportunities in multiple pairs for that given setup in which you have the strength.
- Maybe you found a strength of yours is swing trading. You can align that strength with an external opportunity by spending extra time on analysis and finding pairs that are trending well and can sustain a swing scenario.
- Possibly you have a strength in trading the news with a Fibonacci based entrance strategy after the initial move pulls back to the 61.8. Then, align whatever entrance strategy works for you with the top news events for the month. Mark them on your calendar and be ready.
- Also, with news events you can diversify you positions across multiple pairs. Rather than just focusing on one pair, which may not respond as strongly to the news, trade smaller lots on a few different pairs and you will see clearly which is moving and add to your winners on those positions. Expand your horizons to give yourself more opportunity in the area of your strengths.
MATCHING INTERNAL WEAKNESSES WITH EXTERNAL OPPORTUNITIES
- In the process of creating a strategy for your trading you must equally consider your weaknesses and how those weaknesses come into play with the markets in which you trade.
- A common weakness in trading is not having a bullet proof trade plan that includes guidelines for lot sizing. It is a common weakness to have a series of winning trades and then increase your lot size size and wipe out your recent gains with one loss or a few losses. If you have a specific plan for your lot sizes and you stick to it you will never run into the problems associated with emotional or vengeful trading where lot sizes are increased to make up for losses. If you conservatively stick to your game plan with consistent lot sizes where you never risk more than 1 or 2% of your account on any given trade, then you will be able to weather difficult times in trading and will eventually prosper when the market once again turns your way.
- Everybody has weaknesses and if your are objective about them and take responsibility for them ahead of time by building your plan in a way to account for them, then you will overcome them and keep those weakness from seriously hurting your trading career.
PUTTING IT ALL TOGETHER – DIFFERENTIATION
- Once you have gone through the processes described above you will have a much more accurate perspective of yourself and the market in which you operate and will be able to put together a strategic plan that takes into consideration the elements of strategy mentioned here.
- Once you have this understanding you are in a much better position to see clearly what differentiates you as a trader. This differentiation is an important part of strategy. Every business has to have a strength that gives them a competitive edge. What is your competitive edge? What do you specialize in? Why would someone invest with you? What unique edge do you have to offer?
- Having this understanding of what makes you different and the areas in which you excel creates confidence as well. When you have a clear sense of what you are good at it greatly helps with pride in your work and strategic direction on what areas to focus.
- To read further on Strategy I recommend Harvard Business Essentials: Strategy. This book is for sale on Amazon for $15.
U.S. Dollar Analyst, FOREX.TODAY