Financial markets remind us all of the importance of having a solid plan when we do trading, and for good reason. Random trading never results in consistent, reliable, or long-term profits, it’s more like gambling than it is a methodical approach to trading. If trading is treated as a business and not a game or hobby, discipline will be developed to achieve long-term success.
Well-defined strategies are a good thing to know for experienced traders. Market fluctuations are unpredictable, but they have recognizable patterns. That is why a strategic approach is necessary. A serious person who is focused on success needs to develop a personal trading strategy. In this post, we’ll help you come up with your own trading strategies.
A Trading Strategy You Need
A good strategy is a set of rules to follow. It prevents traders from making emotional decisions, which can destroy your trading if you don’t control them. The key to discipline is sticking to your strategy, and not deviating from it.
The other benefit is that it allows us to backtest a strategy using historical data. Traders can feel confident that their strategy is based on sound principles and not guesswork.
Market analysis is streamlined by a strategy. When your strategy produces signals, you can act without spending too much time analyzing the market.
Pro Tip for Traders: Test any trading strategy on a demo account before using it on a live account. Some strategies will work better than others, but none are foolproof, be realistic.
There are so many strategies online, but making your own is something different. The Forex trading strategy created for you will be based on your style, preferences and ways of Forex trading.
7 Factors to Consider When Creating Your Trading Strategy
When you are creating your strategy on how to trade shares, there are a few key factors to consider. Here’s a breakdown of what to keep in mind:
1. Choose a Time frame
Selecting a timeframe is one of the first steps in developing a trading strategy. Your availability has a major say in this decision. If you don’t have a lot of time to trade then a long-term or automatic strategy may be best. However, if you have the time to commit a few hours a day, you have more freedom. With many short-term trades, you could do high-frequency trading, or with a specific method which leverages your availability.
There is more activity in different markets at different times. For instance, the U.S. markets are the most active in the morning, when it’s the afternoon in Europe. If you align your trading hours to market activity, you will be more effective.
In other words, if you can’t trade as much as you’d like to, then you need to pick a strategy that fits within your schedule.
2. Select a Product
There are thousands of trading products available on the global financial markets through various asset classes such as stocks, Forex pairs, commodities, indices, ETFs, etc. Your trading style will determine what product you select. Stock traders might like to pick individual companies to research, while others might prefer the exposure of indices or ETFs.
If you plan to trade long-term, short-term price fluctuations may not be that important. On the other hand, day traders or scalpers may need highly volatile products like crude oil as larger price movements provide opportunities for quick profit.
3. Identify the Trend
Not all strategies rely on market trends, but recognizing the current direction will improve your success. The first type of traders use technical indicators, such as moving averages or MACD, to find trends, while the second type of traders use price action and try to identify higher highs and lows, or lower highs and lows.
Including trend analysis in your strategy can increase your trading results.
4. Define Your Risk
You can have the best strategy in the world, but unexpected events can bring a market to its knees. And that’s why defining risk is so important to long-term success. If you have decided on the trend, timeframe, and product, then you need to think about risk management.
If you trade volatile products, you may need wider stop-loss levels to accommodate price swings. Smaller positions can help reduce the impact of short-term fluctuations for long-term trades. Short-term traders can take larger positions if they have tight stop losses as well.
5. Plan Your Entries
Once you’ve created the outline of your strategy, work on the best entry points. If you’re looking for long-term trades, you may not need to be super specific, but timing your entry is important to lower your risk and increase your potential rewards. Say, if you’re trading on the daily chart, you can use a lower one, like a 4-hour or 1-hour chart for finding pullbacks for better entry points.
In the short run, precision must come first for short-term traders. The difference between a winning or losing trade can be finding the best possible entry. Optimal entry levels might have to be found through a combination of technical factors.
6. Plan Your Exits
As important as your entry is your exit strategy. One of the ways some traders exit is based on a percentage or point system, and that can work if the market behaves as expected. Trailing stops are used by others, where the stop moves as the market goes your way but the risk is that the market will reverse and close out your position before resuming in the same direction.
One other way is to establish several profit targets so that you can take some of the gains and let the rest of the position run for higher potential profits. For short-term traders, fixed targets may work just fine, whereas for long-term traders flexibility may be more appropriate.
7. Document Your Strategy
If you write your strategy down, you can refine it over time. Record your market approach, and the steps you take before placing a trade. Document the outcome of each trade after executing it, and note any factors that contributed to the success or failure of that trade. Doing this will train you to learn from mistakes and spot patterns that work for you.
Reviewing your trading journal regularly helps you adapt and improve your strategy based on past experiences.
