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Trading Strategies and How to Create Your Own Strategy

As soon as a trader has learned trading basics and got acquainted with the technical and fundamental analysis, he or she faces a next, even more significant, task – to find the best strategy for trading or develop an individual trading system. 

The trading strategy is an element without which it is impossible to trade any instrument successfully. Without a strategy, trading becomes a game of chance for adrenaline, not profit. Therefore, the importance of a strategy for trading cannot be exaggerated. The basis of a trading strategy usually includes:

  • rules for market analysis and the search for favorable opportunities;
  • rules for entering a position;
  • position holding rules;
  • exit rules;
  • risk management and error handling rules.

Yet, just because other traders made money using a certain strategy, it does not mean that it will be just as effective for you. Therefore, each trader needs to figure out a Forex or stock trading strategy that is ideal for him or her individually. 

How to Develop a Trading Strategy

We recommend that you use the following principles of building a trading system to create your individual trading strategy. 

  1. The idea of a trading strategy

First of all, it is important to formulate its main idea. The idea should be rational and based on a pattern of price behavior that is understandable to you (for example, following a trend). The simplest ideas on the market always work better than complex ones! The secret to a successful trading strategy is its simplicity. Experienced traders usually come to this conclusion after trying all the most complex strategies on the available list of trading strategies. It is important to understand that a successful idea of a trading system is a simple and clear concept. A large number of rules or conditions make the system slow, and the speed of reaction is extremely important in trading.

When developing your trading strategy, you should already know which instruments you plan to trade. For example, if you decide to trade stocks with low liquidity, then the fundamental analysis will become a priority for the system, according to which a portfolio of stocks with high long-term growth potential will be created. Such stocks are sold as certain price guiding principles are reached. If trading highly liquid instruments, a rich arsenal of technical analysis is best suited.

2. Risk management principles

The trading system must also certainly include your risk management principles and a specific methodology for determining the position size. This implies that all possible risks will be calculated and minimized.

3. Conditions for opening a position

The rules for opening a position should determine those appropriate moments when the probability of a profitable transaction is high, and the level of risk is small. That is, the system must unambiguously determine the situation when it is necessary to complete a transaction and, at the same time, give an appropriate signal. 

Needless to say, the signals for opening the position are different for everyone. This can be a resistance and support breakouts, signals of certain indicators (for example, oscillators), an intersection of moving averages, a price breakthrough, and much more. Each trader chooses their own, clear, and proven way. For example, for a trend system, it is primarily important to formulate precisely the signs of the emergence and end of a market trend, and only then define a signal to complete a transaction.

4. Conditions for closing a position

Rules for closing a position will help to effectively fix profit if the market moves in the right direction (for example, using the take-profit order), and protect against excessive losses in the event of a market reversal. At this crucial stage, the level at which you place protective stop-loss order is determined. This does not allow losses to become catastrophic if events turned against you. 

5. Position tracking conditions

Position tracking conditions provide for a “moving stop-loss.” That is, clear criteria according to which the stop order will change, adjusting to the stock price as your profit grows (for example, by following the trend line at a certain distance, etc.). The first stop change is best done after passing the breakeven point.

6. Positive expectation

The system must have a positive expectation. This means that the average profit on transactions for a certain period should be positive, taking into account all costs (amount of trading capital). Therefore, no matter how impressive your system may look, if it brings losses, then it needs to be changed after testing.

By setting realistic goals, defeating your impatience and greed, you can create a reliable, working trading strategy. You will understand that you have created that ideal technique. Along with the personal trading system comes psychological comfort, pleasure from the trading process, as well as the realization that you are doing what you were meant for. 

7. Explore your options

Finally, we would like to tell you that you do not need to reinvent the bicycle. You can take advantage of the work of many traders and analysts, study all existing strategies, and take some of the most suitable for your strategies and concepts as the basis for your strategy. Choose the type of strategy you like best, add your personalized changes to it and test it first on a demo account and, if it seems successful, using a small amount of real money.