A trader without a trading strategy is not a trader. Whatever the strategy is, it will help you make sense of the chaos in the markets. In this article, we will tell you what a trading strategy is and why you need it. You'll learn why without a well-thought-out strategy you'll either make unstable profits or lose your deposit. But first things first.
The Market Lives In Chaos
Let's assume that you are good at a couple of indicators, can recognize a couple of candlestick patterns, and can see when a technical analysis pattern is formed on the chart. Using this information you will most likely trade successfully, but how long will your luck stay with you? After all, it is not enough just to follow analytics and trading recommendations, even if the first and second are good.
The market is unpredictable, and often even an experienced trader cannot understand what caused the rise or fall, and where the price will go next.
Until you work out the strategy in practice it will not bring you the result you would like to get from the market. Therefore, it is important to have a systematic approach to trading to make it a stable source of income.
What Is A Trading Strategy?
A trading strategy is a set of rules by which a trader places and closes positions. It contains all the nuances and all the steps which a trader should follow. It does not matter how much free time you have for the market. There will be no long-term success without a trading strategy. It consists of criteria, according to which a trader opens a position. As we've written before, indicators, candlestick patterns, and chart patterns are nothing if you can't apply them correctly in trading.
If a trader opens a trade every time there is some signal from an indicator or a candlestick pattern, the outcome of the trade is unlikely to be satisfying.
We are not saying that they will not work, but one should not expect from them a stable result. And if a trader also uses the leverage, they will lose psychological control and all is lost.
That is why a trader needs a trading strategy that is clear to them and which answers such questions:
- What criteria are necessary to enter the trade?
- What percentage of the deposit is subject to risk in a trade?
- What ratio of risk/reward ratio will be perfect for each position?
These are the questions you need to be guided by when choosing a trading strategy. And here's the other thing. Yes, you can find a lot of examples of trading strategies on the Internet, but each one must be tailored to your own needs. It will take some time to create/customize a strategy, but you are the one who has to make it. These are the basic questions, which your strategy should answer to you.
In practice, you will see which indicator signal is stronger and which one gives false entry points, which chart pattern works best, and which session has more successful entry points.
What Makes A Good Trading Strategy
So, you have decided to create a strategy. Let's take a closer look at what it should consist of.
- First, it should have logical reasoning. This will become its framework, to which we will attach all of the other components.
- Second, we select the instruments for trading. It is best to choose the major pairs because they are amenable to technical analysis and they have good volatility. Pay special attention to the choice of the pair, as it will be your working tool.
- Third, you choose the time frame and the time of the trade (session). You can trade long or medium-term, or intraday trading. Everyone decides for themselves what to choose, your choice depends on your personal characteristics such as temperament and psychological stability. The size of your deposit and your goals also play a major role.
- Then choose a trading style and time frame to work. If you are focused on long-term trading, the higher time frames will do for you, while for scalping it is better to use the lower time frames, such as M1 and M5, M15. Technical indicators will also depend on your style. For example, MACD and Moving Averages are good for long-term trading, while RSI is good for scalping.
- Fourthly, we describe the rules for placing orders, that is, what signal will be the reason for opening a position. Rules for exit or under what conditions the trade will be closed, too, need to be prescribed here. Also, decide for yourself what will be the Stop Loss and Take Profit.
- The fifth point of the strategy refers to the volume of trade. Based on your deposit, calculate the volume since it will limit your risks. Plan and level of drawdown. In order not to overload the deposit, it is worth thinking about the maximum number of simultaneously opened trades.
Having created the trading strategy, proceed to its testing on a demo account. Pay attention to how the price behaves on the chart. We recommend testing the strategy on different instruments and different time frames, to analyze its performance objectively. It is important to test the strategy by drawdown too. Wait for the maximum movement in the opposite direction, to see if the deposit can withstand the drawdown you have planned.
Remember that creating a strategy is a rather time-consuming process. Often the strategy will not work right away, you should not get discouraged, and you should not give up on the idea, because the losses will increase in this case.
Start with simple strategies, gradually moving to more complex ones. We are sure that in the end, you will succeed, and you will have a profitable trading strategy, which will suit you 100%.
