The notion of creating your trading strategy may feel frightening.
The good news is that building a winning trading plan is rather simple. The bad news is that making one that is profitable is much more difficult.
To assist you, we’ve put together a list of seven steps that will act as your trading strategy guide.
1) Select a Market
The first step to creating your trading strategies is to select the financial market in which you will trade. Although it may appear to be an apparent initial step, it is by no means insignificant. Trading strategies are determined by the market in which they are used. What works in the commodities market may or may not work in the stock market. If you haven’t previously, educate yourself thoroughly on your selected market once you’ve made your decision.
2) Select Your Personality
After that, you must decide on your trading style. Which time frame you wish to trade on will greatly affect this. Are you content to spend the entire day in front of your trading terminal, entering and quitting many trades? If that’s the case, scalping might be a good fit for you.
Swing trading may be more ideal for you if you just intend to trade part-time around other responsibilities. When creating your trading strategy, the amount of time you intend to devote to trading is critical. Scalpers trade in enormous numbers every day, frequently entering and departing the market in the hopes of making a few pips on each deal. Swing traders, on the other hand, will hold positions for days, weeks, or even months. This is something that is highly dependent on the trader; there is no such thing as an “optimal” trading technique that will work for everyone.
3) Is it better to be fundamental or technical?
An important step to creating your first trading strategy is deciding whether you want to be a technical or a fundamental player.
Fundamental analysis is the study of an asset’s fundamental worth in light of micro and macroeconomic circumstances. Technical analysts believe that every piece of relevant information is already reflected in an asset’s price. They believe that historical pricing can predict how the market will act in the future.
In most cases, the most successful trading methods will combine the two. Even technical traders will avoid trading around certain economic events or announcements owing to the impact on the market, while others may flock to the markets during these times. An economic calendar is a useful tool for keeping track of upcoming economic announcements.
4) Make a Market Entry Strategy
Now it’s time to get down to business. The next step in creating your trading strategy is to determine how you will enter the market.
For fundamental traders, this may be something as simple as a country’s monetary policy changing. When a central bank lowers its base rate, a fundamental trader may enter a short position against that currency or vice versa. Technical indicators or patterns on a candlestick chart will signal a technical trader’s entry into the market.
5) Make a Plan for Your Exit
An important step in creating your trading strategy is to plan the exit. Some traders fail to recognise that understanding when to depart a market is just as crucial, if not more than knowing when to enter it.
If you exit too soon, you risk not meeting your profit target; if you exit too late, you risk losing more money than you should have. Take profits and stop losses are critical risk management techniques that every trader should employ when trading.
6) Perform a backtest
It’s critical to backtest your trading strategy after you’ve done developing it. Backtesting entails going back in time to check how the price of the financial instrument you’re trading has changed over time, finding all the times you’d have been urged to enter the market, and seeing how your trade would have performed.
Backtesting is a useful tool for determining how effective your trading strategy will be in the real world. It is crucial to remember, however, that past success is not a good predictor of future outcomes.
7) Continue to Improve
You should never consider your trading approach to be a set-in-stone plan. It should be adaptive, and you should always strive to enhance your strategy. It is unavoidable that after successfully developing a winning trading strategy and deploying it on the markets, you will find ways to improve it.
Our seven-step process should assist you in building a winning trading strategy. Online stock trading has turned some people into millionaires while ruining many others at the same time. The internet has a plethora of information and trading stock guides. But it is an art that requires patience and experience. Once you are ready to begin your journey, FinLearn Academy has the best trading stock guides that are sure to leave you with all the necessary tools to become a successful trader.