With this write-up, I will describe to you tips on how you can design a custom trading strategies that fits you. This procedure can help you discover the exact areas that need to be checked if you are developing a plan or you are currently working on one.
There are a lot of trading policies in existence, although purchasing books and taking courses will save you time, but trading is all about doing it yourself. In order to sort for a great trading strategy, many traders spend thousands of dollars. Discovering policies or strategies can be interesting, stress-free and amazingly fast.
For forex trading to do well, it is advised to determine the factors that should be considered in developing a trading strategy and how to set realistic, measurable and reasonable goals to accomplish your objectives.
A good trading strategy explains what you want to achieve and the reason behind it. It is the outcome of a thoughtful analysis of one’s skills, abilities, expectations and resources. This strategy or policy serves as a compass, guiding you on how to develop your own trading pattern.
Just like how a baseball fits in a catcher’s glove fit comfortably, so should your trading strategy fit your trading plan. There is a big difference between a trading plan and a trading strategy.
A trading plan explains the ‘how’ of trading while a trading strategy explains the ‘what’ and ‘why’ that drives your trading. It states the guidelines you should follow when executing, managing and evaluating your personal trades. It is encouraged that you audit the trading strategy path and think about how it relates to you. Do you have a strategy? Do you understand why you want to trade or why you are trading? How will you define your success and how will you know you have accomplished it. With an amazing trading strategy, you will be able to know how a disciplined trade plan can guide you in ways your that you can accomplish your trading policy or strategy.
Although having a trading strategy will not assure success, developing a great strategy will make you more informed of your motivations, making you better manage your trading assumptions and approach to individual trades.
How can a trading strategy be developed? There are no single means to this, it is believed that all approaches should begin with a review of what you want to achieve, your initial skills and capabilities and other considerations. This is another way to develop clear, measurable and actionable goals.
It is easier to focus on your own trading plan by developing a strategy that works mainly because you are the one that developed it.
Things to note when building a trading strategy
Here are a few tips to take note of as you decide on what you want to trade.
- Motivation: there are many things that can gear or motivate one to build a trading strategy. What do you want to achieve mainly? Have you had deep thoughts on reasons you want to trade? Do you want to be disciplined about your finances? Do you plan to develop more income to supplement your living expenses? Is there a plan to fund your child or grandchild’s education? State in clear terms what you wish to achieve will help a great deal in influencing your decision to trade.
- Experience: What skills and talent do you bring to trading? Do you have skills and talent in trading? Do you manage the monthly budget as a small business owner? Do you have an analytical background? Are you fond of collecting and analyzing information? With vast experience, you can consider achieving your goals with your strengths.
- Taking Risk: Do you enjoy taking risks? How will your orientation affect your capability in accomplishing your goals? What risk level must you attain to be able to potentially earn the returns targeted? What will be the effect of risk on other areas of your life?
Ensure that you have a limit as you open the trading account
- Max Loss per Day: What amount are you willing to part away with before you stop trading? (Maximum of 5% of your trading capital).
- Max Trade Loss: What amount are you okay risking on any particular trade? (1% of your total trading capital).
- Road Blocks: What type of challenges do you have? Limited time is the excuse often given for seeking interest and trading. Other excuses include lack of resources, lack of knowledge or competing priorities. Take some time to think about what will keep you from building and putting together your policies. If you are aware of these challenges, you will be well equipped to handle them.
- Additional Things to Note: By finding a strategy that works, using historical data will not assure profits in any market. This is the main reason why many traders do not back-test their policies which mean applying the policies on historical data. Alternatively, they tend to make impromptu trades, which is caused by the absence of due diligence. It is essential to note a policies success rate based on the fact that if the strategy has not worked in the past, it will start to work unexpectedly. That is the reason why it is very crucial to use visual backtesting- studying charts and applying new procedures on a selected time frame.
- Most policies don’t last for a lifetime. It is important to take advantage of the ones that still work because they often fall in and out of being profitable. If a particular strategy has worked over a few months or decades, that is an assurance that it will work whenever it is used again. However, if we never tried out that strategy in the past we will lack the confidence to make use of it in the market. There will be a peace of mind and boost of confidence that comes with knowing that it has worked before.
Creating a valuable strategy
By the time you can fully understand the reason you want to trade and also knowing the important issues that might influence your manner of trading, the next step is creating your strategy. Think carefully about it and consider all the aspect of your thinking by making sure you write your thoughts down. In addition, it serves as a guide for when you begin assessing trade opportunity to match actual results.
A strategy can be created by using different methods. Ensure to make a choice that meets your needs.
The SMART method is used in creating a measurable goal. This encourages the putting together of a timetable that will help meet the said goal and specifically identify intent. Significantly, it will help you to examine how practical accomplishing the goal will be.
Specific – This is a basic list of opportunity, it must be clear, definite and concise.
Measurable – The ability to achieve the goal must be measured in a particular manner. Here, there will be an output list whose content will be measured against the setup criteria.
Actionable – Your determined goal must be acted upon. The ability to place trades based on your goals are appropriate measures.
Realistic – the goal must be practical. It should fit you as a trader and your mission to trading. The number of trades classified is subject to the capital and objectives in your trading.
Time-bound – there should be a said time frame to the achievement of the goal. Ensure you choose a time frame that will allow you complete your said goal. For example, a date set in view of an upcoming earning announcement makes sense as your goal is to develop income.
Growths of asset and income objectives are frequent goals for traders. You may want to settle for longer-term financial goals if you belong to this category and use these to certify other goals as they should be.
Work Your strategy
Setting up a strategy will allow you identify possibly appropriate trades but you will have what you can use to appraise your actions. After carrying out the appraisal, you will notice that your strategy is good but your measures are not making results. Either way, you are learning and applying the experience to future actions.
An Effective Trading strategy
Although a trading plan can have several policies, it is advised that you stick to one. Go through the process of understanding and fine tuning one strategy before trying out another. By the time you have fully understood how the first strategy works then you will have the confidence to build up additional policies.
When trading, you will never stop learning; there will always be challenges and decisions to make, your passion for trading will be your driving force. A lot of traders often forget the reason why they started trading or what they hope to accomplish. When you develop an amazing trading strategy, you will instill trading discipline and have a tool to check your behavior. Also note that we are not in search of policies that work 100%, with this we might hardly find any strategy. Ensure that you select a strategy that nets a profit at the end of your time frame, it could be weeks, months or years.
When placing any trade here are a few points to clarify:
- Defined Entry
- Defined Stop
- Defined Profit Target(s)
This is an essential part of your policies. Define your entry, stop and target when placing the trade. This will make you think clearly as the trade starts and extends.