What is a Trading strategy?
A trading strategy is your personal method and process for deciding when to buy or sell stocks. No successful trader achieves success without a trading strategy and most traders have a variety of strategies depending on what they are trading and the general trend of that specific market including but not limited to day trading strategies, swing trading strategies, options trading strategies, forex trading strategies and stock trading strategies.
Unfortunately most people who trade stocks, find success is difficult to achieve and they are left wondering what the successful traders do. As with all industries the successful people do a few simple things every day and they work hard before the money starts coming in. In trading these simple things can easily be summaries into this, successful traders have at least one trading strategy that they have developed over a period of time (weeks, months and even years), this strategy is also back tested before a single trade is ever made with real money, simple they either use software or a note pad and market data and paper trader the strategy and review if it would have been profitable. They then implement the trading strategy and stick to it regardless of their emotions. And this is what you must do to be a successful trader over a long period of time.
Unfortunately most people who trade stocks, find success is difficult to achieve and they are left wondering what the successful traders do. As with all industries the successful people do a few simple things every day and they work hard before the money starts coming in. In trading these simple things can easily be summaries into this, successful traders have at least one trading strategy that they have developed over a period of time (weeks, months and even years), this strategy is also back tested before a single trade is ever made with real money, simple they either use software or a note pad and market data and paper trader the strategy and review if it would have been profitable. They then implement the trading strategy and stick to it regardless of their emotions. And this is what you must do to be a successful trader over a long period of time.
If you haven't realized having a trading plan facilitates your decision making by helping reduce the influence of your emotions from the equation and, therefore, will hopefully make you trade more efficiently.
One thing I have experienced personally and with others over the years is that a trading strategy is an essential requirement to trading well, yet they don’t know where to start to put one together. I accept that it can be overwhelming at first to tackle this issue, therefore we have developed this simple guide and check list for developing your trading strategy.
Steps in developing a trading Strategy
Must Suit You
Personality
You might be wondering why you can't just take the trading strategy of a successful trader and use that.
Simple a good trading plan is having a plan that perfectly suits you and is right for you, it is all about being comfortable and confident in your trading strategy. But for you to develop your trading strategy to suit you, you must first assess yourself honestly. With our basic test below.
Remember a good trading plan suits who you are especially in times of stress and panic, so be sure to assess the seemingly unimportant things.
Some of the more important factors include your personality traits like patience, confidence, decisiveness, emotional stability, mental agility, and probably most importantly, your attitude, are also questioned below, be sure to be honest and maybe get your close friends or family to assess you also.
Trading Strategy Personality Test
How much time can you committ to trading?
Trading Strategy Personality Test
How much time can you committ to trading?
Per day, Per week, Per month,
Are they short or long periods of time
Are you good with computers?
List what you can do and when you last learnt a new program
Are you a risk taker?
Do the consequence of risk keep you awake? Or distract you?
If you lost 1 months pay what would your for first 3 responses be?
Are you patient? Can you wait piecefully if your flight is 1 hr late?
What do you believe you are capable of?
How long does it take you to make a decision? Do you need to get a second or third opinion before you make a decision?
How would you rate your mental agility for mathematics and logic decision making?
Are you emotionally stable in a variety of situations? And is your attitude to life consistent?
As long as your answers are honest they are correct, this is all about understanding the emotional environment your trading strategy needs to work in.
Trading Timeline
As long as your answers are honest they are correct, this is all about understanding the emotional environment your trading strategy needs to work in.
Trading Timeline
If you don't know how regularly you want to trade you will be lost when developing you plan. Now we are not making a commitment to how long we will hold a stock for, it's more about how often we can committ time to trade.
Trading Strategy Timeline Test
How long do you plan to trade any stock for
Trading Strategy Timeline Test
How long do you plan to trade any stock for
Day, Week
Month, 6 month, Yearly, Longer
If your not sure you need to expect that you will be checking the status of your stock to your system 5-10 times during the trade's life. So if you pick 1 week, will you be able to check the stock against you strategy, and every other stock in the market, each day?
3 Key Decisions
Now that you have assessed yourself and your time resources it is time to develop your trading plan. So let me simplify this for you. There are three key decisions you need to make when trading, so we will answer these in building your trading strategy:-
- When will you enter a trade?
- How much money will you trade?
- When will you close the trade?
Never picture your trading strategy as a detailed document containing pages and pages of information. Think in the simple terms above and once you have answered the below questions, with some detail your trading strategy is ready for testing then trading .
Personally I find that when writing trading strategies you should have no more than 3 criteria when buying
Trading Strategy - When to enter a trade
Personally I find that when writing trading strategies you should have no more than 3 criteria when buying
1.
2.
3.
Eg: market in up trend, Index in up trend, MACD buy signal for stock for 2 days
Trading Strategy - How much money will you trade
You might have a maximum amount you will ever trade on a stock, but you might need to consider a lower amount if a stock is traded in low quantities, and how much of your total cash you will ever have invested at one time.
Maximum $$ commitment per trade
Maximum % of capital invested at any time? (Be prepared for big corrects, to minimize damage and bennifit from rebound.)
Trading Strategy - When will you close a trade
Don't be mistaken, this is the most important part. Personally I prefer to use a single signal either a trailing stop sell signal for long trades or a MACD sell signal for shorter trades.
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Keep It Simple
Your trading strategy needs to be simple as it makes it easier for you to follow and use correctly.
When you think about it, the time tested trading rules like cutting your losses, letting your profits run, follow the trend are based on very simple concepts.
For example, after you enter a trade, if the price moves to your pre-defined exit point, then close the trade. You can't think twice or check something else.
Trading Strategy - Summary Questions
Is the trading plan easy to execute?
Am i comfortable with the trading plan?
Can i stick to my strategy?
If you have answered yes four times, it's time to progress, if not, review your plan.
To remember when trading, the majority of actions required for success are counter intuitive and if you are not accepting of this, you will make poor trading decisions. Also I again say keep the plan simple there are plenty of complicated things to worry about, don't add others. Software now available with excellent technical indicators be sure to focus on what you are using and don't get lost in the functions.
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