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11 steps to creating a successful trading strategy


It’s a well known fact that about 80-95% of traders lose money. Trading without a defined plan is a major contributor. We’ve broken down a typical plan from an experienced trader for you to use to help develop your trading strategy. If you find it useful, don’t forget to share it with your friends.

A clearly defined trading strategy

Having a clearly defined plan alone is not going to make us profitable in the markets but it is one piece of the puzzle to becoming a successful trader.  If you have a clearly defined trading strategy and the discipline to follow that plan, then you are more likely to succeed in trading.

You may think that developing your own strategy is a waste of time, as there are plenty of strategies that can be found or bought elsewhere. However, when you use someone else’s strategy it’s likely you will not always trade it correctly or try to modify it.  This is because the trader designing the strategy is unlikely to have known you and therefore would not have tailored it to your specific needs.  A strategy does not need to be totally original and developing a strategy doesn’t involve searching for that ‘special, hidden gem that no one else knows about’.

Here are eleven steps that will enable you to create your own strategies and, hopefully, lead you to become a profitable trader.

1.   Know yourself

Make a list of your strengths and weaknesses:

a.     Computing skills are particularly useful as most trading these days can be executed online and some trading software allows the construction of automated trading programs.

b.     How much capital do you have to devote to trading and is it enough?  If you don’t have sufficient trading capital you will not be able to use a suitable position size and therefore will be risking too much of your available capital on each trade.

c.     What other skills do you have that can be useful to your trading strategy? Do you have good maths skills and can you think outside of the box? Can you notice things most other people miss?

2.   Become an enthusiatic learner

Constantly learn about the markets and become an enthusiast of economic news even if you are purely a technical trader. Trading is an ongoing learning process and you must research in order to develop your strategy and to stay informed with the news that can move the markets.

3.   Set objectives within your trading strategy

These are some of the questions you need to ask yourself:

a.     How much money do I need to live off every year?

b.     Do I need to live off the profits of trading or do I have other sources of income? What returns from trading do I expect?

c.     How much of my trading capital am I willing to risk in order to achieve my goals?

d.     What level of drawdown can I accommodate?

4.   Decide what timeframe will work best

The timeframe that you will be using for your trading strategy will depend on how much time you can dedicate to trading; if you are not in a position to be checking trades constantly, you may want to consider a longer timeframe; whereas if you can spend more time checking trades then a shorter time frame may suit you. For trading on longer time frames you will need to have more capital than if you are trading short term as the size of your stops will need to be large to take the intraday swings into consideration.

5.   Watch for patterns

Analyse how the price moves in the selected timeframe and notice if there are common price moves that could be profitable. Also why the market moves, how it does and when it does.

6.   Test entry, stop loss and take profit conditions

The entry conditions, stop loss and take profit levels all need to be tested separately.  For example, if you are testing your entries and checking your trades just once a day, you will enter a trade when your entry conditions are met and not set a stop loss or profit target. You should check the trade the next day and close it. Take note of the result of the trade, whether it made a profit or loss and by how much. After repeating this numerous times you can determine whether your entry is reliable.

7.     Determine expectancy

Expectancy is how much capital your trading strategy will make over a large number of trades as expectancy is highly reliant on your exits.  You need to analyse your trades to determine whether most of our expectancy comes from small or big winning trades.

8.   Set position size

If you get your position sizing wrong, you can blow your account quickly, even with a strategy and high expectancy. You should be risking 1-2% of your account per trade. The amount you risk depends on your stop loss and position size, so make sure you get it right.

9.  Back test your trading strategy

This involves testing on historical data. From the results of the back test, you can develop an idea of just how well your strategy would have worked.

10.  Front test your trading strategy

This involves testing on present day data to give you a better understanding of how well your strategy works. Both back and front testing should be carried out on demo accounts.

11.  Continual improvement (without over optimising)

This is very important! Do not continually tweak your strategy to get perfect results (particularly after back testing) and don’t use too many indicators.

These eleven steps should allow you to develop and maintain a trading strategy that is tailored to your own needs and requirements. There’s a very good book written by Van Tharp called Trade Your Way To Financial Freedom that provides more detail into this subject.

Written by Pi De Jonge. Pi is a part-time Technical Analyst at Accendo Markets

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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