Most new traders begin by studying other traders’ trading tactics. This is how I started my trading profession as well. But, as many traders wonder, where do I begin with my trading strategy?
The good news is that putting together your first trading strategy is simple.
The bad news is that developing a profitable trading strategy is difficult.
Begin by setting the proper expectations. It’s simple to create a trading strategy. You can do it if you learn a few trading tools and indicators.
However, expecting your first trading method to make you wealthy is unrealistic.
It isn’t easy to find a trading edge that is objective. Furthermore, you’ll see that profitable trading extends beyond your trading approach.
So, why should you continue to develop your trading strategy? Why not copy a successful trader’s trading strategy?
Traders may share their methods and tools. On the other hand, no trader can or will guarantee your gains. Every trader is unique. As a result, you can only benefit from a one-of-a-kind and personalized set of trading tools.
Developing your trading technique is the smartest and most long-term method.
To create your first trading strategy, follow these ten steps:
STEP 1: DEVELOP A MARKET IDEOLOGY
Before you begin developing your trading strategy, you must first understand how the market operates. Above all, you must respond to this question.
Why do you believe you can profit from the stock market?
Read widely to develop your market ideology. Both technical and fundamental analyses are discussed.
Avoid boasts of getting rich rapidly.
Consider supply and demand.
Theories that say people are rational should be questioned.
Your ideology will define every move that follows. So give it the time and attention it requires.
Regardless, I strongly advise you on how to develop a trading strategy to one concept with your first trading strategy.
Keep things as straightforward as possible.
You don’t want to be taken aback by a complicated technique. But on the other hand, a trading strategy with more moving elements is also more difficult to monitor and improve.
STEP 2: SELECT A MARKET FOR YOUR TRADING PLAN.
Forex? Stocks? Options? Futures?
Understand what you’re buying and selling with a currency quote if you decide to trade forex. First, make sure you understand the various forex broker models. Then, learn how to calculate the margin.
If you choose to trade stocks, you must understand what a share is. For example, you should be able to distinguish between a blue-chip and penny stock.
The point is that each market has a lot to teach you. However, you won’t be able to begin learning in-depth until you’ve decided on a trading market.
Although I advise intraday traders to trade futures, the decision is ultimately yours. The only stipulation is that you must be familiar with the market you intend to trade.
STEP 3: SELECT A TRADING PERIOD
It isn’t easy to choose a trading time frame before any trading experience. You won’t know whether you’re better suited to everyday swing trading or fast scalping.
As a result, you should begin by considering your situation. Intraday trading is a good option if you have the leisure to follow the market for long periods.
When you trade short time frames, you get immediate feedback, which helps you learn faster. However, even if you use larger timeframes, the knowledge you get from intraday price action will be beneficial.
Of course, if you can’t keep an eye on the market for long periods, start with end-of-day charts. You can study enough to decide if swing trading is right for you if you put in the work.
STEP 4: SELECT A TOOL FOR ESTIMATING THE TREND (OR LACK OF)
When you notice a Pin Bar, you don’t trade. When the market rises, you enter a trade using a bullish Pin Bar as a trigger.
When you see a Gimmee Bar, you don’t trade. Instead, you trade when you believe the market is trending sideways, and you enter the market with a Gimmee Bar.
Choose a tool to assist you in judging the market context. (i.e., if it’s trending or not, whether it’s going up or down)
Price action tools such as swing pivots and trend lines are available. In addition, technical indicators such as moving averages and MACD can also be used.
STEP 5: DEFINE YOUR ENTRY TRIGGER
You’ll need an objective entry trigger even if the market is at the right place. It will enable you to enter the market with confidence.
Bar and candlestick patterns can both be used as triggers. Oscillators like the RSI and stochastics are other useful options if you prefer indicators.
STEP 6: DEVELOP AN EXIT TRIGGER PLAN
When things go bad, you must have a plan to get out. The market can turn against you, causing you to lose money beyond your wildest dreams. A stop-loss order is essential. You should also consider how you will escape if things go your way. The market will not always work in your favor. As a result, you must know when to take profits.
STEP 7: DEFINE YOUR RISK IN
Once you’ve figured out your entry and exit regulations, you may focus on risk mitigation.
The most common method is to use position sizing. Your position size defines how much money you put on the line for a specific trading setting.
If you double the size of your stake, you’ll also increase the risk. So keep an eye on the size of your position.
STEP 8: MAKE A LIST OF YOUR TRADING RULES.
Your trading technique is straightforward at this point. You may be able to memorize the trade regulations. You must, however, layout your trading guidelines.
A written trading plan is an effective way to maintain discipline and consistency.
It also keeps track of your trading strategies. So when you’re trying to improve it, it’ll come in handy.
STEP 9: PUT YOUR TRADING STRATEGY TO THE TEST
You may now backtest the approach using your written rules.
Backtesting a discretionary trading strategy can be a time-consuming task. You must manually repeat market price action and record your trades.
This stage can be accelerated if you have a mechanical trading approach and a coding experience.
However, going through the deals one by one is an excellent approach to honing your market intuition. This might also assist you in coming up with ideas to improve your trading approach.
STEP 10: MAKE A PLAN FOR IMPROVING YOUR TRADING STRATEGY.
Your initial trading approach will be unsuccessful. But that’s fine. Your trading strategy is a dynamic entity. It’s not a static situation.
Your trading approach will improve as your experience and understanding expand.
But let’s not take any chances. Instead, plan how you’ll get feedback on your trading strategy and improve it.
Your trading plan should be put to the test in advance. Make a point of taking detailed notes on your market observations. Keep track of your trades and make sure your chart photos are good.
Make minor adjustments to your trading approach.
Remember that your goal with this final step (which could take a long time) is to achieve positive anticipation with each deal. For each deal, there are no positive profits.
Allow statistics to do the heavy lifting for you. Don’t try to impose your will on the marketplace.
If you follow the ten stages above, you’ll have a basic trading strategy.
This isn’t the Holy Grail of strategy. However, it is shaped by your trading technique and your experience.
Continue to work on it, and you’ll have a chance to succeed.