How to Develop Your Trading Strategy
There is a huge variety of trading strategies out there that you can find in books and courses. They will help you to discover and apply the right strategies, as well as find the ones that work for you. Many traders and investors spend a considerable amount of money on them.
Don’t worry, we are here to let you know how to develop a successful trading strategy.
A Trading Strategy for Each Trader
First of all, to create your strategy you need to define certain details. One of those many details is defining what you want to be: a day trader, swing trader, or an investor. Some other details depend on the timeframe you will trade on. Finally, you need to define what you will trade – stocks, options, futures crypto. After defining all this, you can move on to creating a strategy.
The first step to develop your trading strategy is to access charts with the time frame you are trading on. And of course, you will also need an inquisitive and objective mind, and a piece of paper to write down your ideas.
After doing this, organize your ideas so that you can turn them into a strategy.
Your trading strategy should focus and be decided on these factors:
- The direction of the asset in the market – this means to identify if the asset is cheap, expensive, or has a fair value.
- Determine what the entry price will be. After that, deciding what the exit price will be – if there is an exit price, of course.
- If an asset is reasonably priced and you hold a position in it, decide if you want to exit that position.
- The price range in which you want to make the trade.
- The quantity or the amount of capital that you want to trade.
Additionally, your trading strategy should answer some pretty important questions. The first question it needs to answer is, “what are the best conditions to enter the market?”. The second question is: “what are the best conditions to exit the market?”. The last question should be where your stop losses and take profit are.
In summary, your strategy must define an entry, a profit target, and a stop loss.
Steps for Developing Your Trading Strategy
There are several other things you need to know to develop a successful trading strategy.
- Form your market ideology: you must have an idea of how the market works in general.
- Choose a market for your trading strategy. As we mentioned above, you have to choose which is going to be your market. Your options to trade are stocks, options, futures, forex, crypto, or commodities.
- Choose a trading time frame.
- Choose a tool to determine the trend. You must have access to charts that reflect the time frame in which you want to trade. Thus, you must decide which tool is better to help you judge the market context. Also, you can use technical indicators like moving averages.
- Define what your entry trigger will be.
- Define what your exit trigger will be.
- Define what you are going to risk.
- Write down your own trading rules. Having a written trading plan can help you to keep your consistency.
- Backtest your trading strategy. You will have to look at the trades you have made one by one. This way, you can learn from your past mistakes and improve your current strategy.
- Always plan how to improve your trading strategy. Remember that trading strategies are not static. They have their own life, and they must be improved because the market is continually changing.
In conclusion, you can create your trading strategy and be successful with it. But you need to be methodic and constant. Also, you need to follow the steps we gave you and answer the questions we asked.
If your strategy answers those questions and you are sure that you have followed our recommendations, we are confident that you’ll succeed. Your first strategy won’t necessarily be as profitable as you desire, but that doesn’t mean that you have failed. Keep in mind that you have to always seek for improving your strategy, and testing it will help you to do it.
Remember, you need to try different indicators until you find the one you like the most.