There are numerous trading strategies, and some newcomers to the market end up spending hundreds or even thousands of dollars on workshops and courses in search of the perfect method. Yet, while trading techniques typically fall into a subsection of styles, your personal trading strategy should be unique to you.
Creating a good trading strategy entails researching both yourself and the market, and your trading plan, with its very specific rules, is at the heart of this.
Let’s look at the process of formalizing your market approach into a trading plan.
What Exactly is a Trading Plan?
A trading strategy is a detailed set of criteria for entering and leaving transactions, as well as additional information like what assets you will trade and risk management guidelines like stopping trading after x losses.
Some strategies allow for discretion in terms of trading technique, but other restrictions (such as limiting risking a maximum of 2% of capital per trade) should be non-negotiable.
Despite the fact that trading strategies are all about regulations, there are no hard and fast rules for creating one. However, certain data should always be included, such as the size of your risk capital, risk per trade, assets traded, maximum drawdown, personal risk management guidelines, journaling stages, and long-term goals.
A trading plan, as opposed to a trading strategy, describes not only how transactions will be entered and exited, but also how they will fit into the larger picture of your trading.
Treat it Like a Business
If you want to be a professional trader, you must think of trading as a business, not a hobby or even a job.
To begin with, treating it as a pastime implies that there is no genuine commitment to mastering the craft, because it is something you do on the side.
Second, if you’re used to a regular income, considering it a job may lead to frustration.
The reality is that trading is a business with costs and risks. Your goal should be to maximize your company’s chances of survival and hopefully, profitability, by constantly developing and staying ahead of the competition.
Why is a Trading Strategy Necessary?
A trading plan helps you stay on track with the rationale of your trading strategy by ensuring that your decisions are consistent.
Making sound financial decisions in the heat of the moment is more challenging when you don’t have a strategy. Understanding how you will react to certain events ahead of time can bring numerous advantages.
For example, when everything is planned ahead of time and according to the parameters of your trading strategy, it simplifies the trading process. Is the trade not going as planned? No worries.
For trades that aren’t functioning, you should have a clear exit strategy. Is the trade going in your favor? Great. You should determine where you will take profits, whether that is a certain price level or a set of guidelines to follow that signal it is time to exit the position.
A trading plan is also linked to a trading log. If you have exact criteria and follow them precisely, you may be able to determine why some trades perform well while others do not, thereby boosting your edge. Better still, you will practice disciplined trading.
Knowing your advantage well enough to stick to your trading plan reduces negative emotions and cognitive biases.
You are bound to see improved trading results if you combine a good trading technique with a sound trading plan, a journal, and the discipline to consistently execute and monitor your trades.
What should a Trading Plan Include?
Because no two traders are the same, there is no such thing as a conventional trading plan. Trading strategies and risk tolerance both play an important influence on how each individual approaches the markets.
Creating Your Competitive Advantage
Market volatility can be beneficial to profits—but only if you’re on the right side. As a result, recognizing your edge, where it comes from, and how it works, is the first step in developing a strong trading strategy.
Preparations for Trading
Marking out critical support and resistance levels, establishing alerts, and noting the times of potentially significant events on the financial calendar, should all be on your to-do list, depending on your trading approach.
Entrance and Exit Strategies
The bread and butter of your trading strategy are what gets you in and out of the market. Trading patterns can never be accurate, but you should know what signals to watch for.
Some traders place greater attention on exits than on entry, arguing that a skilled trader may exit even the worst-timed trade with a minor loss or even a win.
Determine Your Risk
Each trade should have a maximum loss amount before it is invalidated and entirely liquidated on any given trading day (typically 2% of capital).
You may also establish a maximum risk parameter to limit how much exposure your portfolio is exposed to, which is very useful when trading across several asset classes.
Consider correlations, as two longs in the same asset class could effectively double your position size.
When to Turn Out the Lights
If you are furious, distracted, or preoccupied, your trading strategy is effectively null and void. This is why it is critical to include it in your trading plan before it occurs. This is more of a problem for discretionary traders, but algorithmic traders can still be affected because they must determine whether to turn a trading algorithm on or off.
Preparedness Plans
What will you do if the internet goes down while you are still looking for work? What if your computer freezes just before you’re about to enter a transaction and you’re not sure if you set a stop loss or not?
Skilled traders always have a backup plan, even if it is as simple as entering into their account via their phone to terminate any open positions until their equipment troubles are resolved.
Record-keeping
Skilled traders keep meticulous records as well. There are numerous different paths you may take with this, and it all relies on your trading style. But, keeping a record of the day, time, asset, direction (long/short), and outcome of the transaction (particularly with charts) might provide insights into trends of your trading system or even your personal behavior over time.
Examining Performance
You can go into the how and why of the trades if you’ve kept solid records and have a large sample size. It can be useful for avoiding blunders, but it can also provide insights into how to fine-tune your trading strategy on occasion.
How Do You Stick to Your Trading Strategy?
Novice traders frequently complain about how tough it is to keep to their trading plan. This is due to a variety of factors. Frequently, it is simply because they are constantly changing based on the most recent indicator they read about, neglecting to maintain consistency and test their method over time.
A lack of clearly defined trade regulations might also be an issue. To prevent overcomplicating matters, it is best for both amateurs and pros to keep their trading tactics as simple as possible. Trade plans that are not properly stated are difficult to implement and simple to abandon. Such a trading strategy may result in an overthinking propensity and analytical paralysis.
In contrast, a clearly specified plan can be implemented more efficiently. The procedure becomes more approachable. Even when a trading plan has been thoroughly outlined, new traders report having difficulties sticking to it. That’s because it becomes a matter of self-control and discipline.
Ironically, disciplined people often fail to stick to a trading plan because they squander essential energy in other areas of their lives. According to some studies, disciplined people like certainty, yet everyone who has spent even a short time in the market knows that they are far from sure.
As a result, traders should embrace unpredictability and find comfort in their trading rules.
Recognizing Your Strategy
Understanding where your edge comes from, how it works, and how to keep excessive risk under control is what distinguishes the wheat from the chaff. By focusing on your trading plan, you can avoid the unneeded stress of worrying about the outcome of any particular trade, instead focusing on method, execution, and long-term results.
Having a small amount to lose, being rested, and being able to concentrate will also assist you in developing the correct mindset of a winning trader. Trading as a game can sometimes assist traders to avoid trading their PnL, and instead focus on one thing: winning.
Trading Strategy, Why it Matters
The adage that past performance is no guarantee of future success is a well-known and oft-repeated warning in the world of trading. The reason for this is that trading is a highly complex and dynamic activity, with a wide range of variables that can affect market behavior and outcomes.
In addition to the inherent unpredictability of the market, traders must also contend with their own emotions, biases, and cognitive limitations, which can make it difficult to make rational and informed trading decisions.
A sound trading strategy can help you avoid emotional or impulsive decisions, as well as minimize the impact of market volatility and unforeseen events. By planning your entry and exit points, position size, and risk management strategy ahead of time, you can lower the chance of making expensive mistakes or falling for cognitive biases.
Of course, a trading strategy isn’t a surefire way to make money, and trading profits are never a sure thing. However, a well-designed and consistently applied trading strategy can help you manage risk, stay focused on your objectives, and improve your chances of achieving your trading goals over the long term.
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