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Steps to Creating a Trading Strategy Part 1

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Any trader, professional or amateur, must have a trading strategy. Traders who enter and exit the financial markets arbitrarily, without ever developing a set of conditions and rules for doing so, are unlikely to be successful. 

A trading strategy is a set of predefined rules that govern when and how a trader enters and exits a financial market. 

Trading strategies are heavily influenced by the individual trader, their trading profile, style, risk tolerance, and available capital. There is no such thing as a “holy grail” trading strategy that is suitable and successful for every trader. 

The prospect of developing your own trading strategy may appear intimidating.

The good news is that developing a trading strategy is actually quite simple. The bad news is that making one that is profitable is much more difficult.

1) Choose Market appropriate for you 

The first step is to decide on a financial market in which to trade. 

Although this may appear to be an obvious first step, it is by no means insignificant. Trading strategies will be determined by the market on which they are traded. What works in the commodity market may or may not work in the stock market. 

If you haven’t already done so, once you’ve decided on your target market, make sure you thoroughly educate yourself on it.

2) Choose Style you are comfortable in 

Following that, you must decide on your trading style. This is largely determined by the time frame on which you wish to trade. 

Are you content to spend all day in front of your trading terminal, entering and exiting multiple trades throughout the session? If this is the case, scalping could be a good fit. 

If you only intend to trade part-time to accommodate other commitments, swing trading may be a better fit for you. 

When developing a trading strategy, consider how much time you intend to devote to trading. Scalpers trade in large volumes every day, constantly entering and exiting the market in search of a few pips per trade.

Swing traders, on the other hand, will hold positions for days, weeks, or even months at a time. 

This is something that varies greatly depending on the trader; there is no “best” trading style that applies to everyone.

3) Decide on the type of analysis

What kind of analysis will your trading strategy employ? Fundamental or technical? Or perhaps a combination of the two?

Fundamental analysis is the practise of determining the intrinsic value of an asset based on micro and macroeconomic factors. Fundamental analysis of a Forex currency pair, for example, could entail assessing the health of two countries’ economies and examining their central banks’ monetary policies to determine which direction those currencies will move in. 

Technical analysts believe that every available piece of information is already reflected in an asset’s price. They believe that historical prices can predict how prices will behave in the future.

The most successful trading strategies will typically employ a combination of the two. Even technical traders will avoid trading around certain economic events or announcements due to the impact on the market, whereas others may flock to the markets during these times. An economic calendar is a useful tool for keeping track of upcoming economic announcements.