A trader without a trading strategy (TS) is like a driver with no map. Whatever your strategy is, it will help you deal with the chaos happening in the markets. This article will tell you what a trading strategy is and why you need to have it. You will find out why a well-thought-out trading strategy will help you make more stable profits and protect you from losing your deposit. But first things first.
The market lives in chaos
Let’s assume that you are quite familiar with a pair of indicators. You can recognize a number of candlestick patterns, and you can spot when some technical analysis figure is forming on the chart. Using this information, you will most likely succeed in trading, but how long will the luck stay on your side? After all, it is not enough to simply follow market reviews and trading recommendations, even if both are pretty accurate.
The market is unpredictable. Very often, even an experienced trader cannot understand what caused the market to rise or fall and where the price will go next.
Until you test your strategy in practice, you won’t get the desired result. Therefore, to make trading a stable source of income, it is crucial to apply a systematic approach.
What is a trading strategy?
A trading strategy is a set of rules that specifies a trader’s entry, exit points, and money management criteria for every trade. It takes into account all the nuances, and a trader has to follow all the steps strictly. It doesn’t matter how much time you allocate to stay in the market. Without a trading strategy, you won’t achieve any lasting success.
As we have already mentioned, a trading strategy describes the criteria to follow when opening a trade. And indicators, candlestick patterns and technical analysis figures will be of no use if you cannot apply them correctly in your trading.
If a trader enters the market every time he receives a signal from an indicator or sees a candlestick pattern on the chart, the result of the trade is likely to be disappointing. We are not saying that these signals don’t work, but you shouldn’t expect a stable positive outcome, especially if a trader uses leverage. It’s very easy to lose your cool when the market starts moving in the wrong direction, and it can all go to waste.
That’s exactly why a trader needs a clear trading strategy that answers the following questions:
- What are the criteria for opening a trade?
- What percentage of your capital do you risk in this trade?
- What is the risk/reward ratio in a trade?
These are the questions you should be guided by when choosing a trading strategy. And here’s another thing. Yes, you can find many examples of trading strategies on the Internet. But whichever strategy you choose, you need to adjust it for yourself. It will take some time to create/set up a strategy, but you have to do it.
In practice, you will see which indicators provide stronger signals, which ones give false signals, which chart pattern works best, and which trading session offers good entry points.
Key components of a trading strategy
So, you’ve decided to create a trading strategy. Let’s take a closer look at its main components.
First, it must be rational. And it’s the main criteria.
Second, you need to choose your trading instruments. It’s best to use any of the major currency pairs, as they work well with technical analysis and have good volatility. Take your time when making up your mind and selecting a currency pair as it will become your work tool.
Third, we choose a timeframe and trading time (trading session). You can trade in the long term, medium term, or engage in day trading. Which approach to choose – is up to you and will depend on your personality: your temperament, psychological stability, tolerance to stress, etc. The size of your deposit and your financial goals play an important role too.
If you prefer long-term trading, opt for older time frames. For scalping, it is best to use smaller time intervals, such as M1 and M5, M15.
Your choice of technical indicators will also depend on your trading style. For example, MACD and moving averages are good for long-term trading and RSI for scalping.
Fourth, we describe the entry criteria, i.e., what signal will be your cue to open a trade. Exit rules or the conditions when the trade needs to be closed also need to be specified at this stage. Do not forget to include your stop loss and take profit values.
The fifth step of creating a trading strategy covers trading volume. Calculate the volume based on your deposit. It will help you limit your risks. Account for potential drawdown too. To protect your deposit from draining, it’s worth thinking about the maximum number of open transactions you can afford at a time.
Did you know that you can earn extra money on trading volumes? AMarkets offers its clients a cashback program, i.e., it returns part of the spread from your transactions. The cashback rate depends on your trading volume. This is also worth considering.
Once you’ve created your trading strategy, test it on a demo account first. Pay attention to how the price behaves on the chart. We recommend testing your strategy on different instruments and different time frames to get a more objective and complete assessment.
It is important to test how your strategy works during a drawdown as well. Wait for the maximum movement in the opposite direction in order to understand whether your deposit can withstand the drawdown.
Remember that creating a trading strategy is a rather complicated and time-consuming process. Not every strategy works out right away. But don’t be discouraged. It’ll just take time to polish and adjust it. Start with simple strategies and work your way up to more complex ones. We are confident that in the end, you will succeed and create a profitable trading strategy that will suit you 100%.
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