To win in the financial markets, in addition to managing your emotions, you need to have a trading strategy . This is the basic element. But what is a good trading strategy?
Definition of trading strategy
A trading strategy is a course of action that you must follow to the letter to achieve successful trading. This action plan must be applied to all of your trades. From the moment you deviate from your strategy you give way to improvisation which always leads to the total loss of your capital.
In trading, the strategy must have a long term perspective. We do not judge a strategy over a few trades, or even over a week, but over several months. The objective is to maximize your performance according to a given risk.
A trading strategy defines several elements
– Rules for taking a position in trading : These are the technical elements giving you your buy / sell signals
– Rules for exiting a position : These are the elements allowing you to set your objectives or cut your trade in the event of a reversal of the market
– Money management rules : These are the elements related to risk management ( placement of your stop loss , position size …)
– Products traded : It is the choice of markets and assets that you want to trade
– Objectives : Define realistic profit goals in your trading(which induces the choice of the size of the trading account: see What capital to trade? ) but also define a maximum level of loss of his savings.
A winning trading strategy isn’t for everyone
Newbie traders often mistakenly believe that there are miracle trading strategies out there that almost always pay off. This is why they often seek to copy the strategies of the best traders. At first glance this seems like a good idea, why a strategy that works with one trader could not be successfully applied by others? However, in reality, if you give another trader a winning trading strategy, they will lose. There are many reasons for the impossibility of copying a trading strategy :
– Unit of time used : A strategy that works on a daily basis does not necessarily work on the shortest term and vice versa (see Trading: Which unit of time to choose?)
– Psychology of the trader : Each trader has his preferences, his own profile. Some, for example, are more comfortable with scalping and others with swing trading. Applying a strategy that is not in line with his investor profile is impossible in the long term. You will always be tempted at some point to deviate from the original trading strategy.
– Money management : Risk management is very personal, it depends on psychological factors (risk aversion, resistance to stress, emotions) but also and above all on the experience acquired in trading (placement of stops, movement of stops, taking of anticipated benefits …). All this cannot be learned, we only acquire it over time by dint of
– Confidence : Here is another element that cannot be acquired. I am not talking about self-confidence, but confidence in one’s trading strategy. If you have created it and it works well in the long run, the loss phases (which are part of trading) will not scare you. On the other hand, a trader who applies the strategy of another will start to doubt at each phase of loss. He will end up doubting the signals given to him.
– Product processed : A strategy that works on a specific asset does not necessarily work on all the other assets.
All of these things mean that you cannot win by using another trader’s strategy. You have to create your own strategy. This doesn’t mean that you can’t take inspiration from other traders’ trading strategies, but you have to add things that are unique to you. A good trading strategy is personal.
How to establish your own trading strategy?
A trading strategy has no limits and is unique to everyone. This is why we say that there are as many strategies as there are traders. It is up to you to choose the elements that will compose it. You have surely noticed it on the net, the trading tools, this is not what is lacking. Faced with this mass of information, the novice trader ends up getting lost, not knowing where to start. We end up with traders who test thousands of indicators, without knowing how they work, and in the end, this does not lead to the development of a trading strategy.
To build a good trading strategy, you must first start by learning the basics of technical analysis, namely: and chartist figures. Once you have mastered these elements, you can start to take an interest in technical indicators but don’t get lost, focus on the basics (moving averages, RSI, Bollinger bands …). Keep it simple in your trading!
In the end, you will realize through dialogue on the forums that most traders use pretty much the same trading tools. What varies is how these tools are used, the products processed and the risk management made by the trader. Very often, it is risk management that makes a winning strategy or not. Risk management is learned with experience. This is why there are thousands of winning strategies. The hardest part is not to find one, but to apply it rigorously over the long term.
I’m not going to lie to you, finding a trading strategy takes work and most importantly a lot of time. If you hope to gain quickly in the financial markets, then move on (it will prevent you from losing your savings).
To train in trading, you need to open a demo account. This is where it all happens. Only once you have a well-defined trading strategy can you go for real.
A good trading strategy is your own strategy.