If you’re just starting out as a trader, it’s easy to get overwhelmed with all the information out there. One of the things you may be wondering is how to create your own trading strategy.
Firstly, it’s important to understand what a trading strategy is. A trading strategy is a set of rules and guidelines that a trader uses to determine when to enter and exit trades. It’s like a roadmap for your trading journey. Without a strategy, you may end up making impulsive decisions that could lead to big losses.
So, how do you create your own trading strategy? Here are some steps to follow:
Pick an approach
BEFORE you decide which market to focus on it any, understand the difference between Trading and Investing.
Trading and investing are two different approaches to buying and selling assets. Investing involves holding an asset for a long-term period in hopes of earning returns over an extended period. Trading, on the other hand, involves buying and selling assets frequently with the goal of profiting from short-term price movements.
When investing, the focus is on the asset’s fundamentals, such as the company’s financials, industry trends, and long-term growth prospects. The idea is to hold the asset over an extended period of time and earn returns from dividend payments or selling it at a higher price than the purchase price.
Choose your market conditions
Trading, on the other hand, is about analyzing market trends, supply and demand, and other factors to make quick, short-term gains. Traders use technical analysis to identify trends and patterns in price movements and use that information to enter and exit trades at the most opportune times.
Traders need to pick a path first, then decide their strategy.
Next, trading a range, or trading a trend.
Any market, on any timeframe, can only exist in one state at any time. It will be either trending or not-trending.
And again, there are generally only three ways to consistently trade:
- Trading a range from top-to-bottom, or bottom-to-top
- Trading reversion to the mean
- Trading with a trend
Not included above is exploiting market weaknesses, or ‘trading the gap’, but that second one could be seen as a combination of points 2 & 3 above.
Each approach has it’s pros and cons, but it can also be generally accepted that option 3, trading with a trend, offers the ‘safest’ conditions for newer traders. Strong trends tend to behave more consistently, and also offer greater rewards for the same risk, than the other 2 options.
I’ll cover more on that in future articles.
I tend to mix skills articles with technical analysis articles, writing more skills articles when the markets are not offering as many opportunities, such as this week, where it could be said that sitting on our hands would have been beneficial.
When it comes to which asset classes to focus on, it really depends on your personal preference and goals. Some traders prefer to focus on one asset class, such as forex or stocks, while others may trade multiple asset classes. Again, it’s important to do your research and understand the risks and potential rewards of each asset class.
Creating your own trading strategy can be a challenging and rewarding process. By following these steps and putting in the time and effort, you can develop a strategy that works for you and helps you to achieve your trading goals.
To be continued…