- Form your own market ideology
- Select a market for your trading strategy
- Choose a time frame to trade
- Select a tool to determine the trend
- Define your input signal
- Set an objective starting signal
- Define your risk level
- Record the rules of your trading strategy
- Evaluate your trading strategy
- Plan how to improve your trading strategy
There is good news: creating our first trading strategy is easy, but there is also bad news: creating a profitable strategy is difficult.
First, start with the right expectations. Creating a trading system is easy. Only we must learn some technical analysis tools and indicators, and with this we can start with the creation of a strategy. However, it is unrealistic to think that your first strategy will make you a profit . Finding a methodology that offers an objective sale in the market is difficult. Also from that, the trader will realize that profitable trading goes beyond a trading system.
So why should I worry about creating my own strategy for trading the markets? Why not use the strategy of a successful Trader? Many traders can share their trading tools and approaches. But no, you can't guarantee that your approach will pay off. Every trader is different. Therefore, you can only benefit from a unique and personal combination of trading tools.
The best and most sustainable approach is to develop our own trading strategy. Here's a 10-step methodology for creating a custom strategy:
Step 1: Form your own market ideology
Before you start creating your own trading strategy you should develop an idea of how the market works. Most importantly, you need to answer this question. Why do you think you can make money in the markets?
- Form your market ideology by reading extensively on the subject. read as much as you can on fundamental and technical analysis. Avoid anything that promises "get rich quick" and with little effort.
- Think about demand and supply. Challenge theories that claim that people are perfectly rational. His ideology will define each step he follows. Give him the attention deserves.
In any case, there is a rule for newbies: Keep things as simple as possible. In the beginning, a beginner trader should avoid complex strategies that can overwhelm him. Furthermore, a trading strategy with more moving parts is more difficult to manage and to improve.
Step 2: Select a market for your trading strategy
There are many markets in which we can operate Forex, stocks, commodities, cryptocurrencies, all these are markets in which we can apply multiple strategies.
- If you choose to trade the Forex market, understand what you are buying and selling when trading with a currency pair. Make sure you are aware of the different models of Forex brokers. It is important that you know things like how the trading margin is calculated required to open and maintain an open position.
- If you choose to trade stocks, you should know what a stock means and how to trade it. these assets. You should know the difference between a blue chip stock and a penny stock.
The point is that there is a lot to learn about each market. But can't start learning in depth until you choose the market to focus on. The only rule is: You must understand the market you choose to trade.
Step 3: Choose a time frame to trade
Before he gains any experience in the market, the Trader must decide on the time frame that he will use in his trading strategy. At first, the person will not know if it is more suitable for scalping trading systems, characterised by fast operations, or for swing trading systems, where the frequency of operations is less but its duration is much greater. Should I trade on the 5 minute time frame or on the daily charts? There is no correct answer to this question. This depends on each one.
Therefore, you can start by considering your circumstances. If you have time to observe the market for extended periods, try intraday trading. When we trade on fast time frames, we get feedback that allows us to shorten learning time. Even if we end up choosing the shorter time frames in the end. long, what we learn from intraday price action will continue to be useful.
Of course, if you can't watch the market for extended periods, start with end-of-day charts. With sustained effort, you can learn enough to decide if swing trading is for you.
Step 4: Select a tool to determine the trend
The context of the market is essential to decide how we are going to operate. We should not simply enter and exit based on technical indicator signals and price action. Therefore, it is necessary to use tools that allow us to establish the conditions of the market, especially if it is in a trend or on the contrary it moves laterally without a clear trend. For example, you should not enter the market simply because a Pinbar candlestick appears. It is recommended to look for opening a position when the market is rising and forming a bullish Pinbar candle that serves as a price action signal to trigger the trade. In the same way, it is not sold immediately just because a Pinbar candlestick forms bass guitarist.
It is recommended to look for the opening of a position when the market is down and a bearish Pinbar candlestick is formed that serves as a price action signal to activate the operation. Choose a tool that helps you judge the market context. (i.e. if there is an uptrend or downtrend or if the price oscillates in a defined price range). You can choose price action tools like pivot points and trendlines. You can also use technical indicators like the moving averages, the RSI and the MACD.
Step 5: Define your input signal
Even with the right market context, a trigger or entry signal is needed. This signal will help us enter the market without hesitation. Candlestick patterns, harmonic patterns, and other well known types of price formations (such as Head-Shoulders) are quite useful signals. If you prefer indicators, oscillators like RSI and stochastic oscillator are also good options.
Step 6: Set an objective starting signal
You need to plan how to get out when things go wrong. The market can move against you at any time, causing you losses beyond your imagination. Having a stop-loss is an obligation. You should also plan how to get out when things are not going as planned. The market will not move in our favour forever. So you need to know when to go out and take profits.
Step 7: Define your risk level
Once you have determined your entry and exit rules, you need to work on limiting the risk. Remember that there is no perfect trading strategy. No matter how good one is trading methodology, there will always be losing trades and that is why the trader must control and limit the risk in your operations.
The main way to do this is by using proper position sizing on all trades, based on the size of the account, the level where the stop loss is placed and the proper money management practices. For a given trading signal, the size of your position determines how much money you are putting at risk. If you double your position size, you double your risk. Carefully monitor the size of the assumption.
Step 8: Record the rules of your trading strategy
At this stage, your trading strategy is simple. You might be able to memorize the rules of its methodology. However, it is best to write in detail the rules of our system. Having a written trading plan is a robust method of ensuring discipline and consistency. It also provides a record of your strategy and can be very useful when we want to refine it. As we have already said, no trading system is perfect and the market is constantly changing, So any system must be modified regularly over time to adapt to changes in market conditions.
Step 9: Evaluate your trading strategy using backtesting and other similar tools
With your rules written, you can now test the strategy. This is necessary to see what we can expect from the methodology when it is used to operate under real market conditions.
If you have a discretionary trading strategy, backtesting applications can be an arduous process. For this, you can use price data from the past, repeating the price action, to simulate operations in the market. The operations carried out must be recorded manually and the results obtained must be analyzed to measure the possible return that the strategy can generate.
Step 10: Plan how to improve your trading strategy
Your first trading strategy will probably not be profitable. But it's ok and so it’s part of the learning process. However, their trading methodology is a living thing. It is not static and with experience it will gradually improve until you can detect its own errors such as:
- Never leave to chance
- Plan how you will get proper feedback and improve your trading strategy.
- Avoid drastic changes in your trading strategy.
It is also highly recommended to perform WalkForward analysis and optimization tests of your strategy. Study the results carefully and take careful notes of your market observations. Record your trades carefully and keep your charts in order. For this final step (which could take forever), remember that your goal is to achieve a positive expectation with each transaction and in the strategy at a general level. Don't focus only on the profits you can make on all trades, as this can lead you to take too much risk simply to avoid losing trades.
- Follow the 10 steps above and at the end you should have a basic trading strategy.
- With this, you will not get the Holy Grail, no system can offer that. But what you will get is a methodology created based on your experience and according to your style of negotiation.
- Continually work on a strategy that matches your personality and you have a chance to succeed.
This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.