Trading is all about the strategy. A good strategy is the key that opens the door to the limitless riches in trading. Let’s look at the elements of a winning trading strategy and give you the key to open that door.
1. Building your strategy
Before you start you need to tailor your strategy. There are a lot of successful strategies out there, but none are as effective for you as the one that you have honed yourself. It is not uncommon to apply the principles of another person’s strategy to your own trading, but even trading the same positions, your results will differ because the strategy is tailored to them, not you. They will see the triggers form at the best time and open the position more advantageously. They will recognize the close at a slightly better time as well. A strategy geared to your own skills will maximize your abilities and make your trading better.
2. Testing
This is part of the building process. It is best to practice your trading in a relatively stress free environment, like a demo account. Then you can work it through various scenarios and have a wealth of success for when you go live. A big part of the testing process is understanding your thought processes, and documenting the reasons for the trade. As much as possible, this should be put into the formal strategy. In a real trading environment where fear and greed are constantly urging you to make a move, having a concrete rule will allow you to cut off emotional trading.
3. Analyzing your results
If at first you don’t succeed, try and try again. But before you try, figure out why you failed. Analyzing your results will allow you to tweak the underlying strategy for better results. It will allow you to see your faults and tendencies. Analyze your failed positions as much as possible so that you can figure out how to minimize these flaws and build avoidance processes into your strategy.
4. Risk vs benefit
With good testing and analysis you will see whether a particular strategy is worth the risk. Risk in this case is how often the strategy picks a profitable position, with a high risk position being one that has a low chance of picking the direction of the market. Ideally you want to use the low risk strategy, because this will bring profits. On the other side, you also want a high reward scenario to justify the risk. For the right level of reward you might tolerate a higher risk, but it should all come down to numbers.
When analyzing this element you need to look at the percentage of times the positions are profitable and the relative profit vs the relative loss. To give a practical example, if this strategy makes a profit 50% of the time, with the average loss being 50 pips relative to an average gain of 30 pips, this is a strategy that provides losses over the long term. But, if the situation was reversed and the profit was 50 pips to a 30 pip loss, this strategy will gain an average of 20 pips per trade and a long term gain. This simplifies the way to control risk vs reward.
5. Discipline
To use a sporting analogy, this is where training becomes execution. Few are made with the temperament to coldly trade and stick to their strategy, so you will often find that training yourself in the cauldron of trading will be the best way to acquire the necessary skills. But once this is paired with your strong trading strategy, the success and money will follow.
The key is simple. Take your refined strategy and execute. Repeat until you’re rich.
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