Ask any trader who makes money consistently in the financial markets and they will tell you that you either follow a methodically written trading strategy or run a high risk of failure.There is an old saying in business and trading, “if you fail to plan, then you are planning to fail”.It takes time, effort, and research to develop a trading methodology or approach that works in the financial markets. Creating a detailed trading plan may not guarantee you automatic success but will eliminate one major roadblock - planning to fail!If your first trading strategy lacks preparation or uses flawed techniques, your success may take time to come, but it places you in a position to chart your trading course and adjust going forward. At least you can document your trading process and avoid repeating costly mistakes as you learn and develop your trading strategy.In this article we a going to discuss 9 basic considerations when developing your first trading strategy.
Building A Winning Trading Strategy: 9 Basic Considerations
1.Treat Trading as a Business
Trading is a business, and if you want to succeed in it you had better treat it as such and come up with a written business plan or in terms of trading a “trading strategy”.If you do not have a trading strategy when you open a brokerage account and instead, simply read a few articles, buy a charting programme, and then start trading with real money, it will be a recipe for disaster. Your trading strategy should be written and should have clear entry and exit signals that are not subject to change during trading hours. But when the market has closed, your strategy should be subject to re-evaluation. This will help you adapt your plan to different market conditions and adjust it as your market skills and instinct improve.
2.Write Your Own Trading Strategy
You may be tempted to take the easy way out and follow someone else's trading strategy or rely on others to generate trading signals for you, but this cannot guarantee you any significant success in the financial markets. Each trader should chart their trading course by writing their own trading strategy that is tailored to their trading goals, personal trading style and risk tolerance.No two traders are exactly the same which means that no two trading strategies are the same. Therefore, to give yourself the best chance for long-term success, stop using someone else's plan and write your own trading strategy that reflects your unique personality, trading characteristics and trading goals.
3.Assess Your Skill to Build Confidence
The best way to test your skills, develop a market instinct and build confidence that will work in a live trading environment is through paper trading with a demo trading account. Paper trading allows you to apply and test the techniques you are learning in a risk-free environment.You can develop a more aggressive trading plan, test it, and see how you fare without wiping yourself out. You can apply the conclusions of your fundamental and technical analysis and assess your performance.But remember, it is important to stick to your trading strategy; to trade as if your money was in the market. This way you will be able to better assess your skill as a trader and know that any confidence is well-founded.
4.Never Force Yourself to Trade
Mental preparation is everything when it comes to winning in the financial markets. You should learn to assess how you feel and know whether you are up to the trading challenge ahead.Take the day off if you are not psychologically and emotionally ready for the market. The markets are not going anywhere and will be there the next day for you.It is almost a guarantee that you will make mistakes when you are distracted, angry, or otherwise preoccupied, and mistakes in the market can be extremely expensive.It is also important that you avoid chasing losses. Some days you will win, others you may lose. Remove emotion by sticking to the strategy or remove yourself from the market and recuperate.
5.Respect Risk
Understanding risk and having a way to manage it in your portfolio is crucial to succeeding in the market.It is common for new traders to not totally understand their emotional and psychological relationship with risk. Therefore, taking some time to be introspective, exploring, and understanding your risk tolerance is paramount.Depending on your risk tolerance level and trading style, you should clearly define how much of your trading capital you should risk on a trading day. This should be between 1% and 5% of your total trading capital. If you lose that amount, stay out of the market, take a break, and prepare for another day.
6.Set Realistic Trading Goals
Set realistic daily, weekly, monthly, and annual goals with specific profit targets and risk-reward ratios either in a dollar amount or portfolio percentage.If you want to have a winning trading strategy, only take trades which offer potential profit that is at least three times more than the risk. Your goal should be to make $15 per trade in profit if your stop-loss is set at $5 per trade.
7.Stay Informed
Do your research and know what is going on around the world before the markets open.Check if overseas markets and indices like Dow Jones or S&P 500 are up or down. Check the economic calendar and know what earnings or economic reports are due to be published.Early in your journey, trading ahead of important economic data will involve significant risk because you are likely to be less sure of how the markets may react. It is therefore wise to wait until such reports are released rather than plunging yourself into the avoidable risk that may result from volatility as the markets react to these reports.
8.Keep Excellent Records
You should develop a way to document your trading history by keeping excellent records.Experienced and successful traders do this via a trading journal. When you win or lose a trade, try to know why and how. Record the lessons you have learned and the factors and signals that led you to take the trade. This will help you avoid repeating unnecessary mistakes.
9.Analyse Performance and Soar
There will always be winning and losing trades. Taking the time to analyse your performance after every trading day is a great way to learn your lessons and write an important conclusion in your trading journal.Add up your profits or losses and check whether you are still on track or if you are diverging from your strategy. That way, you will develop a trading strategy that wins in the long run.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when trading in CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
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