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12.12.2023

How to build a trading strategy

In today's post we will talk about building a trading strategy. Every trader knows that you cannot trade profitably without it. A trading strategy must consist of several essential elements that make it fully complete. It then allows you to maintain consistency and discipline and be profitable in the long term. 

 

Elements of a trading strategy

 

A good trading strategy should have several obligatory elements, without which it cannot be said to be complete. It then allows you to move freely in the market without unnecessarily hurting your equity curve. In addition, a trading strategy develops consistency and makes trading a more structured activity. Let's move on to discuss the elements of a trading strategy:

 

Signal generator - this is a technical indicator or analysis that allows us to make buy and sell decisions. In other words, it is a 'trigger' to enter a position. It is important not to use a thousand possible solutions but to choose a method that we fully understand. The more transparent the signals are to us, the better.

 

Risk management - this stage takes place before the trade is taken. Our strategy must speak clearly about the risk we are entering the market with even before taking any trades. This is also where the total account risk or drawdown can be determined. Our programmes help here to maintain risk discipline - you can risk a maximum, daily, of 5% of your total capital. The overall account risk is generally 10%. It is therefore easy to calculate how much risk you should take in order not to reach your daily loss limit in five or two moves.

 

Open position management - it is not a necessity, but it would be good to know how you handle your open position. Plan for yourself whether you stick rigidly to the SL and TP, or whether you move the SL on the break even as soon as it makes some profit. It's very important to handle every trade in exactly the same way and not subject it to randomness in your choices. This stage leaves you with the most freedom of the whole trading process. 

 

Profit policy - do you know how you want to account for your profits? Do you prefer their accumulation or regular withdrawals? Remember not to risk your profits! This is good advice! Profits are part of your account that provides you with a certain 'buffer' between you and your initial capital. Do not use profits to increase the size of your trades! If you already want to do so when withdrawing profits leave yourself some of them in your account.

 

The mental side of trading - take care of your mental health! Your plan should include all sorts of ups and downs. With a series of losses that you feel you don't control, take a break of a few days from trading. Also plan a calming/focusing activity immediately before trading. Sit down with a clear head and refrain from trading when you are having an emotionally worse day. Plan all these elements for yourself even before you start trading the markets.