Most people think that trading randomly gives them an edge. But you need to understand that most people are not ‘mostly’ profitable. Take a look at what and how we do with a backtested strategy. It’s just a way to show why a Trading Strategy is essential and how it can make it swift for you to ride the markets and be on the right side of Mr Market.
You need to understand why America’s President, Mr Lincoln, quoted that if he got 4 hours to chop a tree, he would use 3 hours to sharpen his axe. So what makes you think that you can go about trading in the market without anylegitimate back-tested strategy.
So the good thing about a trading strategy is – that you can develop it. On the contrary, the tough thing is to ensure that it’s profitable. Also, you should keep in mind that you are not making a trading strategy to get rich quick. Still, you are making a trading strategy to conserve your capital in the Market.
Here is Trading Cafe India’s ultimate guide to creating a winning trading strategy.
What Type Of Trader Are You?
Before you create your perfect trading strategy, you need to know how the market spans out. You need to understand the fact that the Market doesn’t owe you anything. But it’s you who will have to align with the market’s movements to gain some decent returns from it.
Before you make a trading strategy, you need to decide what type of trader you are? You might be a pullback trader, or a turtle trader, or a swing trader. Whatever it may, you need to clarify that in your head first. Once you have answered this question, you can comfortably proceed to create a trading strategy of your own.
Now you also need to know if you would be using your strategy on buying side or selling side, or on both of them. Most people are much more comfortable when they have a bullish view rather than a bearish bias. On the contrary, some people might always look at an opportunity to short the market. You need to understand which one you are? In our opinion, it’s okay to be both bullish and bearish. Actually, we believe that one should be a hawk in the Market, always looking at an opportunity to encash the movement of both sides.
Where Will Your Strategy Work? Or Not?
Talking about our Indian Stock Market, it alone has almost four to five segments where you can trade. That means your trading strategy has one of the four segments to choose from. They are equity (cash), future, options, or commodities.
You should know that a particular set of scanners, patterns, and strategies will only work in the specific market segment. For example, a put debit spread can’t work in the cash market. Or simply buying and holding might not have an edge in the options segment.
The bottom line being, you need to decide in which market you have to trade, and once you do that, it will be a lot easier for you to come up with a trading strategy of your own.
Ask Yourself “What Is My Trading Style?
If you want to confirm your advancement to create your first trading strategy, you need to answer the question that asks what type of trader you are. Some people are scalpers, others buy and hold for years, or are just positional or day traders.
Clearly, you can’t eat at everyone’s table, or else you will end up unsatisfied only. The same goes for your trading strategy. You need to create different setups for different kinds of trade calls.
In this strategy itself, another method of ours is camouflaged – the time range. Before you enter any trade, just make sure of your time horizon. How long you stay in the trade matters a lot. Not to forget thousands of traders who turn into investors after cancelling their Stop Loss triggers. You shouldn’t be one of them.
Have Something To Help You Pick Up The Momentum
To stick to your time horizon with complete confidence, you will need a tool or a system that will help you gauge the momentum in the scrip you will be in. Let’s assume that you observe a beautiful pattern on a chart, making an entry based on it. Now you need to be able to foresee how quickly the trade will escalate in your direction. Because as they popularly say ~ your best trades start showing off right after you make your entry…!! ????
Many people use different indicators as well as price action to make an entry into the trade. These indicators, one of which is RSI, help people to spot the momentum before they enter the trade.
Also, make sure your trading strategy just doesn’t give you a random entry anywhere in a trade. Entries should be wholly backed with logics – such as entering a long trade at support levels or entering a short trade at the resistance levels.
Being A Turtle or The Last Kisser
Whether a reversal or breakouts occur on a chart, the retest happens almost more than 90% of the times. There are two ways to trade these situations. See which method your trading strategy implies. If your trading strategy is easily inclined towards trading the retest of Breakout or Breakdown, then go for it. If not, then your strategy should wait for one last kiss or the retest of the breakout zone to give you an entry.
Strategy Should Manage Losses
Your trading strategy won’t be even worth a penny if it doesn’t help you limit the downside of a trade. As a professional trader, your number one job is to save your capital and then appreciate it.
So always develop a strategy that helps you exit with a bare minimum loss if proven wrong in the trade. That signal can be trendline discontinuation, Fibonacci level rejection, or even a MACD bearish crossover.
Don’t Forget To Backtest.
Now your trading strategy is almost complete, but we shouldn’t go ahead and start implementing it without being double sure about it. You have all the historical data of the markets around the world. You just need to go ahead and backtest your strategy on all of those charts and data. Also, along with backtesting, you shouldn’t miss out on forwarding testing. Now forward test your trading strategy in the live Market with minimum quantity. Until you are entirely sure, do not move ahead with the strategy and regular quantity into the live Market.
So here you go, these were our sure shot and analysed ways to create your first trading strategy ever. We hope for it to be equally profitable…!!
To learn how we and our students trade consistently, do check our mentorship program through the below link: