One of the first things that can happen to you when you start trading is earn a lot of money without having a fixed course. This will give you a false feeling that trading is sucking and that you don’t need anything else. Then the market will put you in your place. But of course, it will catch you quite raised by the previous gain and the fall will be harder. Then the frustration will be such that you want to quit trading and you will think that everything is manipulated and is against you. ring a bell?
Why does this happen? You were lucky to start out and you don’t have a clear strategy that allows you to trade without those ups and downs like you are on a roller coaster. If you dedicate time to create one or several strategies and adjust the risk so that the movements of the market do not leave you KO, you will be able to put the odds in your favor.
How can you create a trading strategy? It’s very simple, today there are many tools that allow you to create systems and automate them without having to learn programming. You only have to follow a series of steps to make sure that you have everything defined and that you do not leave anything in the air. I tell you the Five steps to setting up a trading strategy.
1. Define a time horizon
Your trading strategy has to be well defined in time. Establishes when to open a position and when to close it. The exact moment in time or circumstance. In addition to the frequency if, for example, it will not operate on Fridays or during a strip at night.
This is especially useful in some intraday strategies to limit no trades being made during the day. roll over, since the spreads are usually higher and we pay more for each trade. It is also interesting not to operate, for example, on Sundays at the opening or when there is volatility, such as when the macro data is published.
if you do day trading you will seek to carry out operations in small time frames with the objective of looking for intraday movements in the price, while if you do swing trading you will look for wider price ranges and your time horizon will be longer.
2. Entry and exit indicators
The indicators, as their own name indicates, will act to give a signal to enter or exit a position. An indicator can be as simple as a moving average or more complex and custom. Indicators with very simple rules really work very well over time.
For example, we can define in our trading strategy that when the one-hour opening price of EUR/USD exceeds its 20-period weighted moving average, buy and close the positions when the one-hour opening price is subsequently below it. of this average/
The objective of an indicator is to serve as a reference to, for example, detect a trend. Indicators are not a panacea or magic, they are just markers on the way to reach our goal. You have to see it as clues to make everything work out for the best and get an advantage, but remember that the key is to work with different systems.
3. Define the risk in our strategy
Defining the risk in our trading strategy is not that it is important, it is that it is basic and fundamental. Your system must contemplate the amount to buy or sell of an asset and how much is the maximum you can lose.
The maximum amount you can lose You can calculate it in euros or dollars or you can calculate it in % of your account. I recommend that you do it in percentage terms to avoid constantly adjusting.
Many traders start to consider how much they can lose once it happens, because at first they think it’s not even going to happen. Incredible but true. This makes them risk more money than they can really take. establishes a Maximum % you can lose in your trading strategy (it will depend on your actual risk tolerance), it will help you keep your feet on the ground.
4. Parameter setting
Where will you place the stop loss? And the take profit or objective of each operation? what will be the indicator settings what are you going to use? For example, if, as I said in the previous example, you use a moving average. How many periods will it be?
It is important that all this is well configured, clear and objective. This way you will have a perfectly delimited trading strategy that will not make you think or doubt in its execution.
5. Write your strategy
Could you explain your strategy to someone in a simple way? Something that is often said is that your strategy must be able to enter a post it. It’s a bit radical perhaps, but in essence, the shorter and simpler, the more robust and more likely it will work over time.
Writing your strategy is something that It will help you very well to understand it. Imagine if you had to tell someone to program it for you. You must be very objective and avoid statements of the type “a lot, high, little or low”. You will have to define very well how much is that much, that high, that little or that low. This will help you not to self-sabotage and to have mental clarity to act precisely in reality. Whether you are operating manually or automated.
6. [Bonus Extra] Keep a record of your operations
Many traders create a strategy and just execute it. If it goes well, they raise the amount until they can’t assume any more risk, the position goes against them by little and by being so exposed they bust the account. Others just do it and if it’s not profitable at first, they quit.
Winning traders don’t do this, they work with different strategies that monitor with proper risk management. This means that your perception is not focused on a single strategy and that you risk everything on one card. This way you will have a more panoramic vision, but remember that you must, yes or yes, keep track of your strategies.
This point is important because it will help you establish criteria where you disconnect the strategies that are not working. It will help you limit losses considerably. Many traders live clinging to the idea that they have to be strong no matter what and stick to your system. But of course, what happens if your strategy is no longer profitable? This is nothing new, There are trading systems that stop having a statistical advantage in the market. That is why working with a portfolio is the smart thing to do. So you can have some on the bench to replace the starters when they slack off.
If you operate manually and you are starting to apply a system, don’t worry, it’s fine to start, but take a control of each operation and its result can help you a lot and it is something basic. You can do the same by connecting your account with platforms such as myfxbook, fxblue, etc.
I also leave you a video that I recorded where I explain all this directly: