A Mini Strategy-Crafting Guide

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If you’re just starting out, this article might be useful to you.
But if you’ve been trading for a while now and have a profitable strategy, then this should bring back some warm nostalgic feeling.

Sure, everyone wants to have a system that is profitable. We want a system that we can rely on all our lives so that we might, one day, not have to work in future and let our money work for us.

But does trading work that way? If so, your friends and family – everyone of them would be billionaires sitting at home right now.

In order to succeed in trading, it takes more than reading a Dummies guide to Technical Analysis, or watching Bloomberg.
You need to have serious PASSION for this, because when the drawdowns hit, it is the only thing that keeps you going.
You need to develop a strong interest in the markets – economic news, brokers, TA, FA – learn everything as widely as you can.
You need to know that there will be psychological challenges throughout your journey, even for the most experienced – not just a simple keying in a buy or sell.

If you think you’re ready for it, then here goes.

Once you have developed a level of understanding of the markets and basic TA, it is time for you to start demo trading. Do not start on a live account until you’re consistently profitable on your demo

1) Your character
Do you think you’re a really patient trader and can wait for a potentially large profit?
Or are you someone who prefers taking multiple trades per week?
Or are you an extremely daring person, willing to take trades multiple times in a day?
Once you find out the type of trader you are, this determines the time frame you ought to be looking at.

2) The nature of your trades – your trading style:

  • Trend Trader
  • Swing Trader
  • Breakout Trader
  • Mean Reversion Trader

Each type of trader looks at different things on the chart and uses different indicators or charting tools to help them.

3) Indicators and Chart Tools
There are tons of trading indicators out there that can aid you in crafting your first trading strategy.
RSI, Stochastics, Pivot Points, Bollinger Bands, etc.
Find out the function of each one and see how it suits you as a trader.
For example, if you’re a mean reversion trader looking at taking reversal trades, perhaps Bollinger Bands might help you in that area.

Most importantly, what you choose must be relevant to your strategy and you must have a full understanding of your tools.
Although some experienced traders might beg to differ that they can trade on a naked chart, this is only gained through experience. For starters, this would be a good way to get started.

4) Entries and Exits
Are you going to wait for some candlestick pattern to form before entering?
Are you going to wait for a certain level to break before entering?

Have well defined entry and exit rules, not click buy and sell whenever you “feel” like it.

5) Backtest
Now, put them altogether and start trading on your demo account.
Create an Excel spreadsheet to keep track of your trades – entries, exits, even screenshots of your before/after taking the trading.
The screenshots of your trades are the only visual evidence you have of your mistakes and success when doing a strategy review.

 

If your new system is consistently performing well for around 3 months, feel free to take your trading to a live account.
Start with a small sum first, then if you’re feeling more confident and the results of your strategy is kicking in, that’s the time you can start thinking of depositing the actual amount you’re willing to invest in your trading.

But if your system turns out to be unprofitable in demo trading, have a look at your screenshots and find out what the issue is.
Most likely, you’ll need to do some tweaking to your system specifications – whether or not it is an indicator problem or emotionally-charged entry, only you know the problem yourself.
Rinse and repeat till results are ideal to you.

 

And there you have it, a strategy tailor-made for yourself.

What I can say is that having a profitable strategy does not automatically turn you into a profitable trader. It requires an acute sense of discretion when analyzing potential trades, strong emotional control, strict risk management and last but not least, experience.

 

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