As an amateur trader, your thoughts are probably all jumbled up, creating a mess up in your head. It’s quite expected because trading itself is a confusing subject if not learned properly. It’s true that moving head-on into trading without a prior strategy in hand will lead you to your doom. But does that mean forming a strategy with no base or planning will be effective? Well, obviously no! A trading strategy is not just a roadmap that gives you the right direction to move ahead along with the market. Instead, you can think of it as a comprehensive guide that tells you when to act, how to act, and the red flags to steer around.
Since the importance of a trading strategy is non-negotiable, the question that arises next is the correct way to formulate the same. You cannot just randomly pick bits from the strategies and actions of other successful traders and expect your first trade to earn you thousands of bucks as returns. A successful strategy requires meticulous planning and correct use of tools, like an algo trading software or an Options Trading strategy builder. But that’s not all because at the end of the day, it will be your judgment and intellect to matter the most. So, considering everything said above, we have curated a thorough guide, explaining the ten steps you should remember to create the first trading strategy with a higher success rate.
Develop A Personal Market Ideology
Do you know the market well enough to take the risks?
Do you have an in-depth understanding of the movements to bet on the market fluctuations?
How well your strategy is proofed against unexpected market conditions?
Answering these questions at the beginning is imminent for every first-time trader. The market plays a crucial role in deciding whether your strategy will earn you a fortune or cause you to lose more than your tolerance limit. Going in blindly without gaining a personal understanding of the entire trade market is merely an act of ignorance. It will most likely worsen the outcomes for you, regardless of how well-prepared you are. So, the first thing you have to do is conduct a thorough research about the market, learn its functions, know about the technical terms and associations, and develop an ideology.
Choose An Apt Trade Market
The term “trade market” is like an umbrella, consisting of three individually-performing divisions, namely foreign exchange, stocks, and options. Most beginners consider them to be the same in respect to performance, movements, risks, and other variables. Although in a broader picture, they do seem to be similar, the same can’t be said at the granular level. Whether it’s the technological terms associated with each market type or the risks and profits, there are considerable differences to remember.
Not choosing a proper market can reduce the efficacy of your trading strategy. Besides, you won’t be able to determine the right set of tools to use in future. For instance, if you decide to invest in currencies through forex, using an Options strategy builder blindly will lead you nowhere and interfere with your trade plans. Similarly, investing in equities without any prior knowledge of shares and dividends might result in an empty wallet. Hence, it’s important you learn the specifics of each market and then choose the most ideal one suitable for your plans.
Decide The Trade Time Window
Everything has a correct time and if not performed within the destined window, the results might never align with your expectations. The same principle is applicable for trading, especially as the market is severely volatile and the profit-making window can change abruptly without any prior signs. So, before you proceed any further, decide the correct time for trading. For instance, as an intraday trader, decide whether swing trade or quick scaling will be apt for you. Both are for shorter periods but the former window remains open till the market movement swings from bearish to bullish or vice versa.
On the contrary, quick scaling is more inclined towards making profits by speedily opening and closing the positions based on the price action movements. Similarly, if you are a day trader, decide whether you want to leave the position open overnight or close the trade at the end of the same day. Deciding the time window for trade will help you identify the appropriate closing point and seal the deal with fortunes.
Select The Tool For Trend Determination
One of the major mistakes most traders make while investing is identification of the market trend. In fact, even the most experienced or successful traders are not spared from this misjudgment. For instance, opening a trade position during a bearish pin bar will most likely result in loss since during such times, the price action movement is negative. In other words, the prices are likely to fall and result in huge monetary deductions. So, identifying the market movement and predicting the upcoming trends in the price action movement is essential for drawing a successful trading strategy.
To help you with this, several tools are available on the market that let you study the market movements and identify the trend with highest probability of happening in real-time. Remember that these are mostly based on speculations, which is why choosing a tool with highest predictive accuracy is important for you to judge the correct market trend.
Define The Entry Trigger For Your Trade
The entry trigger is a definitive context that tells you the right time to enter the market and open the trade position. For this, you can rely on the candlestick or bar triggers as they are highly accurate and offer clearer insights into the price action movements. On the other hand, if you have an inclination towards indicators, stochastic and the RSIs will be good to begin with.
Identify The Exit Triggers
Knowing where to stop is crucial for every trader, no matter how successful you are. And since this is your first time, having a dedicated and well-defined stop-loss strategy is imminent and beyond the clutches of negotiation. It will not only help you save a greater section of your investments but also assist you in correctly identifying the time to stop your trade further. The exit triggers define the right moment when you should withdraw from the market and close your open trade position. For instance, when the price action movement suddenly goes southwards, you can leverage these triggers to determine when to close so as to avoid monetary losses beyond imagination.
Risk Definition and Detection
Trade and risk walk hand in hand. But does that mean you shouldn’t take the leap of faith and become reluctant in your investments? No, obviously not because risk detection and prevention strategies will help you steer around these bottlenecks with ease. Trading risks are usually defined using your position size. In other words, the amount of commodity or stock value under your name will determine the risk level of the trade position. Higher the valuation, higher will be the risks and vice versa.
Similarly, investing in small-cap funds will be a riskier choice because they are much more volatile and susceptible to price action movements than large-cap or medium-cap ones. So, understanding the probable risks of your trade choices and formulating strategies for their mitigation will be essential to prevent monetary losses.
Jot Down The Trading Rules
Trading rules act as a guided roadmap, allowing you to know the limitations, technical boundaries, and other facts associated with the investment. Writing them down will not only help you remember them properly but also pave the way for further refinement. For instance, if your trading strategy doesn’t adhere to the rules at some point, you can detect the same and work on the issue further.
Run A Backtest
Most TradingView strategy developers prefer to leverage their code knowledge to run a back test on the trading strategy developed. It allows them to quickly detect the discrepancies and refine them further to future-proof the initial plan. Use historical trade datasets to assess if the strategic model will perform in the expected manner or there are potential risks of downfall.
Make Rooms For Continuous Improvements
Last but not the least, you should check if there are any rooms left for improvements in the trading strategy you developed. Refinement will not only reduce the associated risks but also help you get a firmer grip on different trade markets and technicalities associated with the same.
Conclusion
Trading offers great returns on investments and there’s no doubt in this statement. But you need to be a smart and cautious trader to enjoy the gains. With this detailed guide, we hope you won’t have to worry about creating a successful trading strategy as a first-time trader.
