Trading strategies are not simple to create, as it involves analysis, testing, optimization and much more.
Successful traders were able, throughout time, to develop a solid plan for mastering their trading strategies at the best possible manner.
Having a strategy that works but managing it wrong is a recipe for failure. It is like having a sports car and with your way of driving converting it into a slow moving truck.
What you should have in mind while developing your strategy is factors, such as the price, the volatility associated with momentum, and patterns.
Trading strategies: The four key parameters
A strategy should have four parameters under consideration. The entry, the exit, the risk and money management, and psychology.
When it comes to the entry tactic, an indicator or price action could be used.
Using an indicator for your entry involves reading overbought and oversold levels, whereas with price action is the reading of the candlestick bars and patterns.
Similarly, with the exit, indicators or price action can be used, as well as the most commonly used criteria, the stop loss, and the take profit.
Thirdly, risk and money management is super critical, the most important area when trading the markets. The correct and appropriate management of your funds and capital is the key to secure your account’s balance in the long-run.
Last but not least, psychology. The majority of traders lack discipline as their psychology is unbalanced especially during difficult trading periods.
The repetition of your trading strategy is the tool to overcome stress, fear, and manage your psychology right.
Moreover, if we were to allocate a percentage rate of importance for each of the four parameters it could have been as follows:
1. Entry (20%)
2. Exit (20%)
3. Risk and money management (20%)
4. Psychology (40%)
Psychology is in the first place, and thereafter, the entry, the exit, and the risk and money management parameters follow.