Hi all
I’ve now covered the major basic areas of TA trading, so now it’s time to bring them altogether and start building a workable strategy.
🙂
Strategy Building
The strategy should be so clearly written, so that at any point you should know what to do. This will make trading a lot easier and a lot less stressful, there can be nothing worse than looking at a losing position and not knowing where to get out, or how big the loss is going to be.
There are a number of elements that make up a good strategy and it will be different for every trader. Here are the most important elements:
Which markets
It may sound obvious, but which markets are you going to trade and are you able to trade them. It’s no good deciding to trade the UK markets on a day-trading basis if your doing a full-time job during the day.
You also have to ask yourself “What advantages does this market have over the other options I have available?”
Who am I going trade through
How are your trades going to hit the market. Will you use a spreadbetting company, a CFD account or a traditional broker?
Which has the greatest advantages and do they have the level of service you require. Some people might find that spreadbetting offers the best deal for trading, but it might not be best for everyone.
Entry criteria
This is where things have to be detailed.
Are you looking to buy low and sell high (swing trading) or buy high and sell higher (momentum trading). What will get you into the market.
Are you looking for a test of support to hold price up, or are you happy to get in mid-move. What will be the factor that confirms whether you take the trade or not. E.g. You might be looking for the general index to be moving higher, or might be looking for some sort of indicator to signal a move in your favour is imminent.
Does the trade your about to take have a good risk / reward ratio. As I’ve said before, I would be reluctant to take any trade with less than a 3:1 R/R ratio.
How are you going to place your trades. Are you going to use limit orders or market orders to get you in.
% Risk of capital on any trade
I’ve mentioned earlier that 1-2% of risk on every trade is reasonable. Any more than that and you risk a large drop in your account if you hit a bad patch or drawdown.
Are you prepared to have more than one position open at any one time. Having more than one position open can get confusing on a short-term basis but for longer-term traders it’s the most efficient way to trade.
Exit Criteria
As I mentioned earlier, there can be nothing worse than looking at a losing position and not knowing where to get out, or how big the loss is going to be. The exit criteria can take many forms.
Are you going to set a stop-loss in the market or use a mental one. I would always advise using a stop in the market if you can.
Are you going to use a trailing stop and lock in profits when you can or take them off the table when offered.
Are you looking to exit at your price target or just tighten the stop.
Are you going to scale the position out (selling out bit by bit) or take everything off the table in one go.
How long are you looking to hold the trade open for. Are you looking to sell in hours, days, weeks, months or years from now.
What charting set-up
Which time-frames are you going to be looking at. This is the table I posted earlier and should give you an idea of what charts you should be looking at:.
<table border=”1”><tr><td>
Type of Trader </td><td>
Holding Period</td><td>
Chart to trade off </td></tr><tr><td>Tick Trader</td><td>Minutes</td><td>Tick / 1 min </td></tr><tr><td>Day Trader</td><td>Less than a day</td><td>1-5 Min </td></tr><tr><td>Position Trader</td><td>Hours / Days</td><td>15-60 Min </td></tr><tr><td>EOD trader</td><td>Weeks / Months</td><td>Daily </td></tr><tr><td>Long-term</td><td>Years</td><td>Weekly / Monthly / Yearly </td></tr></table>
Are there any indicators you look at.
Testing
Are you going to test the above strategy by paper trading, simulating or are you happy to go straight in and trade from the start. I would advice paper trading any strategy to make sure it works. Some look great on paper, but when it comes to actually trading they are not actually workable. I’ve come up with quite a few strategies that haven’t worked when it came to testing them.
Time to change the strategy
How long will you give the strategy, before you start to amend it. If you start changing a strategy too early, you will risk not giving it a chance. Give it too long though, and you risk draining your account with a strategy that isn’t working.
The question above are ones that you SHOULD WRITE DOWN. I’m sure you can think about them in your head, but when it comes to the crunch, you need to be able to look at a piece of paper that tells you what to do – it shouldn’t need much thinking about. These questions are the minimum that I would have as part of a strategy, you might find that there is other areas that I haven’t talked about, but you still want them in your strategy. Great, the more detailed you can make it the better
🙂
The following is a strategy that I used a while ago before I started trading full-time. It is a basic swing trading strategy that I was able to trade off when I was at work, as I only needed to look at the market every few hours.
This is NOT a recommended strategy, only an example of a possible one. You must trade a strategy that you feel 100% happy with.
Sample strategy Text in red is my response to the questions
Which markets –
I will be trading UK FTSE 100 Stocks, as I know these are the ones I can get easy access to chart for. The main advantage is I know the market well, and information is easily available when I’m at work.
Who am I going trade through -
I will be using Finspreads as I can access there trading platform from work.
Are you looking to buy low and sell high -
Buy low and sell high
What will get you into the market -
I will be looking for a bounce up off of support a support line to go long, or a bounce down form resistance to go short. This applies to trendlines as well as horizontal support / resistance. I will also be looking for a R/R of no less than 3:1.
What will be the factor that confirms whether you take the trade or not. -
I will only enter the trade if I get one bar in my favour. So if support is tested, I’m looking for an extra up bar to appear before going long
How are you going to place your trades -
I am happy to enter with a normal market order.
% Risk of capital on any trade -
I will risk 2% of my trading capital on any single trade.
Are you prepared to have more than one position open at any one time. -
I will be looking to have no more than 3 positions open at anyone time, so my maximum exposure to the market will never be more than 6% of my trading capital
Are you going to set a stop-loss in the market or use a mental one. –
I will use a mental stop, and check the market every hour. My initial stop-loss will be placed just under support for a long trade and just above resistance for a short.
Are you going to use a trailing stop -
I will using a trailing stop to make sure my R/R ratio stays at 3:1 throughout the trade.
Are you looking to exit at your price target or just tighten the stop. -
AS price reaches my price target I will tighten the stop up, so if it goes through I can benefit from it and still keep my 3:1 R/R ratio
Are you going to scale the position out -
I will sell / cover all my position if my stop is hit
How long are you looking to hold the trade open for. -
Holding for about a week.
Which time-frames are you going to be looking at -
I will be trading off a 60min chart, as this moves slow enough for me to check the market every hour.
Are there any indicators you look at. -
No, purely price
Testing -
I am happy to trade straight away as the strategy is based on solid support and resistance theory.
Time to change the strategy. -
I will review my strategy in 3 months time
I’m sure there are other areas in the strategy that should be covered but the ones above are the main ones. If anyone wants help with their strategy feel free to post it in the First steps section of the Bulletin Board and I’ll be sure to have a look at them, and hopefully get some useful comments from others
🙂
Take care,
