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5 Tips For Building A Winning Trading Strategy

InvestorEducation / Learn to Trade Sep 26, 2019 - 08:02 AM GMT

By: Andrew_Cioffi


An organized approach to stock trading is fundamental to the success of your trading endeavors. While a flawless plan doesn’t exist, the idea of a strategic approach is to minimize risks. It will help you avoid making irrational decisions in the heat of the moment. As such, your trading will be rule-based, increasing your chances of taking profits. 

Essentially, building a trading strategy involves lots of technicalities. From fundamental analysis and choosing markets, to trade management; and everything in between. The following tips lay the basis of building a trading strategy, giving you a head-start on what to focus on.

Define Your Time Frame 

Even the most avid traders have a time frame within which they analyze the financial markets. The time frame can either be daily or even monthly depending on your personality and preference.  For short term traders, intraday charts are the ideal option. This way you will leverage the numerous trading opportunities and avoid overnight risks. 

However, given the volatility of the market, your system should be intricate enough to facilitate change of biases frequently. 

The long term traders will find it easy to use the weekly or monthly charts. This translates to fewer transactions, thereby increasing the overall returns. On the other hand, hourly charts offer more flexibility to swing traders who execute trades that lasts for hours or days. 

Set Your Risk Level 

When building a trading system, it’s imperative to consider how much you are willing to risk. A useful rule of thumb is to risk 1% to 2% of your portfolio in any trading day. This means that if you lose or make a profit within the risk percentage, you should stay out of the market until the next trading day. 

But, your overall risk level depends on your risk tolerance and trading style. For traders with a good financial cushion, you may consider increasing your risk levels above the 2% mark. Investors with fewer assets and/or limited earning time horizon, you should avoid risking much. Ideally, you can focus on long-term trading that is often characterized by lower risks. 

Identify Your Entry and Exit Triggers 

Hesitating to enter a trade can limit your potential profits while a timely exit may spare you devastating losses. Unfortunately, there is no straightforward answer as to when to enter or exit a trade. Identifying entry and exit triggers involves looking at the trendlines. They are a clear indicator of uptrends and downtrends, where each determines the entry and exit point respectively. 

A more trusted and less risky method of entering and exiting the market is using limit and stop-loss orders. The limit order allows you to set the value at which you will enter the market. For instance, say, the stock is trading at $125, and you believe the price will dip slightly to $120 before trending back up again. Your order will be executed once the stocks drop to the set value, giving you entry to the anticipated upward trend. A stop-loss order allows you to set the lowest limit at which you will sell your stocks. This gives you an exit, saving you further losses in case the stocks prices continue dropping. 

Keep Records 

Records serve as reference points for profits and losses incurred. They give answers as to why a certain strategy worked while the other one failed. A good record should include targets, support and resistance levels as well as entry and exit points. To make it even more comprehensive, consider adding explanations about why you made a certain trade. Should the system fail, you will identify the pitfalls and fix any loopholes to increase your success. 

Follow Your Rules 

Writing trading rules is one thing; following them is a whole different entity. But, the effectiveness of your system largely depends on your discipline in executing the set out principles. Trading using a simulator is a great way to cultivate discipline, especially for a novice trader. It puts you in a real trading setting, allowing you to test whether your system works while instilling trading discipline. 

Although creating a defined standard of rules isn’t the answer to successful stock trading. It serves to provide a more effective trading framework rather than depending on assumptions. It is also important to note that the system should be dynamic to match your growing experience. 

By Andrew Cioffi

© 2019 Copyright Andrew Cioffi - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

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