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How to develop your stock trading strategy

InvestorEducation / Learn to Trade Aug 06, 2020 - 12:56 PM GMT

By: Submissions

InvestorEducation

Developing a trading strategy from scratch might seem an impossible task for the rookies. But if they know the common terms at trading, they can do so like a pro trader. The successful traders love to use their trading method as it syncs perfectly with their personality. You can buy the most expensive trading method in the marketplace, still, you won’t feel comfortable since the strategy is designed based on someone else personality. The developers design the system in such a way that it syncs with the personality of the developer.

We all know no one shares the same personality. So, those who are looking to become a profitable stock trader must learn to analyze the stock markets with their trading method. Let’s see how we can create a trading system like a pro.


Open a paper trading account

You might be wondering what the heck the paper trading account is. The paper trading account is nothing but a demo account. The reason you should open a paper trading account is to test your trading skills. Most traders don’t have any idea about how this market works. So, if they open a real account, they will be always under heavy pressure and this will create an unnecessary threat that will limit the profit factors to a great extent. For the betterment of your trading, you must eliminate the unnecessary stress. Open the paper trading account so that you don’t have to worry about the losses. Try to sync with the market so that you feel comfortable with this profession.

Start taking the trades

Before you intend to develop the trading method, you should start taking the trades without having any knowledge. Explore the features of the trading platform so that you can learn the use of root tools. It might seem tough at the initial stage but once you learn to use the tools professionally, you will feel more comfortable with your trading approach and this will allow you to make better decisions at trading. You might think trading is a very complicated task but it’s not. It is the easiest thing once you know the use of the premium tools available on the platform.

Developing a simple edge

To buy the shares, you must develop a simple edge. Instead of focusing on the indicators, focus on the raw price data. The elite traders always suggest the rookies trade the market with the help price action trading method. The price action method can be incorporated into any form of system and it can significantly improve the win rate for the traders. After you learn to take trades at the trend line, channel, Fibonacci retracement level, it’s time to incorporate the price action signals. With the help of the price action signals, the traders will be able to improve the skills to a great extent. Most importantly, they will know when to close the trade when things go wrong.

Developing the recovery plan

Everyone thinks about the trade execution plan. Very few traders are smart enough to emphasize on the exit trading method. Even if they do, they think about the potential stop loss. It turns out closing the trades’ plays an important role to maximize the profit potential. You might think you know a lot about this market but try to ride the trend to its very end. You will notice, you will need a lot more new techniques. For instance, you have to know about the significant highs and lows of the market. These are the points where the price can reverse or even change the trend. You have to very cautious while the price is heading to this zone or else a good profitable trade can turn into a big loss. And the exit plan needs to be designed in such a way so that you are not taking the trades with a negative risk to reward ratio. The minimum risk to reward ratio for the trades should be 1:3 or else you don’t have a robust trading edge.

Testing your draft trading plan

After creating the draft plan, it’s time to test the system in real trading accounts. This is the most important part of creating a trading method. Many traders jump to the real market without backtesting their trading methods. Unless you backtest the trading method, you won’t be able to fine-tune the system. Most of the time, this will lead to catastrophic loss and you won’t be able to earn money. For the betterment of your future, you should test by executing 30-40 trades. You might be thinking it will take years but do have the option to trade multiple stocks. And the benefits of trading multiple stocks in the testing phase is enormous.

You will learn how your system reacts to different assets. Eventually, you will be able to pick favorite assets that have the potential to give maximum returns. If necessary, you can use simulation software to fasten the process of trading. Once the backtesting is done, it’s time to trade the real market.

Trading the real market

Taking trades in the real market is a whole new experience. You should be cautious about your emotions as emotional stress can force you to break the rules at trading. And if you break the rules, you are no longer trading with the backtested trading model. So, learn to control the emotions in the real market.

By Russell Fenton

© 2020 Copyright Russell Fenton - 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.


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