Developing a Trading Strategy
A trading strategy is simply a pre-determined set of rules that a trader has developed to guide their trading. The advantages to the trader of developing a trading strategy are:
- It removes emotions from trading. A trader following a strategy knows what to do whatever the market does. A trader that does not have a strategy tries to make decisions when the market is open and is liable to become emotionally attached to positions. They may experience panic and indecision when the market does not move in their favour, as they do not have a prepared response.However, developing a trading strategy that is effective can become a complex process. There are computer programs available (such as TradeStation and WealthLab) which aim to automate the process. Unfortunately the ease with which systems can be developed and optimised using these programs can mislead the unwary trader. Fundamentally a strategy must be built around some kind of statistical edge. It is this edge that will play out over time and create positive cashflow for the system and the trader.
-Saving time. Developing a trading strategy that has an edge is hard work. However, once developed the rules can easily be automated freeing the trader from having to watch charts all day and allowing time to develop further strategies.
In this article, which will be published in two parts, we will examine each stage in the process of developing a trading strategy, from identifying a possible edge through to a written trading plan. Along the way we will develop a simple strategy to day trade the Dow Jones index.
3. Choosing an Instrument to Trade.
4. The Trade Set-up.
5. Entry Rules.
6. Stop Loss Rules.
7. Profit Taking Exits.
8. Ways to Improve the Profit per Trade.
9. Money Management Rules.