How to Create a World-Class Trading Strategy?



What's up, folks! 👋

In this article, we will examine the simple processes involved in constructing a robust trading strategy.

A strong trading plan's underlying decision-making process is rather consistent across the board, even though various successful traders use different "variables" when it comes to identifying trades. Therefore, we will discuss some essential elements that your individual trading plan must include. All right, let's get this party started!

Asset Selection 🏦🏦

Asset selection is a crucial part of any successful trading. Considering the limited number of symbols that may be traded, this is a simple process for those involved in Futures and FX trading. But for those who deal in equities and cryptocurrencies, the number of symbols available for trading is practically infinite. How will you determine which symbols have the highest potential payout and lowest risk? In order to maximize your strategy's projected value, you must have a clear set of criteria for identifying trading opportunities that interest you.

A day trader, for instance, may look for stocks that gapped up more than 4 percent overnight on more than X million shares traded. Alternatively, a crypto swing trader may look for liquid crypto assets that are oversold or overbought and may offer a mean reversion chance.

There are, however, two factors that traders should always keep in mind regardless of the asset they're dealing with:

  • Volatility ✅
  • Liquidity ✅

In order to move into and out of larger positions over time, an asset needs to have high liquidity.

Low volatility makes it challenging to produce absolute returns from an asset's trading range. While this isn't always the case (some options strategies actually seek to profit from low volatility), it is undoubtedly crucial for spot traders.

Execution Logic 🧠🧠

After deciding on a particular trading asset, the following step is to specify what constitutes a legitimate trading opportunity. Almost all assets fluctuate daily; how do you define "setups" that provide the highest risk/reward for you?

All of the tough choices have been taken in advance of the in-the-moment circumstance, and the finest trading strategies include logic that reads like a decision tree, making it so the trader doesn't have to think too hard about the process.

These decision trees can grow to an unlimited level of complexity, but as long as you design and are confident in your own execution logic, you can stick to it and refine it over time.

When developing decision logic, it is essential to take into account the following:

  • Direction ✅
  • Execution ✅

Although some market participants are willing to enter trades in either way, many others prefer to focus on only one direction, as it makes it simpler to define your trading objectives. Therefore, most money managers and traders will try to form a "view" before taking any action.

Consider the following: "I will only search for long trades when the asset is above its 20d moving average."

“If the ISM PMI is greater than 50, then I will only look to buy stocks.”

Then, once you know what direction you’re trading in (it can be both!), actually figuring out PRECISELY what gets you into and out of a trade becomes necessary.

Having both guidance and action helps to distinguish between a legitimate trading opportunity and a figment of your imagination. It's essential for mitigating danger and escaping sticky situations.

Cash Management 💵💵

If you lose everything in a single trade because you were scaled too large, finding assets to trade and trading them according to a high-quality plan are pointless. Consequently, the most successful trading strategies contemplate a catastrophic outcome and factor in the possibility of loss.

Sizing trades (to risk no more than 1-5% of your capital at any one moment, for example) is a common approach to risk management, as is imposing limits on the number of trades you can make in a given theme or industry. Taking a chance is something you do on the way in, not the way out.

Know your risk tolerance and how each trade fits into your overall position management strategy before you execute it. Please read this article for further information.

This is the whole picture, then! You may protect yourself from the trading's inevitable ups and downs by following these three simple procedures.

Then why the delay? Get to work 😉
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