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Home / HOW TO START DEVELOPING YOUR OWN TRADING STRATEGY (AND BE SUCCESSFUL)

HOW TO START DEVELOPING YOUR OWN TRADING STRATEGY (AND BE SUCCESSFUL)

Pretty much everyone with investments of their own has heard of the term ‘trading strategy.’ In short, a trading strategy is the roadmap that a trader follows while trading the markets. A trading strategy consists of a set of rules that a trader follows according to market action. The purpose of following a trading strategy is to remove emotions from the decision-making process. When traders follow a sound trading stategy they combat the emotional temptations to sell or buy. With a trading strategy in place, a trade knows exactly when to buy or sell, regardless of what the market does, or how the trader may feel about that move. 

About Day Trading Strategies

A "pattern day trader" is defined as someone that makes more than 3 "round-trip" trades in a rolling 5-day period. A round-trip is when a trader purchases a security, and sells that security, in the same day. Every profitable trader will tell you that the key to day-trading success is an effective, reliable trading strategy. To be successful, you'll need to identify a winning system, implement it, and have the discipline to stick to it. For most people, developing a brand-new and totally unique day-trading strategy may sound like a great way to maximize your profitability, but it will take time to refine and could end up being rather impractical. Most often the best and most effective approach is to adopt an existing day-trading strategy in use by other traders. These traders have already spent the time and money field testing the strategy and proved it to be successful.

 

"Think big, think positive, never show any sign of weakness. Always go for the throat. Buy low, sell high. Fear? That's the other guy's problem. Nothing you have ever experienced will prepare you for the unlimited carnage you are about to witness. Superbowl, World Series - they don't know what pressure is. In this building, it's either kill or be killed. You make no friends in the pits and you take no prisoners. One moment you're up half a mil in soybeans and the next, boom, your kids don't go to college and they've repossessed your Bentley. Are you with me?"  - Louis Winthorpe III, Trading Places, 1983.

 

Whether the strategy you’re using is your own or you've adopted someone else’s, it is critical that you have a thorough understanding of it, especially its entry and exit signals. As the quote from the greatest stock market movie of all time, Trading Places, highlights, knowing when to get in, and especially when to get out, defines the winners and the losers. Among the knowledge required for success is to know enough to know what not to listen to. This is to say, don't be victimized by untested and unverified trading "advise," especially the free advice available in numerous trading forums, chat rooms, or cocktail parties. Although it may be tempting, and some advice you receive at venues like these might be compelling, it's likely to be more opinion rather than fact. In the market, opinions are like noses, everyone's got one, and they arn't worth anything. Instead, what you need is a proven and effective trading strategy, one that will work in any market, under any market condition.

Because of this need for solid strategies, more and more traders are looking for trading success through technical approaches to the markets. Technical analysis relies on using historical data as indicators of future price action. One of these approaches is Welles Wilder’s Relative Strenght Index (RSI) indicator. The general idea behind using the RSI is to buy when the RSI crosses above a particular mark and to sell when the RSI crosses below a particular mark. If your marks are clearly defined there is no room for interpretation. In trading, you’ll need to make big decisions in a matter of seconds. There’s simply no time to second guess, rethink, or try to interpret data flying your way at light speed. However, following a set of simple, easy-to-understand rules that eliminates the uncertainty and emotionality of buying and sell timing is the major key to trading success. 

Though the rules traders set are very important, they are not the most essential element of trading success. The most essential element is the human factor, and keeping a cool head. The best trading strategy in the world will be useless if a trader becomes emotional and starts to panic during times of volatility. Traders must remain calm through trying conditions, and execute their trading strategy efficiently, without hesitation, or "next thing you know, they've repossessed your Bentley."