As you become a more and more sophisticated and intelligent trader it will become increasingly more important to build a strategy with clear entry and exit parameters as well as proper risk management measures. What does all of that mean? It means you need to identify a certain behavior within the markets that you can consistently capitalize on over and over again. You will need to start thinking very hard about what other market participants are looking at and how they are trading on a day to day basis. You need to understand the psychology of the very best traders and the majority of traders who always seem to lose money. Identify the characteristics of the market. Many times a significant turning point in price has been signaled a few days in advance. Once you have an idea of what type of market behavior you want to exploit then you can start building a strategy around that "edge". Your "edge" is the advantage you have over other market participants in certain conditions and market opportunities. When building a strategy you are now going to need to pick your appropriate entry point. The entry point isn't as important as the other components that will be explained later but it is usually in congruence with the market "edge" you have identified. You might want to experiment with your entry points to find the best way to maximize your returns. Moving on to exit points and how they are probably the most important aspect of your trading strategy. Exit points are where you will take your entire position off the table and book your profit or loss. Typically you will want to experiment with an exit point that will allow your profits to run up and your losses to stay small. Many times building a strategy that applies this exit strategy will have lower than a 50% win rate, but the trades that you do win will most likely be three to four times as large as your losing trades. This significantly skews your returns to be much more positive than if you were taking small wins but have a few large losses. Its important to utilize this mentality of low win rate but high individual trade wins, because many of the very best traders apply this technique and those who do not are most likely not trading anymore. Experiment with exit points that will allow your profits to run up big and capitalize on huge market movements. Many traders and investors believe that the only part of a strategy that they need to be successful is entry and exit points, but many do not realize the power of how to utilize stop losses and proper position sizing. This is the risk management aspect of the trading strategy and it is probably the most important aspect of any strategy with well defined parameters. By adjusting how much you risk on each trade for example 5% of your portfolio to 10% of your portfolio you can significantly reduce your returns because of how your strategy entry and exit signals work with the position size. If you take losses more often than wins than most likely you will want to keep your trade size smaller. But if your win rate is more than 50% it might be a good idea to see how your strategy performance will change if you decide to risk more on each trade. A great free tool to test your strategies is a website called http://www.marketinout.com/. This website will allow you to test long and short strategies and personally customize your entry, exit, and risk management parameters to see if your strategies could be profitable. The Daily Trade highly recommends using this tool to help you build your own strategy and analyze the results of the strategy going back ten years. Happy Trading!
James
James