4 indispensable components of a trading strategy
It's time to get to the bottom of what is strategy for because all traders have heard: "You need a trading strategy, a trading strategy, a trading strategy...", but not everyone knows what it all means. What do you understand what a trading strategy is?
Trading strategy - is an opaque concept when you say it. It is not quite clear what exactly it means. It seems obvious, but it's very general and streamlined. When a person hears "trading strategy" in his head, he has no idea what exactly it means. And herein lies the problem, because most traders do not call a trading strategy what it really is.
Where does the big minus on the account and how to fix it?
Some of you will say: a trading strategy is an entry point, stop loss and Take Profit. But in fact, only entry points, Stop Losses and Take Profits are not enough in practice. Why?
Does this picture look familiar to you?
- +120$
- +270$
- -150$
- +70$
- -3870$
What makes this situation possible? Right, because the first 4 trades traded one volume, and the last one traded a different volume. This is how these same trades looked in terms of the volume exposed.
- 1 lot
- 1 lot
- 1 lot
- 1 lot
- 9 lots
Have you become experienced and brave, or have you seen a "cool opportunity" and are willing to go in with more volume for it? Get ready for such staggering losses. Preferring to see only an opportunity to make money, but not taking care of the safety of your deposit, you can lose money faster than you figure out what happened. And this means that the volume of the deal should also be taken into account in the strategy in advance!
So let's add a new paragraph to our definition. A trading strategy is:
- Entry point
- Exit points:
- stop loss
- take profit
- Deal volume, lot.
Are these 3 components of the strategy enough? Some would say yes, but they would be wrong.
Do you make trading decisions wisely?
Have you ever noticed that for some unknown reason you close some of your trades before they reach a take or stop? And then you watch as the market executes exactly the scenario you predicted, but without you. Or another example: you put in a trade and it makes some profit. Will you break even? Under what specific conditions?
All of this is another separate item of trading strategy. Psychology of Trading Decisions (PPTD). This is not the psychology of the market or the psychology of trading, or the psychology of a trader in their usual books. No. This is exactly the Psychology of making your personal Trading Decisions in the process of making trades and controlling them. Too complicated?
In simple terms, PTRP means control over your own decisions during trading and, as a consequence, a refusal of the automatic decisions, which are customary for all people and which usually lead to the loss of the deposit. I must say that it is difficult to control your decisions during trading, because at this point our emotions interfere (or even dominate) in the process of reflection.
So last year I developed the concept of PPTR to reduce the risk for traders, including newcomers, to a minimum and allow them to go into the trade with protection already sewn in against most of the most common problems traders suffer losses from.
Less than 4 is not a strategy!
In fact, each of the components of a trading strategy can be broken down into smaller sub-items, but that's not what you need to understand right now: every strategy consists of at least these 4 elements. Anything less is not a strategy, something else.
Now let's see what is a trading strategy in the full sense of the phrase. It is:
- Entry point
- Exit points
- Transaction volume (lot)
- PPTR.
Each of these elements is written for a reason. Just as the rules of the road are written by incidents and accidents, so too are the 4 elements of the trading strategy rigidly regulated by me based on 7 years of trading practice, which, as you understand, has not always been successful.
In the following articles, we're going to break down what to base strategies on and we're going to reveal a few more key trading issues.
This article is featured in the 96th issue of ForTrader.org magazine