Trading strategies: a systematic approach

Dmitry Demidenko, trader, iLearney trainerIn the master class "Be a Trader with iLearney"

Sooner or later Trader comes to the necessity of using some trading system in his activity practice. Trying to understand how successful market participants regularly get positive financial results, he faces a boundless ocean of information, which can be quite difficult to filter. Many portals offer "time-tested strategies"They show the statistics of successful traders' accounts and recommend "to be trained by specialists". How to make sense of this endless stream of data and choose what you need?

To begin with, it is necessary to understand that we are all different and that what works for one may not work for another. From this comes a legitimate answer: In order to become a trader, you must first understand yourself. Understand your personality traits, risk appetite, perseverance, ability to accept failure, focus on long-term results, goals, finally. And only then move on to the study of specific strategies. And not just familiarize yourself with them, but study them systematically.

Such different kind of trading

Trading textbooks provide its classification depending on the duration of position holding. According to this characteristic, there are position trading, medium-term trading and scalping. However, such a classification can only be correlated with such human qualities as assiduity and quick reaction time. I think that there are not many scalpers among melancholics, and among cholerics there are position traders.

An important quality of a trader is risk appetite. Ultra-conservative investors will prefer to keep their savings in the bank, and overly aggressive investors will be willing to go against the opinion of the crowd in order to get the maximum profit if the forecast is successful. In order to understand which strategies will suit both, it is necessary to divide trading into three categories depending on the specifics of the market trend:

Trading in the direction of the trend.
2. Counter-trend trading.
Trading out of consolidation.

For beginning traders, experts recommend to perform operations in the direction of the current trendUsing the principle "the trend is your friend, trade with the trend". However, this style of trading is not suitable for everyone. It is necessary to understand that it assumes the limited risk and, correspondingly, rather low profit. Essentially a trader must "buy expensive and sell even more expensive". In this case the main varieties of working in the direction of the current trend are Recovery trading and breakout strategiesbased on the testing of previously occurring extrema.

Trading on recoveries assumes the presence of a pronounced trend with the subsequent development of a corrective movement, which is manifested in the desire of the market to restore to the level of previously formed resistance or support. Analytical lines or moving averages can be used as the latter.

Chart of the currency pair Australian dollar/US dollar, 4H

The chart of the currency pair Australian dollar/US dollar, H4

The chart shows that unsuccessful attempts of market quotations to consolidate below the support level could be used to open longs in a pronounced trend.

Another type of trading in the direction of the current trend is breakthrough strategiesThe turtle tactic, for example, is based on making transactions when levels of previously reached extrema are updated. It assumes a later entry, but is often quite effective.

For traders who are able to take more significant risks, they can Strategies based on working against the trend. The basic Wall Street principle of "buy low and sell high" is used in their construction. For the most aggressive investors seeking to maximize potential profits we can recommend trial strategiesThe following are the most common methods of trading against the market crowd at the very top of an uptrend or when the downtrend reaches its next low.

Euro/Pound Sterling currency pair chart, H4

Euro/Pound Sterling currency pair chart, H4

The figure shows that the currency pair quotes reached the next maximum, then there was a correction and the market tried to consolidate above the previously formed extremum. As a result, its unsuccessful attempt to continue the upward movement provoked a reversal.

Working on strategies based on samples implies the need to repeatedly test important extrema, which entails the possibility of fixing several successive losses in case of unsuccessful tests. In order to use such tactics, one must have the appropriate character traits. In my opinion, tests will be useful to those traders who cannot adequately perceive losses. They allow one to understand that regardless of the number of small negative financial results the trading system can be profitable, because with a favorable development of events one transaction is able to provide the final profit.

For traders who prefer to work against the trend, but consider trying too risky, it is recommended to use culminating trade. It assumes the presence of additional signs, confirming the reversal of the trend. Position opening in this case occurs somewhat later than when testing previously formed extrema, but with favorable developments, the profitability of such systems can be significant.

For traders seeking to minimize risk and maximize profitability fit the strategy based on work from consolidation. It is extremely important to be able to correctly identify its range and pay attention to its duration. It is necessary to be guided by the principle: the longer the absence of a trend lasts, the more likely the development of a strong impulse movement.

In trade from the consolidation can be used as breakthrough strategiesas well as strategies based on the recovery to the previously formed consolidation range. The first of them are more risky, but allow to enter the market at the very beginning of the impulse movement development. The latter involve a pullback after testing one of the boundaries of the consolidation range, which is used to open a position. Despite the lower risk, the use of the latter strategies can lead to the fact that the transaction will be missed.

US dollar/yen currency pair chart, H4

Chart of the currency pair U.S. dollar/yen, H4

Thus, depending on the trader's risk appetite, different types of trading can be distinguished. We will talk about the strategies belonging to them in our next conversations. Now we would like to recommend traders to determine their own risk appetite and to compare it with assiduity and quickness of reaction in order to understand on what time interval they would be able to apply suitable strategies.

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