Developing your Trading Strategy

David Becker
Updated: Mar 22, 2020, 10:15 UTC

Trading is a business, pure and simple, and the goal is to generate revenues that produces the best risk adjusted returns as an investment. 

Developing your Trading Strategy

A robust trading strategy is one that you feel comfortable trading.  If you do not want to have discretion, you can find a strategy that is purely systematic, but if you want to make money by expressing your view, you need to follow a few steps to insure the best performance.

To start, you need a strategy that matches your trading style, while developing a risk management strategy that allows you to consistently make money.

US Dollar Index

One of the first steps you need to take is finding a strategy that fits your trading style.  While some people are value oriented investors that like to find a bargain, other like to catch momentum by entering a trend as an assets breaks out.

Discretionary traders usually combine fundamental analysis along with technical analysis.  New economic data is always prevalent, and it is important to pay attention to new information.  A surprise scenario such as the British voting to exit the European Union, can ruin even the best strategies.  Technical analysis provides a methodology that evaluates the price of an asset, which many believe incorporates all the available information known to investors.

Once you have defined your style, you can match it with some combination of fundamental and technical analysis.  Many traders like to back test their ideas, using a system that can provide them with historical returns.  While future performance does not necessarily predict future returns, a historically back tested trading strategy can give you confidence to hold onto positions that initially move against you.

You can back test a strategy using a system like MT4, where the performance is based on the risk management profile you plan to install.  This is where matching your strategy to your style comes in handy. If you are interested in catching a long term trend you need to understand that markets generally tend to trend only 33% of the time.  The rest of the time, markets are consolidating as investors wait for new information to drive the direction of an asset.

Trend following strategies are usually lagging strategies where traders use some form of moving average to define a trend.  Since many time you will be slightly late to the party, you need to make more on winning trades then you lose on unsuccessful trades.  If you win twice as much on a winning trade than you lose on an unsuccessful trade, you only need to win 33% of the time.

For each trade you decide to transact, you need to determine your risk parameters.  Break out traders who use momentum indicators such as the MACD (moving average convergence divergence) index or oscillators, such as stochastics, should look to find a risk reward profile that best suites breakout trading.  In these types of strategies you should be looking to make slightly more than you are willing to lose.  You also need to win at least as many times as you lose to make sure you make money. By combining robust risk management techniques with a solid strategy you can develop a successful trading strategy.

About the Author

David Becker focuses his attention on various consulting and portfolio management activities at Fortuity LLC, where he currently provides oversight for a multimillion-dollar portfolio consisting of commodities, debt, equities, real estate, and more.

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