5 Basic Tips on Developing Trading Strategies

Choose your favorite asset class or even focus on one single trading instrument. It is always better to work with something that you are interested in. Therefore you will be naturally willing to pay much more attention to what information or events are crucial to the price development and recognize the typical behavior of that market. After some time, you will easily distinguish the chart of your specific trading instrument amongst the other just by looking at it. The goal is not to be an average trader on all the assets but to become a professional on just one or a few of them.

By examining the price movements on the chart and browsing in the history, you will surely be able to spot any regularities/irregularities in the market behavior. For example, by looking at the EURUSD chart, you can see that the market is mostly stable with low volatility from midnight up to around 5 UTC. As the European trading session approaches, volatility rapidly increases, and we can clearly see the change in the market conditions. Another spike in volatility can be easily spotted when the American trading session begins. From that point up until midnight, the volatility tends to decrease gradually. A nice article about trading sessions can be found here. Another characteristic that even an absolute beginner can easily spot is the behavior during the fundamental data release times. When the data is published, we are often witnessing massive price movements and extreme increases in volatility. Any strategy that may have worked in “standard” conditions will most probably collapse under this kind of circumstances. The opposite extreme in that sense is the period during midnight when the market rollover takes place, and the swaps are credited/debited. Around that time, the trading conditions are not suitable for almost any trading strategy, spreads are often higher significantly, and some brokers even disable the trading operations for several minutes. Also, the volatility is often so low that it is almost impossible to exceed the increased spreads. The best way to get the market behavior under the skin is to trade as much as possible on the Demo Account. Even though you do not have the complete trading strategy yet, you will be learning new things at a much faster pace.

Be prepared that most of your trading ideas will not work in the beginning. Many beginners think that they have an ultimate secret trading idea that will bring them astronomical profits and a millionaire lifestyle. The opposite is almost exclusively true. When you start testing your ideas thoroughly, you will find out that most of your strategies, ideas, and systems are not as profitable as you thought. To find something that is truly working is a long process of endless days of development, testing, trial, and error before you will start to see first reasonable results. So do not expect to find the holy grail of trading overnight. That is not how things work on the forex market.

Always try to find the best possible price to enter and close the trade. This may seem like absurdly simple advice (everyone knows that after all), but you will be surprised how many traders do the exact opposite. When creating a strategy, look for the signals occurring at the favorable entry/close levels from the past price development perspective. As it is often trivially said, “buy low sell high,” so try to optimize your strategy in that manner. Even a breakout strategy can be developed in alignment with this advice since you can always wait for a small correction before entering the trade. This way, you can filter out less effective trades and achieve better RRR (Risk/Reward Ratio).

Aim for consistency. When you optimize your strategy over longer testing periods, always look at the distribution of the trade results. Your goal should be to have a uniform distribution of the trades over the whole testing period. It is desired that the performance of your strategy is not strongly dependent on the change in market conditions. You also do not want to see any longer periods when the strategy was in drawdown and did not generate any profit. Another important metric is also the expected outcome of the average trade. The more Pips (Points) you can generate on a single trade basis, the less prone to any execution inaccuracies the strategy will be.

Resume:

  1. Chose your favorite trading asset.
  2. Focus on high volatility and liquidity periods. Avoid the fundamental data release times a night trading.
  3. Be prepared to work hard to create a working strategy.
  4. Look for favorable price levels to enter/close the trade.
  5. Aim for the consistency of the trade results and highest average trade gain.

You can expect another post on this topic soon. Meanwhile, you can share in the comments the tips that helped you create successful strategies.

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