One of the most important tools, if not the most important tool, any trader has is his or her trading strategy. You can study markets, make charts, use fancy software, and read as many books as you want, but if you don’t have a successful and proven trading strategy you will not be a profitable trader. The best trading plans have a few things in common, and knowing these tips will help you refine your trading strategy.
First and foremost your strategy needs to be simple. Trading plans have rules, but the most successful strategies will have less than ten rules. Strategies with more than ten rules tend to be “curve-fitted”, which means the strategy has been set up in such a way that it works very well with past data, but is too rigid to produce profits when applied to an actual trading situation. A volatile market isn’t going to wait for you to plug numbers into a formula. Simple, easy to follow rules will allow you to work quickly, and efficiently within volatile markets.
Your trading strategy should also allow you to produce at least five trades each week. Since most trading strategies have a winning percentage of between 60% and 80%, you will need to make several trades in order to see a profit. In essence, the more trades you make, the less likely it is that you will have lost money overall at the end of each month.
Don’t be afraid of losses. Many beginning traders who do their research and start trading only to experience a string of losses can get easily frustrated and overcompensate by “doubling down”. When this happens it is easy to allow emotions to take over, and it is even easier to wipe out your entire trading account. If you have a trading strategy that you have tested, then give it time to work. The best trading systems will allow you to start trading with one or two contracts, and then increase the number of contracts as you have success. Trust that your strategy works, and give it time to make up for losses.
Emotions can also be harmful to traders when exiting markets. Fear, panic, doubt, and hesitation are all common emotions when trading. However, acting on these emotions can be damaging to your confidence as a trader, and to your trading account. To avoid these kinds of human errors you should automate your exits. Talk to your broker about setting up a “bracket order”. A bracket order will allow you to set both a profit target and a stop loss related to your entry in the market, and is fully automated so there is no human error involved.
Test your strategy. In reality, you should try out your strategy on at least two-hundred trades before you use it in a real market situation. Testing out a strategy will help you determine not only how to use it efficiently, but what the win/loss ratio is for your strategy. If you test your trading strategy and find that you are only winning 50% or less of your trades, you should think about tweaking your strategy and retesting or even seeking out a different strategy. A reliable strategy will give you a win percentage of at least 60%, but 70% to 80% are also reasonable and not unrealistic.
Trading can be risky, and your job as a trader is to eliminate as much of that risk as you can. Emotions and impatience are two of the biggest factors for loss in a trading environment. Don’t let yourself end up in a losing situation due to circumstances that are not beyond your control. Practice and test your strategy to make sure it works, and that it is easy enough to use and follow. Trusting your strategy, and recognizing weak points in it and yourself will help you trade successfully, and will ensure you are around to trade another day.
About the author:
Markus Heitkoetter is the author of the best-selling book "The Complete Guide To Day Trading" and is also the CEO and founder of Rockwell Trading Services LLC. For more free information, tips, and techniques around day trading, visit his website http://www.rockwelltrading.com.
Rockwell Trading Tips For Achieving An Ideal Trading Strateg