Developing Your Trading Strategy

Developing your trading strategy is about profiting from the right opportunities. In the 10 commandments for trading success, we spoke about putting the odds in your favour and becoming the casino, not the roulette punter. We also spoke about asymmetric risk-reward opportunities. These are both key elements of developing your trading strategy.

Every element of your strategy and plan must be known ahead of time. Entry, target, stop loss – all need to be deeply ingrained in your mind and in writing. A flow chart of your complete trading plan can help with this. Journalling in detail is beyond the scope of this article. We are going to cover the markets and how you can find edge.

Developing your trading strategy – finding an edge

If you don’t have an edge, you need to find one. You’ll find one through focussed learning. I would recommend spending an hour or two per day in a focussed learning environment. By this I mean:

1. Turn off phone/browser/distractions

You need to be focussed. Distractions and anything else diverting your attention is not good when developing your trading strategy. Full focus is needed, this is not a game and you must not treat it as such.

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2. Open 1-4 charts of the forex majors

Open 1-4 of EURUSD, AUDUSD, GBPUSD and USDJPY. They have the lowest spreads, due to being the most heavily traded. The single most traded currency is the USD, which features in all of the majors.

3. Put the charts on 1min or 5min

Unorthodox, yes. However, if pressed for time (2 hours per day) this is a way to see a lot of price action unfold. You will be seeing candles form at a much faster rate than weekly or daily charts (traditionally touted for people to learn on). We likely won’t actually be trading on these timeframes, due to costs and other factors. Learning market basics on low timeframe charts will allow you to learn more quickly. These patterns will be apparent on all timeframes. Once you’ve learned what they look like, you can practically apply them to higher timeframes.

4. Draw in key support and resistance levels

Take your charts, zoom out, then draw in the absolute biggest and best support and resistance levels. These are levels which the market has made tops and bottoms at, quickly reversing to form a high or low in price.

5. Watch the action around your levels

We know that these areas are key to the market. Now we need to watch and learn what happens upon return to the areas. You want to start developing your trading strategy around these levels. What happens as they break? When they’re broken and retested? When they can’t break? What happens when they break and reverse? 

You need to be aware of the action that occurs around these areas specifically. We are learning with focus on these levels.

6. Note down what you see

If you see a similar pattern occur time and time again – write it down! Make yourself aware of what your are looking for. Perhaps a set of IF-THEN guidelines – e.g. ‘If I see X at Y, do Z’. Create a hypothesis and work with it moving forward.

7. Screenshot, annotate, journal

Whatever you have written down and keep seeing – take pictures of it. You’ll need to compare every single occurrence. Annotate each image and describe to yourself exactly what it is you see, this will be essential as you build on the setup. If you have spotted a pattern and believe there to be edge, you need to know everything about it.

8. Find a way to trade it

Building on the last point, simply having a pattern doesn’t mean it is a tradeable pattern. You need to figure out how to enter, where to put a stop loss and where to target on the trade. On top of this, you need to think of a good method of trade management.

9. What doesn’t work so well?

Is there something that links the patterns which eventually fail? Are there cues to tell you it won’t work as you’d hoped? Note these down too, avoid it. Did your pattern/observation work in the way you’d think it would work? How did it work differently?

10. Repeat stages 6-9

Trading is about continual improvement. Repeating these steps over and over in continuous refinement, will lead you to developing your trading strategy to being better and better.

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Next Article: Executing Your Edge