How do do you create your trading strategy?

I asked many experienced traders that: Which timeframe is the best to use?
They all replied:Any time frame you use can fetch you profits.
I asked about indicators. They said:You can use any indicator. They all conclude that you should build and follow your own strategy and not look for hot tips, trading signals, etc.
I hereby want to know the first step to building one's trading strategy. Is it not advisable to follow experts' advice or tips?

Kenny

Trade on higher TF's and follow the trend and your chances of being successful will dramatically increase coupled with good MM and patience.

Read this book- "Trade your way to financial freedom" by Dr. Tharp.

These things are explained there. You will need to decide if you have 14 hours a day to watch the screen or only 15-30 mins a day or even once a week to look at charts. Financial goals are also a part of it.. so just read the book.


Bob

I approach most are the same, Wednesday buy USD / JPY or GBP / JPY. Friday buy CAD / JPY

The first thing is to read a lot and watch the market closely every single day, and when you're a little better you'll start to understand how the market works and you'll create a strategy that works for you.
Trading Forex is like any other job, you won't be succesfull trying to pick someone's else knowladge, to be a CEO you have to go to university and study for 4 years + and work to put what you learn in pratice, forex is no different.

I'm no expert. but would like to suggest 3 steps approach.

1. Follow a few trading system/strategy.
2. Learn something out of them.
3. Combine the "something".

jackt
I may not be creative but I can be innovative!

Hi Kenny,

Merlin has an excellent post which gives his step by step approach to creating and testing a system.

http://www.forexfactory.com/showthread.php?t=4446

This doesn't cover the more general issues like which time frame is most comfortable for you, etc. but it will give you a good insight into what building a system looks like.

Hello, Liujiangshi,

Thanks. But may I know why we must just buy USD JPY on Wednesday and CAD JPY on Friday?

Yeah, I agree with you. But I was also introduced to james16group.com which advised to trade on only daily timeframes. When I tried using 1h timeframe, I realised that I would have lost many pips if trading on only dail timeframe

I am sorry to say that you got it all wrong. I would suggest that you go back and carefully re-read what you were taught. Trading on the daily / weekly are the higher TF's. That's where the real money is.

A mechanical system isn't necessary to be a profitable trader. There are many successful traders whose trades are entirely discretionary. They look for things like Janpanese candlesticks, support and resistance levels, trendlines and trend channels, and recognizable chart patterns like double tops and double bottoms, etc. A common denominator between all successful traders is proper money management.

In reply to the OP, you really do have to see what works for you. Try various systems on here. For me, I can't scalp, no matter how much I try. I win some and give it back. Swing trading is more my style, holding a position for 1 to 3 days (sometimes more).

As for mechanical systems, they rely on a very specific environment. Change that and the system stops working and you need to identify quickly whether you're just having a drawdown period or a system failure before you lose all your earnings. I have used a handful of mechanical systems but now prefer "proper" trading.

Set up a demo account and have a play...

How you create your strategy depends a lot on your personality.

If you are a patient kind of person who likes thinking about the big picture then perhaps position trading is for you (assuming you have the balls of steel to sit through big drawdowns)

If you can make yourself stay alert and sit in front of the computer for five hours a day and tracking a few markets, then perhaps day trading is for you

If you have a short attention span and your reflexes are wired up on a quad shot caramel latte then may be you could news trade (warning - many have tried and lost a lot of money at this - don't be sucked in by the many scam artists in this area)

If you are great at spotting patterns, then perhaps swing trading over a 3-5 day time frame is for you.

If you are a whiz at programming and have the aptitude to develop and test endless automated systems, then perhaps this is for you

If you have a convoluted brain that sees all kinds of weird intermarket relationships, then perhaps pairs trading and arbitrage is for you.

If you are a great salesman, then perhaps you could sell systems on the internet.

There are lots of valid ways to trade. All can make you money. Once you know what trading style fits your personality, the next thing that comes is the long long long search for a trading approach that has an edge. Someone else mentioned Van Tharp's book on "Trade Your Way to Financial Freedom". You could do no worse than starting there to look for ideas on how to build your system

I think experience is the best teacher. Though after reading a lot from many posts and articles that the most common denominator for traders is proper money management, when I failed to obey this, I lost some of my money and that really taught me a lesson.

Also, experienced traders always warn against using smaller time frame which can whipsaw one to death. By using longer time frame, I've been able to improve my profitable trading.

But one thing I would like to know is that as an inexperienced trader who decides to use longer time frame and leave the trade for days, how can you control your emotion 'cos at any time, a great news can occur and go against your position?

Kenny

As you say, experience is the best teacher. Once you've made all the mistakes that it is possible to make, experience starts to accumulate. If you're lucky, you'll start remembering what worked for you, or rather what didn't. Then you go looking for the next set of mistakes to add to your collection.

Don't ignore what goes wrong, study it and figure what went wrong and why. Most of the time, you're the problem. If everything you did was correct, and it still blows, well - shit happens, hopefully life goes on. But mostly we're the cause of our troubles, and at the very least, that's something we can work on.

It's when you don't stop to figure out what you did wrong, that things really go wrong. You'll probably end up repeating those mistakes again and again.


As to the main question -

There are two approaches to trading strategies. One is to follow someone else's trading strategy like a cooking recipe. You don't have to understand what's going on, just follow the instructions. If you're lucky, you make money, maybe, for awhile.

To develop your own strategy you need two things. You have to figure out your fundamental trading beliefs. Until you've sorted out your belief system you're not going to have much of a strategy. Then you need experience. Without a lot of experience, you can't have a strategy.

So do some research and grab what you find that looks useful. At first, everything will look believable. With time, and plenty of mistakes, you'll start figuring out what makes sense for you. As experience grows, you can start to identify and filter out nonsense much quicker than at the start.

I'm lucky. It took me less than a week of trading to realize that I don't believe in indicators, candlesticks and all the other assists. Given that world view, actually made things pretty simple, trends and ranges. Having made that realization, I found it much simpler and quicker to figure out the basics. I have a long way to go, but I'm well ahead of the curve from where we all have to start.

Do your own homework. The answers are all here and best of all, it's all free. There is no need to go and pay someone unless you believe that it's going to get you to the aha moment faster - or you want the company.

Important - filter out the rubbish. Rubbish is even more abundant than the good stuff. Assume that everything is rubbish until proven otherwise. Think about what you're reading, then decide. If you don't understand it, it's rubbish. If the writer has an agenda, it's rubbish.

// And, yes, I suggest you consider this post as rubbish too.

Fortunately, there are great guys here that are genuinely trying to help. Treasure them when you find them. You'll have to decide for yourself who's worth the time. I have no recommendations as context is forever changing. Good guys turn bad, idiots sometimes deliver a nugget of gold, and what looked like and maybe was the real deal a few months ago turns out to be pile of broken crockery once you look at it closely.

Main item to digest - you have to get that experience and you have to decide on the value. There are no short cuts.

I agree with u Coda. But, can I know how you trade without using indicators? Because I see that even if am able to catch the trend, some indicators like stochastics and MACD signal me of reversal.

Someone has also said that you can trade successfully on a bare chat. How true is this? Do you agree with it?

Kenny

In order to create a strategy - you need insight

How you go about getting insight is up to you. I did mine by reading, practicing & learning..in order words getting the 'knowledge' or 'insight' -

once i had this i could develop a strategy - remember u can have more than one strategy... i have one for long to short term, ranging and news trading.

I highly suggest you read up about jesse livermore specifically his "how to trade in stocks book" as well as "reminiscences of a stock operator". I also suggest you read up about trend trading there are numerous books out there that talk about it. good luck!

G-dogg

Understand what your indicators represent and how they calculate whatever it is they show - then consider the following:

What will magic indicator X do if the price were to go up from where it is now?

And what would that magic indicator X do if the price were to go down instead of going up?

In either case it would simply react to whatever price decided to do. Usually, each will produce a different result. If you're mathematically inclined, price is the independent variable, and the indicator reacts in someway to what price has decided to do.

So, how can the tail wag the dog? At best indicators do just what their name says, indicate, but only what happened from now backwards. The future will be whatever it decides to be.

Anything an indicator can show you is already on the chart, because price is there. Why use an indicator when with a little more thought and effort you can understand the real thing?

The best we can do is make a reasoned guesstimate and then say: If A happens then we've got a winner, but if B happens I cut my losses and come back later for another go. When you don't plan for scenario B you haven't done your job. The cool thing about all this is that there are only 2 scenarios most of the time.

There are a lot of threads about "trading naked" here. Though you have to wonder about some of the nekkid people when they suddenly start talking about indicators despite supposedly having nothing on their charts.

Take a look at this thread - a good place to start. There's a lot of other stuff available.

As always, use judgement. Decide for yourself if something makes sense or it sounds like nonsense.

Not alot of detail, but in summary:

Start with a market tendency.
Build a strategy around the tendency.
Build entry and exit techniques around the strategy.

Always know that the market tendency WILL CHANGE again.

Keep this method/strategy in your arsenal of other strategies and return to it when the market tendency returns.