Building a Trading Strategy

I was bored and decided to start thinking about how to build a good trading strategy and wrote down my thoughts. Decided to post it here to see if it would make a good discussion.


Elements of a successful trade

 

1. Trend
2. Price Action
3. Momentum
4. Confluence
5. Risk Management

Trend


Trading with the trend increases the chances of success greatly. If you trade with the trend while the trend is still going full force, you are guaranteed to be profitable.
Even if price goes against you, so long as you do not run out of margin. Due to the constant risk of trend reversal and margin calls, a stop loss is needed to safeguard against ruin. Using a few more techniques and strategies to get the best entry will optimize picking the best entry into the continuation of a trend.


Price Action


Price Action analysis gives high probability setups for entering into a trade. While they may not give the absolute best entry (temporary counter swings to the trend can still occur past highs/lows indicated by price action), they limit entries and give a defined stop loss. With this you can then apply risk management strategies to the trade to insure that a loss will not hurt your account.


Momentum


Trading into momentum can help reduce draw down. If the momentum is strong enough, it will carry price far enough from your original stop loss to make moving stop loss to break even quick and easy. Using a momentum strategy as further confirmation to a price action breakout or price action continuation can further improve an entry and lower risk.


Confluence


Retracement levels, Pivot points, Psych levels, and Moving averages can help you plan your strategy far ahead of time. With these zones you can map out “hot zones” on charts, minimizing exposure and only entering when multiple conditions favor your entry.


Risk Management


The only 100% certain thing in trading is that some or many trades will lose, and that a well thought out risk management strategy can counter this. By limiting risk you can survive long losing streaks and still come out profitable in half the trades.

you missed out psychology....

I like everything you posted. For me I would eliminate confluence, not because it's not helpful but I'm not sure it is necessary.

I would add some additional thoughts. I have done some thinking on this myself as I have devised a system that is successful but what makes it successful? I read someone recently that said to a new trader, "just make good trades." No one intentionally makes a bad trade but few people can define good trades and bad trades.

I think the best way to determine it is with numbers. There are 6 that I think work together. They can work in a variety of ways also, they don't just have to work one way because those 6 numbers create a 7th which is the number that determines how much you will make and when.

Once you have those numbers you can build your system around them and then you can improve it. One of the best ways to improve it is to take your system and turn it into an EA or automated system where you can back test it, adapt it and optimize it.

And the exit the most important aspect of trading in general.

I also think you must have a trading system that complements your style, it could be a scalping, medium term or a long term strategy.

If there is a mismatch between system and style then this could cause problems.

Probably still my weakest point, but improving.

The hard part for me and the way I should improve exits is deciding beforehand whether Im looking for a long-term trade or short-term. If I achieve 1:1.5 or 1:3 thats a good trade. 1:10 makes me even more confident.

I think a lot of traders have a problem with this too, they go into a trade without thinking about where they want to exit, and end up exiting too early or not realizing soon enough that their position is going to turn against them.

You should have a reason to exit a trade just like you would have a reason to enter one. If your exiting on a whim to "secure your profits", you are exiting for the wrong reason. If your exiting because you achieved your R:R goal, your doing better. If your exiting because price action tells you to, your making a good decision.

Sounds like your on the right track, PA is the best way to trade along with trading in the direction of the trend. Confluence is very important aspect to entering in only high probability low risk trades and at the right moment, right in the area where all those confluences of S/R come together to form a strong defense for price to bounce from and go back in the direction of the trend.

--NM

Thats a great point NightMoves.....entry should be where you get confluence of S/R/fib/etc