What is a Trading Strategy?

Trading online without a strategy is gambling. Luck is not a strategy. Hope is not a strategy. Gut feeling is not a strategy. Knowing technical and fundamental analysis is a good start, but still not a strategy. So what makes a good trading strategy?

A trading strategy is a set of predefined rules used to make trading decisions.

The important part is “predefined”. A trading strategy is a plan, a navigation map which the trader has to follow if he wants to succeed. A successful strategy is based not only on analysis but on a wide array of factors – risk tolerance, time horizon, liquidity, scale-ability, transaction costs and etc. A solid strategy should have a clear objective, entry and exit rules.

How to develop a successful trading strategy?

There countless types and combinations of strategies you can use in your trading. Most of them are based on technical or fundamental analysis.

A fundamental trading strategy is based on fundamental analysis. The trader is analyzing fundamental factors such as interest rates, capital flows, market sentiment and etc. to form his opinion on the direction and levels the price of a given symbol should be at. This type of analysis is usually performed by big financial institutions, because they have access to the information and enough analytical resources.

A technical strategy is generating trading signals based on technical indicators. A technical trader is using the charts, together with a set of indicators to create the entry and exit rules of the strategy. This type of strategies need less development resources. They can be implemented not only by big institutions, but by individual traders as well.

Why backtesting is important?

An important factor for building a successful strategy, regardless of the chosen approach, is the possibility for reliable backtesting. This way you can test how reliable is the strategy you are working on. Extensive back testing and simulations help you filter our the systems which are not really good. However you need to be careful not to over-optimize or curve fit your strategy.

Trading Strategy Backtest Results
Trading Strategy Backtest Results from MetaTrader 5

You can learn more about the trading strategies in the following articles:

Breakout vs Reversal trading strategies

Choose your trading style