Earlier, we discussed the concept of a strategy and trading plan. Now, it’s time to delve into a detailed, step-by-step exploration of how to implement a trading strategy.
These steps outline the process to enhance your likelihood of generating income while minimizing the risk of negative outcomes.
Choosing the strategy:
Numerous strategies are available across the internet. You can select one of these strategies, or while implementing a strategy, you might encounter unfamiliar patterns. In such cases, you can conduct research and leverage those patterns to formulate a new strategy. Alternatively, you can employ fundamental concepts like trends, support, and resistance to identify recurrent price patterns and establish a trading strategy based on them. Additionally, significant events such as CEO resignations, earnings misses, or dividend cuts can be used to identify patterns that can be turned into strategies.
In essence, the realm of strategy selection offers a multitude of choices, enabling you to craft a strategy from virtually anything. Over time and with increasing experience in trading, you will naturally uncover these patterns and movements, leading you to the discovery of effective strategies.
Research on strategy and trading plan:
Once you’ve chosen your trading strategy, the next step involves conducting thorough research. You should identify both the factors that support the success of your chosen strategy and those that could hinder its effectiveness. Gather a comprehensive set of information and compile it to assess what is yielding favorable outcomes and what isn’t. This process should encompass various elements, including the most suitable trading instruments, optimal trading times, and essentially, an evaluation of all parameters outlined in your trading plan. By doing so, you can construct a refined trading plan that gives you a competitive advantage.
Backtest your strategy:
After formulating your trading plan, proceed to assess its performance on historical data. This involves examining its past effectiveness – if the results are positive, you’re on track; otherwise, it’s an opportunity to identify recurring issues causing losses. Adjust your trading plan to address these concerns. Your focus should be on key trading metrics such as the win-loss ratio and batting average. Determine whether these metrics are in your favor and if the strategy has consistently generated profits based on historical data.
Search for occurrences of events, and when these events unfold, observe the market’s response. Repeat this process iteratively.
Therefore, if the outcomes of the backtest are unfavorable, indicating that the strategy is ineffective, there’s no issue – simply proceed to explore another strategy.
“Your plan isn’t to find strategies that work, your plan is to find if the strategy works or not.” : Mohsen Hassan
You have the opportunity to perform strategy backtesting using Python if you are familiar with the language, or you can opt for a visual analysis by directly observing the chart’s performance. Additionally, there is a variety of online backtesting tools available for selection, including the backtesting feature provided by TradingView.
Paper trade your strategy:
Practice your strategy using virtual funds; many brokers provide paper trading options. This step is crucial – always initiate new strategies with simulated funds to verify if you can replicate your backtest results in the current market conditions.
Analyze results:
While trading, it’s essential to maintain a comprehensive record of all your past trades, organized by each individual strategy. This practice enables you to assess the strategy’s performance, analyzing its effectiveness. By utilizing this data, you can compute various ratios and metrics. This step holds significant importance – maintaining a track record is a crucial aspect. It’s worth noting that this is a key criterion for prop shops and prominent funds when evaluating traders; possessing a verified track record greatly enhances your employability prospects.
Trade live:
If your historical trade analysis yields positive results, consider initiating live trading. The objective is to test your ability to generate actual profits using real money, recognizing that the introduction of actual funds can trigger emotional responses and introduce various psychological factors that may impact your logical decision-making. In this context, it’s advisable to start with a modest initial capital. This approach allows you to gauge your capability to achieve favorable outcomes under real trading conditions. If you can consistently produce positive results with this smaller capital, it’s an indication that you might be ready to scale up your trading account.
However, the key factor here is your adherence to your trading plan. Regardless of whether your trades result in gains or losses, maintaining discipline and following your trading plan is paramount. This aspect takes precedence over the immediate financial outcome. Thus, during the transition to live trading, your primary focus should be on evaluating your ability to consistently execute your trading plan and generate real-world results.
If successful in this regard, consider increasing the size of your trading account while also identifying any areas where you might be falling short and making necessary improvements. If you feel the need, you can further enhance your skills and confidence by engaging in additional paper trading and practice sessions.
Conclusion
These steps outline the process of commencing trading with a strategy, and it’s an iterative approach. In instances where things do not unfold as planned, you backtrack, conduct research, adjust your strategy, and reiterate the backtesting process with modifications. This cycle continues until tangible outcomes are achieved. If a strategy fails to produce results even after numerous attempts, it signifies that the strategy is not viable. In such cases, the prudent course of action is to explore and adopt an alternative strategy.
It’s entirely feasible to run multiple strategies simultaneously, allocating capital based on their individual performance. Keeping meticulous track records aids in identifying areas for enhancement, determining strategies to be scaled up or cut. Continuous backtesting and simulated trading sessions for new strategies are crucial practices. Additionally, it’s important to consistently seek out new strategies in the market, even if your existing ones are successful. The efficacy of your current strategies can wane over time, while a variation or adaptation might prove profitable. As a trader, embracing innovation and regularly testing new approaches is imperative for sustained success in the trading arena.