What is a successful trading strategy and how to design and evaluate it?
It doesn’t matter if you are new to the stock market or forex market or you are a professional trader, in any case you need a successful trading strategy to succeed in the financial markets; because without a trading strategy, sooner or later you will face problems and you may suffer. For this reason, in this article, Zand Traders has brought you important points related to designing a successful trading strategy. Please be with us.
What is a trading strategy?
You may have heard this term many times, but you don’t know exactly what it means to have a trading strategy; everything you include in a trading strategy will help you achieve your main goal of investing and trading, which is to preserve your capital and achieve profit.
By formulating a trading strategy, you can make the best decisions for buying and selling even in critical market conditions.
The trading strategy includes factors that include:
-Identifying the general direction of market movement
-Determination of profit and loss limits
-Determining the working time frame
-Having a plan for risk management
In the following, we will briefly explain these items.
Why do we need a trading strategy?
The goal of every investor in trading markets is to become a successful investor. As you know, the stock market is a risky market, and making the right decision in different market conditions depends on having a written trading strategy.
This is because in the highly volatile conditions of the stock market, there are days when the market atmosphere is emotional and in these conditions it becomes very difficult to decide whether to buy or sell. Therefore, it is necessary that in such cases, traders refer to their trading strategy and make correct decisions according to what they have formulated. Therefore, having a successful trading strategy is very necessary.
How to design a successful trading strategy?
A successful trading strategy has several main factors. By understanding these factors, you can design a trading strategy correctly.
What type of trader are you?
Before any action, it is necessary to determine what kind of trader you are and what kind of trades you would like to do according to your mood. For example, scalp trades, daily and short-term trades, long-term trades, etc.
Identifying the general direction of market movement
You should be able to distinguish whether the direction of market movement is up or down at the time of trading. Being able to recognize market trends will help you make the right decision whether to be a seller or a buyer in that market position!
You will also need to know fundamental analysis and technical analysis to determine the direction of the general movement of the market and market entry points.
Determining profit and loss limits of transactions
In fact, it is necessary to determine the amount of profit and loss of the transaction before starting any kind of transaction and enter into the transaction by obtaining the ratio of profit to loss. In this case, it is necessary that this ratio be economical and rational.
In determining the amount of profit and loss in trading, it is necessary to think rationally in determining the profit and the amount of loss should be the minimum possible amount.
Specify the time period or time frame
There is no specific rule to determine the time period and it completely depends on you and your personality. If you are one of those people who want to make a profit in a short period of time, you can participate in daily market transactions and monitor and take action on hourly transactions.
But if you have another job and are interested in doing long-term transactions, you can specify time periods of 1 to 3 years to achieve profit.
Risk management is one of the most important factors in formulating a successful trading strategy. In any case, there is risk in the stock market and other trading markets. If you can properly manage risk, you will loss less.
After you have designed your trading strategy, you can evaluate it to ensure it is working properly. In the following, we will introduce you the principles of trading strategy evaluation. So stay with us.
Evaluation of trading strategy
A very important part of forex trading is being able to evaluate your trading strategy. In this way, you can find out the relative success rate of your trading strategy. We have explained the evaluation steps of this strategy in this section, read these materials carefully.
Collect the market data
The most important thing is that you have enough information about the market before starting to check the performance of your strategy.
This information can be related to the past of the market or transactions that have been registered recently; but in any case, it is necessary to collect enough data; the more information you have, the more accurate your assessment results will be.
Frequency of work in the market
If trading in the forex market is your second job, then you should determine how often you enter the market. For example, one day a week? all day long? the whole week and…
In fact, every time you enter the market, you also accept the risk associated with each transaction, and the longer you are in the market, the more likely you are to make a profit or loss.
For this reason, determining the extent of your presence in the market can have a great impact on the evaluation of your trading strategy. After that, you can use the number of trades you make and the number of days you are in the market to get your frequency number through the following formula.
Frequency of daily transactions = number of business days / number of transactions
Calculate the profit-loss ratio
Obtaining the profit-loss ratio will help you to determine the number of successful trades you have made. You can get this number using the following formula and through the data you have collected.
Profit-loss ratio = total failed trades/total successful trades
If this ratio exceeds 1, it means that your successful transactions were more than your unsuccessful transactions; and if it is less than 1, vice versa.
Calculate the effective profit-loss ratio
To know how much profit you have made on your successful trades, you can calculate the effective profit-loss ratio. This ratio shows how much profit you have had in successful trades compared to unsuccessful trades.
Effective profit-loss ratio = total pips lost / total pips gained
If this ratio is less than 1, it means that you are losing your capital. In this way, by doing these calculations and obtaining these ratios, you can find out how effective and efficient your trading strategy is and can make you successful in the trades you do.
Now you know what trading strategy is and in general it can be said that in order to design a successful trading strategy, it is not only necessary to be aware of the influencing factors in this strategy, but you can determine this strategy according to your mood and personality. And manage your transactions accordingly.