Why is a trading strategy imperative? A trading strategy is the center of your business. Without a business plan most businesses will be unsuccessful, the same philosophy applies to trading plans.
A well defined and executed trading strategy will permit you to stay flexible whilst being disciplined.
What’s a trading plan?
A good trading strategy is a guideline to assist you in making good trading decisions.
It’s comprised of two fundamental parts:
1. Trading system or technique for buy/sell indicators
2. Money management parameters
Developing a trading plan can be very time consuming, this is why lots of people don’t bother. In far too many cases the instant satisfaction of trading simply overwhelms the trader.
A trading plan does not have to be complex, in actual fact it is usually better not to be so.
An example of a minimal trading plan is:
“Buy 1000 share CFDs in Google on open the day after my entry criteria has been met.”
You could follow this every day and never have to think very hard. That is in itself a bonus. It means it is easy to follow and easy to stick to.
Professional trading plans are almost always more complicated than this. Why? Because to trade professionally you will have to be able to persuade people to part with their funds. This is naturally not always easy!
The type of questions that a professional will probably be asked when they start raising money to trade with will include questions like:
1. How will you trade?
2. What sort of system will you employ?
3. What markets will you trade?
4. How much will you risk?
5. How much are you able to lose?
6. What can you reasonably anticipate to make?
7. Just how much are your trading costs?
8. How will you prevent yourself from losing all the money invested?
9. Just how much will you risk at once?
10. How many markets will you trade?
11. What will be your average hold time?
12. How will you minimize losses?
These seem like easy questions, but be honest with yourself and write the answers down.
Components of a trading strategy
Trading plans are often very personal things. If one system worked for everyone then the markets would of course cease to exist, which explains why they do not. A couple of pointers to help you pick a trading system include:
1. Disregard the “secret” systems, they don’t work
2. You might have dissimilar systems for a variety of markets, stay away from this if possible
3. Your system doesn’t need to be mechanical, many would argue mechanical systems can not work
4. Should have the flexibility for being long and short
5. It must have a money management plan that will help you control risk
Perhaps the best advice is to buy something used by experts and learn to trade it. Experts know that the best systems to trade exhibit a couple of simple characteristics:
1. Have a positive expectancy of making money
2. Adapt to different markets
3. Have understandable entry and exit rules
4. Aren’t overly optimized
5. Utilize effective capital management rules
These types of systems are inherently nice to trade as there’s a clear understanding that in the long run they make money. They do however need some effort to learn how to trade them, which tends to discourage a number of traders.
To find out how you to build a winning trading plan for CFDs you will need to read our trading CFDs handbook. Once you have decided on a trading plan you will need to decide on a CFD provider that can help you apply your strategy.
