Why is a trading strategy important? A trading plan is the center of your business. Without a business plan most businesses will fail, exactly the same philosophy applies to trading plans.
A well defined and executed trading strategy will will let you stay flexible whilst being regimented.
What is a trading plan?
A good trading strategy is a guideline to help you in making good trading decisions.
It is comprised of two basic parts:
1. Trading system or method for buy/sell alerts
2. Money management parameters
Developing a trading plan can be very time consuming, this is the reason a lot of people don’t bother. In far too many cases the instant satisfaction of trading simply overpowers the trader.
A trading plan doesn’t have to be complicated, in fact it is usually better not to be so.
An illustration of a minimal trading plan is:
“Buy 1000 share CFDs in Google on open the day after my entry criteria has been met.”
You may choose to follow this day-after-day and never need to think very hard. That is in itself a bonus. It means it is simple to follow and straightforward 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 convince people to part with their money. This is naturally not always easy!
The sort of questions that a professional will likely be asked when they start raising funds to trade with will include questions like:
1. How do you intend to trade?
2. What kind of system will you utilize?
3. What markets will you trade?
4. Just how much will you risk?
5. How much is it possible to lose?
6. What can you reasonably anticipate to make?
7. Just how much are your trading expenses?
8. How will you stop yourself from losing all the money invested?
9. How much will you risk at once?
10. What number of markets will you trade?
11. What is going to be your usual hold time?
12. How will you minimize risk?
These appear to be straightforward questions, but be honest with yourself and write the answers down.
Ingredients of a trading strategy
Trading plans can be very individual things. If one system worked for all then the markets would of course cease to exist, which is why they do not. A couple of pointers that will help you choose a trading system include:
1. Disregard the “secret” systems, they do not work
2. You could have dissimilar systems for a variety of markets, avoid this if possible
3. Your system does not have to be mechanical, many would argue mechanical systems cannot work
4. Should have the flexibility for being long and short
5. It should have a money management plan to help you control risk
Perhaps the best advice is to purchase something used by pros and learn to trade it. Professionals know that the best systems to trade exhibit a few simple characteristics:
1. Have a positive expectancy of making money
2. Adapt to different markets
3. Have understandable entry and exit rules
4. Usually are not overly optimized
5. Utilize effective capital management rules
These kind of systems are inherently nice to trade as there is 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 many traders.
To find out how you to build a winning trading strategy for CFDs you will need to read our CFD trading handbook. Once you have decided on a trading plan you will need to decide on a CFD provider that can help you apply your plan.