I think with this article we are leading a valuable contribution to unveil the “secret trading”! Because honestly, how many people can really say that they are profitable? Correct: Very few! And that’s why I want to tell you step by step how you earn money regularly through strategies.
First of all, I am a swing trader and trade the most important foreign exchange, commodity and index markets – part-time. I do it as a sideline, because although the stock exchange is a passion for me, I never want to follow the markets constantly for several hours a day.
I lead the teamtrader project with a few other colleagues, in which we teach & teach exactly that: Professional swing trading for professionals – with concrete trading strategies!
Trading Strategies: The Subtle Difference
And here we are already at the topic: Trading strategies are not just trading strategies. Many traders are already content with a few vague entry rules – perhaps a few more stop rules. But that is not enough at all!
My collegues are always surprised when they attend our strategy training courses. Very often the sentence “I didn’t even know it was so extensive and so structured!
And that’s why I recommend this: Read this article carefully if you really want to become a profitable trader!
1. The Rules Of Your Trading Strategy
When people tell me that they finally have a trading strategy and I ask them if they can explain the exact rules of the strategy to me, often only inaccurate explanations come.
I don’t mean it badly, but I have to make it clear: That’s exactly why most traders are not successful!
Important: A trading strategy needs a clear set of rules! This is how every strategy should be defined:
Getting Started: You need to know when you’re opening a new position!
Stop: You need to know where you make the initial stop (initial stop loss) and how this stop behaves during the trade (for example, if it is trailed or if it always stays where it was initially set).
Exit: You need to know when to close the position and realize the profit!
Requirements: You need to know when you are applying this strategy at all (e.g. in strong trend markets, in highly volatile markets, shortly after news or in long sideways markets etc.)
Let’s say someone is trading a strategy that opens a short position in the marker shown. Can we now say that the strategy is good? Of course not!
Of course, in hindsight everything looks logical and you can see the remaining downward trend after the short entry. However, without a fixed Stop Loss, Trailing Stop and Exit, we cannot say at all that this is a profitable strategy!
I want to make you aware that getting started is by no means the most important thing in trading! It also depends on how you design your trade management.
If you have now fulfilled these 4 points (Requirements / Entry / Stop / Exit), you have defined a trading strategy. Congratulations! But will you now become profitable if you act on this strategy? – I don’t know!
Because here’s the most interesting thing:
2. Facts & Figures About Your Strategy
It is not enough simply to have a strategy fully “defined”. You must also know whether this set of rules will make you profitable!
And that’s the hardest part of strategy creation.
Using Backtest you now have to check whether your set of rules works in practice! It is important that your backtest is carried out professionally. A backtest of 10 or 20 trades is far from meaningful, as you certainly know.
You also have to be careful with the topic “period”: In the case of a backtest for a day trading strategy, it would also not be meaningful if, for example, the backtest only included one month!
Briefly something about the topic “Backtest”: I don’t believe in automatic back-tests – at least not in discretionary trading! The backtests we reveal to you in Level X (our swing trading training) were created manually. Compared to many automatically performed back tests, which circulate freely on the Internet, this represents a completely different quality!
But now to the facts & figures:
Once you have a backtest on your strategy, you must now determine important key figures on your strategy to find out whether your strategy is profitable!
The most important key figures:
- Hit Ratio
- Payoff Ratio
- Diversification of the Hit Rate
You can find detailed explanations of these key figures here.
The expected value is one of the most important key figures. Because once this number is positive, you know that your trading strategy is profitable!
3 Drawdown Probabilities
Now we come to a topic which you only get explained to traders who are profitably active on the stock exchange themselves! In my opinion, it is essential for profitable trading to deal with its drawdown probabilities!
Drawdown probabilities simply indicate how likely certain drawdown sizes (e.g. -10% or -25%) and how likely certain drawdown lengths (e.g. 30 days or 60 days) are.
In my swing trading training I provide these figures with my strategies. Dealing with drawdowns, which I also address in great detail, can be better managed with such probabilities.
Moreover, such numbers help the trader to get a much better feeling when trading.
And interpretation – an important building block!
As I said, my trading strategies have a clear set of rules, but no set of rules set in stone. What I mean to say is that as discretionary traders we always have the opportunity to change the rules a little bit!
The rules of a strategy are immensely important, but they should also have some leeway so that they can be adapted to current market conditions.
I hope this article has shown you how seriously I take trading strategies. After all, that makes the difference; professional strategies or amateurish strategies?
I think it is extremely important to know that a professional strategy is the means to withdraw money from the market in the long term.
The other market participants are not stupid! There are many traders out there who have put a lot of time and money into their training to take the money out of other market participants’ pockets. Therefore, the topic of “trading strategies” should be dealt with in detail.