DEVELOPING A TRADING STRATEGY
The biggest setback most novice traders have is controlling their emotions. The market can play psychological tricks with your brain. With experience you will learn that the market moves in waves. When the market falls for a few consecutive days, traders project their trading equity going to zero; and when the market rises, they fantasize about how much money they will make. Traders constantly struggle with these emotions. The natural tendency is for traders to hold onto their losing trades too long and sell their winning trades too early. These are normal human emotions that have been hardwired into our DNA and ensured our ancestors' survival in the past. Unfortunately for traders, these emotions do not serve us well! The reason most traders fail is due to not having developed a mechanism to override these natural emotions. Your goal is to develop a systematic, rules-based, trading strategy that remove emotions from the trading process. Back testing will help confirm that your strategy will have a positive likelihood or an edge, and confirm its reliability. Your trading strategy must be very clear and straight forward.
Your strategy must clearly identify the following:
• What markets to trade
• How to identify potential trade setups
• When to enter the trade
• Risk vs. Reward
• How to determine your initial stop loss exit
• How to determine your profit stop exit
The rules for your trading strategy must be clear enough that you could give them to your spouse or a friend, and with minimal direction they would be able to follow the rules. If the rules are clear, it will help remove emotions from the trade. Clear rules also make it easier to back test your strategy to confirm its reliability. Most new traders assume there is a Holy Grail trading strategy that, once found, will guarantee fortunes. The truth is there is no Holy Grail trading system; there are hundreds of ways to make money trading. Our goal is to develop a trading system that fits your personality and is easy to repeatedly execute. If you try and use someone else's system, chances are you will
fail, as you will not fully understand why it works, and it will not fit your personality.