How to Create a Basic Trading Strategy in 10 Easy Steps – Part 2

6. What Triggers an Exit?

“Know when to hold em’ and know when to fold em’” as they say in poker.

You also need a great exit strategy when you enter into a trade as well.

You need to know when you have taken a big enough bite from the apple to know when it is time to exit.

Exit triggers may include:

• When your indicators show that the trend of the trade is about to shift against you
• When you have hit a certain profit target on the trade
• When you have lost a certain amount on the trade and are attempting to stop the bleeding

You need to set up your exit triggers before you ever get involved with the trade because you need to stick to them no matter what the market action turns out to be.

People can get caught up in the emotional aspects of trading and cost themselves great sums of money by not keeping a level head about things. You don’t want to be that person, and that means you need to have your exit strategy ready to go right from the start

7. How Much Risk Will You Take on A Given Trade?

One of the most common reasons why people blow out their trading accounts is that they take too much risk on a particular trade.

People forget this all the time when they take a deep dive into the markets and join in with reckless abandon. They don’t think about what they are doing, and they assume that they can just outsmart the market at all times.

The major risk when doing this is that they will put too much at stake on a single trade.

Traders should limit their risk to no more than 1% of their total capital on any given trade (ideally less):

Day traders ideally should risk less than 1% of their capital on any single trade. That means that a stop-loss order closes out a trade if it results in no more than a 1% loss of trading capital. That means that even if you lose multiple trades in a row only a small amount of your capital will be lost.

At the same time, if you make more than 1% on each winning trade your losses are recouped. Getting overly confident in the success of a given trade is a big way that many end up losing their entire account.

8. Keep A Written Record of Your Trading Rules

Markets can get wild at times, and it is very easy for some traders to get hit by a string of losses one right after the next. When this happens, some traders start to feel as though they will never be a successful trader and that they ought to give it up entirely.

It is easy to get dejected in those dark moments, but that is why you should always keep a written record of your trading rules near your person at all times. You may need to refer to your rules and why you have adopted them if you start to get hit by multiple losses.

It will remind you of why you got into the trading game in the first place, and that is all that most people really need when they suffer some losses.

9. Back Test Your Strategy

Once you think that you have the perfect trading strategy all set up, you should put it to the test by back testing it against market conditions from the past.

This is truly the only way that you will know with any certainty if your strategy is likely to be a winner or not.

History does not dictate the future, but it is the only thing that we have to go on when trying to come up with the right formula for success. If your strategy seems like it would have worked consistently over much of the previous trading days, then perhaps it will work going forward as well. Conversely, if your strategy struggles under previous conditions, then don’t expect it to hold up well going forward.

10. Make A Plan for Improvement

Understand that your first few strategies will probably not work out how you intended. Few people get it right on their first try, but the best traders know that they must adapt their strategies as they receive new information.

Be open to the idea of taking in new information and working with that information to plan future trades. If the market thrashes your first few strategies, take it with a grain of salt. You are still learning, and the markets can be a great teacher.

CONCLUSION

Everyone needs to go into battle with a game plan. If you fail to develop one, you may end up in a situation where you lose a lot of money and perhaps knock yourself out of trading in the markets entirely.

Thus, you should try to do all that you can to protect yourself from that fate by developing and testing a strategy that works best for you.