What Is a Trading Strategy?
A trading strategy is a systematic methodology used for buying and selling in the various markets. A trading strategy is based on predefined rules and criteria used when making trading decisions.
A trading strategy may simple or complex. The key is that a trading strategy be set using objective data and analysis. A trading strategy should be periodically re-evaluated and tweaked as market conditions or individual goals change.
Developing a Trading Strategy
There are many types of trading strategies, but they are based largely on either technicals or fundamentals. The common thread is that both rely on quantifiable information that can be backtested for accuracy. Technical trading strategies rely on technical indicators to generate trading signals.
Technical traders believe all information about a given asset is contained in its price and that it moves in trends. For example, a simple trading strategy may be a moving average crossover whereby a short-term moving average crosses above or below a long-term moving average.
Source: Investopia
What are the basics of the trading strategy?
A trading strategy must contains “Entry” and “Exit” rules. If you consider the develop two sided (Long/Short) strategy then you need to clarify entry and exit rules for both sides.
Here is an example of two sided trading strategy
Strategy uses the following indicators
EMA(5), EMA(21), EMA(50), EMA(200)
Bollinger Band %
ADX Indicator
Long Position Entry Requirements
- EMA(5) > EMA(21)
- EMA(50) > EMA(200)
- BB % > 0.75
- ADX > 15
If all of above rules are valid, a new long position is opens.
Short Position Entry Requirements
- EMA(5) < EMA(21)
- EMA(50) < EMA(200)
- BB % < 0.75
- ADX > 15
If all of above rules are valid, a new short position is opens.
Position Exit rules defining with “Stop-Loss” and “Take Profit”
Stop Loss
- Use 3% as a Stop-Loss target.
- If the long position is open and the price move down %3 from the entry price, a long position closed with loss.
- If the short position is open and the price move up %3 from the entry price, a short position closed with loss.
Take Profit
- Use 8% as a Take Profit target.
- If the long position is open and the price move up %8 from the entry price, a long position closed with profit.
- If the short position is open and the price move down %8 from the entry price, a short position closed with profit.
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