Table of contents:
- 1 Trading Strategy calculation example
- 2 Why do I need a suitable trading strategy at all?
- 3 But is it all about creating a working trading strategy?
- 4 Why you need to develop your own trading strategy
- 5 So who would you follow? Can you see who is a good trader and who is not?
- 6 The step-by-step guide to your own trading strategy
- 7 Step 1: Find out which trading style suits you
- 8 Step 2: Which fundamentals and which chart technical approaches do you need for your setup?
- 9 Step 3: How and where do you find a trade entry?
- 10 Step 4: Where do you find an exit from a trade?
- 11 Step 5: Which financial instrument fits the selected trading setup?
- 12 Step 6: Combine steps 1-5 and implement the findings
- 13 Conclusion:
Here you will learn how to create your own trading strategy that fits your capital and enables you to make sustainable profits in trading.
No matter if you are a beginner or an advanced trader, a daytrader or a swing trader, in this article you will get a step-by-step guide to create your own trading strategy.
Once you have a sustainable trading strategy and can apply this setup duplicably to many markets, the world is open to you!
In this case you will be able to achieve dream returns and earn millions every year!
Trading Strategy calculation example
If you start with 20.000 EUR (of course you can also start with smaller amounts) and achieve 50% return per year for 10 years (taxes n.ber.), you have catapulted your account to over 1.150.000,- EUR.
If you also want to play a few number games, just use the various calculators on zinsen-berechnen.de.
To get to the first million on the trading account, we need a working trading strategy.
Before we start, we have to clarify a few basics.
Let’s start with the right mindset and ask ourselves the question at the beginning:
Why do I need a suitable trading strategy at all?
As you know, in trading we can multiply or even destroy our starting capital in a short time by using the lever.
In order to achieve the former, we absolutely need a functioning trading setup. Because if I trade without a plan and strategy, it’s as if I’m driving with 220 km/h on the left lane…without brakes!
In other words: It can go well for a while, but at some point the big bang will certainly come.
A clean trading strategy gives you constant profits and the opportunity to grow your account bit by bit.
But is it all about creating a working trading strategy?
No. Although it’s hard enough, we must remember that trading strategy is only one of four key factors in trading.
The following trading process illustrates what you also need to pay attention to if you want to trade successfully.
In this chart you can immediately see that trading is a cycle. All four key factors (fundamental analysis, chart analysis, trading strategy and psychology) are equally weighted.
Traders and especially beginners tend to focus on the factor “trading strategy” and invest all their time resources in it. This is dangerous, because a strategy will not work if the trader does not have his psyche under control or lacks fundamental knowledge.
Even if I show you in this article how to develop your own trading strategy, you still have to deal with the other key factors.
Before we get to the step-by-step guide, we need to clarify why you need to develop your own trading strategy.
Why you need to develop your own trading strategy
The fact that you have clicked on this article and are interested in developing your own trading strategy is an important first step forward.
Many people interested in trading believe that they can simply follow a successful trader blindly or copy the strategy 1:1. But this does not work in the long run, as we will see in a moment.
For all those who do not yet know why classic copy trading only leads to short-term success, I have the following examples ready.
Unfortunately, I can report from my own experience that the stupid re-trading of foreign trades can also quickly backfire.
At the beginning of my trading career I followed a successful professional trader. He posted his trades in real time and with a 1-2 minute time delay I jumped on the bandwagon as well.
But the following problems arose:
- As a scalper or daytrader, who is only after a few points, 1-2 min time delay is quite a long time. The courses can then already have run far away.
- My account size could not keep up with his risky trading style (he traded without stop loss) and his million dollar account at all.
- My character traits and my psyche could not stand the long loss phases at all and drove me to senseless hedges at the year low or year high, depending on the market situation.
If you want to follow the story of my first year as a trader in more detail, click here on the link.
This story already gives you three important hints for you and your trading setup:
- Find a trading strategy that fits your account size (risk management)
- Find a trading strategy that suits your mental state and character traits (psychology)
- Find a trading strategy that matches your trading skills and a specific financial instrument (expertise)
You can see that these three indications are in line with the trading process cycle mentioned above.
Another reason why you need your own strategy and should not rely on Social Trading (Copytrading) is the “wrong” image that the supposedly successful traders convey.
Let’s assume you open an account with a trading provider where you can follow other traders. Following means that you automatically open the same position as the one opened by the person you are following.
Now you are in the member area of your CFD broker and see a table with the top 5 traders:
- Hara-kiri +332%
- Toby4932 +112%
- Buffoon +94
- Kittykat +34%
- HarryDeer +25
The Broker allows you to follow any social trader and exactly replicate their trades. Usually (unfortunately) everyone is allowed to register here.
So who would you follow? Can you see who is a good trader and who is not?
No, you cannot and neither can I. A simple percentage does not tell us whether a trader is good or not.
Sure, 332% is impressive. But how did they come about?
If it took 3 trades to make them, it would be a disaster. I guarantee you that in two weeks this trader wouldn’t even be in the top 100. Because he has an extremely high risk in every single trade.
If it took 300 trades over a longer period of time and the maximum drawdown of the account was no more than 15%, then this is a very good trader.
So now you have a good impression of what a good trading strategy should achieve. On the one hand a positive return, which should be higher than the returns of safe investments and on the other hand a maximum loss of 15%, based on the account capital.
How you can achieve this is now discussed in the step-by-step instructions.
The step-by-step guide to your own trading strategy
Your personal trading strategy should bring you constant profits in the long run. But this can only be achieved if it fits you and your characteristics.
If you don’t know exactly which trading style suits you, that’s not too bad. Take the time to test different markets, financial instruments and trading approaches (scalping, swing trading, etc.) using demo accounts.
This aspect is also the first step in our instructions.
Step 1: Find out which trading style suits you
The point here is that by trying out different setups you can filter out which approaches are generally possible and which ones don’t suit you at all. The following questions will help you:
Is there a certain market or time of day when I want to trade?
Which time perspective do my trades have? Do I want to hold a trade for only a few minutes or several hours or even days?
How does my professional situation or family obligation fit into the respective approach
We generally distinguish between scalptraders (very short holding time), daytraders (several hours) and swingtraders (a few days or weeks).
All trading styles can bring in or destroy the same amount of money. There is no better or worse by default, because it all stands and falls with the implementation of the trader.
Step 2: Which fundamentals and which chart technical approaches do you need for your setup?
Depending on your setup, you may need more or less fundamental data. In Forex Newstrading, for example, fundamental data make up about 60% of the entire strategy. Breakout trading, on the other hand, neglects the fundamental component and pays particular attention to the chart constellation.
Are there indicators that appeal to you and with which you have had good experience?
My favorites are for example supports and resistances, Fibonacci retracements, EMA200 and pivot points. But they are only a part of the strategy (and not the basis)!
Step 3: How and where do you find a trade entry?
Classically, there are two widely used trading approaches. The trend trade and the correction trade.
Of course there are also other approaches such as the breakout trade or the Martingale Strategy. But to present everything here is beyond the scope of this blog post.
I have dedicated a separate article to the escape trade, if you need a little more inspiration 🙂
Step 4: Where do you find an exit from a trade?
Here we are already in the middle of risk management and money management. Within the trading strategy you have to decide where to place a stop loss and where to place a take profit.
As a rule of thumb, the 1% rule applies, according to which you may risk a maximum of 1% of your account capital per trade. With this technique, you could theoretically allow yourself 100 wrong trades in a row and on the other hand, you have a nice, low portfolio volatility.
Here I would like to remind you once again that it is first and foremost about protecting the account and only then about achieving a reasonable return.
However, the application of the 1% rule also makes it clear that with small trading accounts, particular attention must be paid to the financial instrument.
A 1000 EUR account may only allow a maximum loss of 10 EUR per trade. With this you can hardly trade with certificates. With CFDs, however, this is again possible, as order fees are rarely charged here and the smallest position sizes are possible.
More about this in the next step.
Step 5: Which financial instrument fits the selected trading setup?
A sophisticated trading strategy is of no use to you if the financial instrument with which you trade it is unpredictable and unreliable.
Again, you need to test different products. I myself have become a fan of CFDs because they are transparent and easy to understand. There is now a lot of competition among brokers, which has increased the quality enormously.
On the other hand, I’ve fallen on my nose with warrants, because there has often been a lot of gambling on the part of the issuer. Unfortunately, the banks can play with the spread and the time value, so the warrant is not always fairly priced.
Make sure that you have 100% understanding of how the instrument you are trading works.
You must also pay attention to the costs. There is no point in betting on knockouts with a 500 EUR deposit and only wanting to take 10 points (scalp) with you when you have order fees of 10 EUR. Here, the fee structure of the instrument eats up your potential return.
Step 6: Combine steps 1-5 and implement the findings
What you have worked out so far is quite a respectable basic structure. You can imagine it like building a house. The foundation is now in place, but now it needs to be filled with life.
In practice this means that you should now practice on a demo account. Test the strategy consciously over several weeks and ideally several market phases. Demo accounts are equipped with play money and are offered free of charge by many brokers.
Write down your strategy and note when you trade and when you don’t!
Important: Note not only the results of the individual trades but also your thoughts and emotions.
Ask yourself again and again: Have I deviated from my trading strategy and if so, why? Which mistakes have I made?
If you then have the feeling that the strategy brings you more profits than losses AND the losses are expressed in money terms below the profits, then you have with high probability a functioning trading strategy!
Then and only then is it time for real money trading! Again, new challenges are waiting for you – keyword “psyche”.
These 5 steps show you very clearly what is important in trading and how you can develop a sustainable strategy.
You will also understand why you need your own trading strategy and why you can’t just follow someone else’s example.
Also be aware that the creation of the strategy is only 1 of 4 building blocks in successful trading.
In addition, it makes sense to test several strategies and to trade in parallel, because you are less inclined to trade in sense lostrades.
The older you get in trading, the more the daily tasks and challenges shift. At some point, it’s no longer about tinkering with and improving the strategy, but only about trading psychology.
And then, after 10,000 trades and hundreds of hours before the charts, the moment comes when everything changes…
The moment of boredom in trading…