Wednesday, June 6, 2007

Basic Trading Strategy

Trading strategy is applying technical and fundamental analysis in a trading method, this method (strategy) have to document three things before we can call it strategy:

1- The chart setup.
2- Entry point.
3- Exit point.

Let’s look in these basic elements of any strategy:

1- Chart setup:

Any trading strategy have to start with information about the chart setup of the strategy which include:

  • The indicators the strategy uses and their settings
  • The time frame of the chart(s) to use.
  • The currencies the strategy work with.

Some of strategies extends the basic requirements of the chart setup but it can be less than those three basics.

2- Entry point:

The strategy main approach is persuading you that if you entered the market now and at this point you will be a winner.
The entry points distinguishing between the strategies and it even between the same strategy but different versions or updates.

Some simple strategies requires less than two conditions to occur to trigger the Buy/Sell signals, for example the Moving Average strategy requires only crossing slow and fast moving average indicators.

Complex strategies requires more conditions for more accuracy, however it trades leaser than simple strategies.

3- Exit point:

Entering a trade at the good time is very important thing the strategy, however, exiting the trade is more important than entering the trade.
Ideas like “Let the profit run and cut losses earlier” and “Money Management” making the exiting is a strategy itself.

Exiting strategy have to care about the following points:

1- Stop loss level: When to exit the trade with the minimum loss.

2- Take profit level: When to exit the trade with the maximum profit you can take.

3- Close conditions: The strategy may provide point where the trade have to be close. For example in our simple moving average crossing strategy; if the open position was a result of an up cross of the fast to the slow moving average, the opened position have to be closed when in the cross reversal.

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